San Jose, Calif. There is supposed to be an impenetrable wall between financial analysts and their investment-banking counterparts to avoid conflicts of interests in which analysts might be pressured to report favorably on companies that would, in turn, give banking business to their firms.
In the past two years, however, incidents have surfaced in technology and other sectors that suggest that wall has big holes in it. One such case involves a high-profile EDA analyst, his former employer and one of the biggest names in the design automation business today: Synopsys Inc.
New information from a previously partially censored court document sheds new light on the world of investment banking and research and on the analyst, Erach Desai, and his relationship in 2001 with Synopsys executives and with his own bosses.
Last year, regulators from the Massachusetts Securities Division began a widespread securities investigation into the practices of Credit Suisse First Boston's Global Technology Group. The well-documented investigation recently led to several penalties for CSFB the most prominent of which was the indictment of CSFB investment-banking technology whiz Frank Quattrone for obstruction of justice and witness tampering. Quattrone's case ended in a hung jury earlier this month.
Regulators built their case against CSFB partly from Desai's testimony, which EE Times reported in October 2002 (see www.eetimes.com/story/OEG20021025S0042). The Massachusetts Securities Division recently made previously omitted portions of that testimony public.
The Massachusetts Securities Division office subpoenaed Desai in early 2002, ordering him to describe his interactions with the investment-banking side of CSFB while employed as CSFB's EDA analyst from August of 1998 to October 2001.
In the first part of a deposition conducted in September 2002, Desai, then working as a consultant at Decisive Research Technology (Greenwich, Conn.), disclosed how he was pressured by software CEOs and by CSFB investment bankers to get banking business.
In the unedited version of the deposition, obtained by EE Times, Desai further describes how he believed former Synopsys CFO Brad Henske got him fired by using leverage from Synopsys' plans to acquire Avanti Corp. a deal valued at more than $800 million that would eventually yield $10 million to $20 million for CSFB.
In the deposition, Desai said that Henske, who is now chief financial officer at accounting-software giant Intuit Inc., had a face-to-face meeting with CSFB investment bankers to discuss future business between the companies and requested Desai's presence. At the meeting, Desai said in the deposition, Henske spent 20 minutes explaining how Synopsys was "not happy" with Desai's research coverage. Desai at the time had a "Buy" rating on Synopsys.
'Get more positive'
The analyst also recounts how, two days later, the head of the investment-banking side of the technology group at CSFB, John Hodge, called Desai into his office and told him, "You have to figure out a way to get more positive on the story because I believe we can do business here," according to the deposition.
Desai stated in the deposition that at the request of the bankers, he held firm on his rating of Synopsys even as he learned that in August 2001 Synopsys had retained CSFB's banking arm to be its "investment adviser" in its acquisition of Avanti.
Desai, in the deposition, said that he was fired three months later and strongly suspected Henske initiated his firing.
In all the documents and e-mails subpoenaed by the Massachusetts regulators and subsequently turned over by CSFB officials, no evidence was found of direct correspondence between Henske and CSFB officials requesting or hinting that Henske wanted Desai fired.
Henske and representatives for Intuit did not respond to requests for interviews with EE Times.
In the deposition, Desai related that in a meeting between Henske and the bankers in June 2001, Henske was "unhappy" with a May 25, 2001, desk note Desai had issued to CSFB's institutional investors.
In that desk note, Desai pointed out that in a particular quarter just reported by Synopsys, the company had taken a one-time earnings increase because it had cashed in some investments. He noted that some Synopsys investors had wrongly multiplied that quarter's earnings number by four to derive an estimate of Synopsys' yearly earnings that would be inaccurate, because Synopsys was not likely or able to take away the same returns on investments for subsequent quarters.
In that note, Desai also wrote that "if he [Henske] can repeat this performance on the investment side, maybe he should be a hedge fund manager rather than a CFO," Desai recalled in the deposition.
Desai also stated in his deposition that Henske told him, "I need a copy of that e-mail [referring to the desk note], because one of us is going to lose our job over it."
Soon after, a superior at CSFB, Elliot Rogers, e-mailed Desai requesting a copy of the letter. "Elliot wrote me an e-mail saying why were you carrying high estimates on Synopsys if you would be waffling on recommending the stock . . . calling people 'hedge managers' in a desk note that goes out to 120 institutions is not appropriate," recalled Desai in the deposition.
Desai wrote back to Rogers saying that he was thinking of downgrading Synopsys' stock. Rogers, according to Desai's deposition, replied by saying, "maybe there should be change in coverage." Rogers said that question was posed not because of banking pressure but because of Desai's performance, Desai claimed.
'Synopsys had no influence'
Desai, along with four other analysts in CSFB's 50-employee technology group, was let go in a 10 percent across-the-board layoff in October 2001. Desai was replaced by a junior analyst, who maintained Desai's buy rating on Synopsys, according to the deposition.
"Synopsys had nothing to do with Erach Desai losing his job," a Synopsys representative told EE Times. "Synopsys had no influence on CSFB's coverage of the company."
A CSFB representative said that the company is moving on after paying regulators $200 million and declined to comment further on the Desai testimony.
In his career at CSFB, Desai, in various parts of the deposition, noted that he had indeed made some errant stock calls, some of which he said were at the request of bankers. But the analyst also was fundamental in helping CSFB woo banking business. For example, he helped CSFB take public Numerical Technologies, Simplex Solutions, PDF Solutions and Magma Design Automation more than half the EDA companies that went public in that time frame. Desai was fired roughly a month before Magma went public in November 2001.
Desai said he wants to leave that chapter of his life in the past and declined to comment further on the matter other than to say, "As a personal opinion, not as a representative of American Technology Research [Desai's new employer, which does not have an investment-banking business], my concern is that many of the individuals who have been involved in questionable behavior in the past continue to flourish in corporations and in investment banks."