The Memo That Made Spitzer's 'Blood Boil'

The following extracts are from a memo made public because a US class-action lawsuit. It was authored in 2002 by John Hoffman, then global head of research at Salomon Smith Barney, and addressed to Michael Carpenter, then the firm's CEO. The subject matter was a possible revision of the firm's research ratings system.

The memo mentioned the fact that 'pressures on the analysts by corporate management, by investment bankers and by selected institutional accounts cause the analyst to steer away from negative ratings'. It continued by underlining that 'research analysts have been told repeatedly that the primary goal of the firm is to get our equity underwriting market share ranking up into the top three. This message is reinforced in the investment banking weekly meetings and planning offsites to which research management and analysts are invited'.

Hoffman warmed to his theme, when he stated that 'the scope of....conflict is obvious when we compare the Investment Banking initiatives with our research coverage. The Investment Bank has designated 400 corporations as Platinum Accounts and another 1,700 as 'Core' accounts. Each of the corporations so designated is expected to produce $20m+ of $5m+ respectively in fees to Citigroup. Equity Research covers about 3,000 companies, and since these also tend to be the leading corporations in the world, the overlap with these ID priority account lists is substantial. To have even 20% of these stocks with a negative rating (probably the minimum to satisfy the demands for balance) means that a lot of Platinum and Core accounts will carry some kind of negative equity rating'.

The memo concludes: 'Before we institute a new, more disciplined and more balanced rating system, we need complete support from you and from all division heads of the firm. Are we all agreed that we want to be a leader on the topic of more accurate and more balanced ratings, recognizing that this could increase conflict with our major corporate clients, could put our bankers at a disadvantage to those who moves lowly or not at all, and will almost certainly dampen Investment Banking momentum towards a leadership market share in our industry ?'.

Hoffman's note ended by mentioning that Carpenter had 'the only hard copy of this memo'.

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