With I.P.O.’s on the rise, analysts get new scrutiny
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Interviewing analysts as part of the process of going public has become more prevalent, several analysts said, with the proliferation of so-called I.P.O. advisers, firms that advise companies in the early stages of an offering. These firms are paid to help companies and, often, their private equity owners screen banks vying to take companies public. Among other things, they arrange for meetings between companies and the Wall Street analysts and bankers.

"If you are going to see the people who are screening the underwriters you are there for one purpose, to win banking business," said another Wall Street analyst, who also requested anonymity because his company prohibits employees from speaking to the media without prior approval. This analyst said he knew of the practice but had not taken part in any meetings.

Participants say company meetings with the analysts and bankers are held separately, but can happen within hours of each other, and banks rarely send compliance officers to monitor the discussions. Analysts say that when private equity executives are involved, the sessions can turn especially uncomfortable, veering into questions about a company's valuation.

Solebury Capital, Rothschild and Lazard are among the leading firms in this area. Solebury has recently guided a number of companies through the I.P.O. process, including the discount retailer Five Below; Bloomin' Brands, which owns Outback Steakhouse and Bonefish Grill; and HD Supply Holdings, according to regulatory filings.

In an interview, Solebury's co-chief executives, Alan Sheriff and Ted Hatfield, said that their corporate clients meet with analysts as well as bankers as they work through the offering process, but that the meetings with analysts are "informational," regarding general market trends.

"Pitching investment banking in analyst meetings is strictly off limits," Mr. Sheriff said.



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A senior research executive at one major Wall Street firm says he thinks it is acceptable for an analyst to have a broad chat with a company looking to go public, and the analyst can benefit from that meeting by learning more about the industry. But he expressed concern about meetings with companies in the process of choosing banks to underwrite their I.P.O.'s.

"I am not O.K. with a third party organizing a beauty contest with the express purpose of winning banking business," said the executive, whose firm has a policy against speaking to the media. "The problem is, the analyst going to the meeting knows the purpose and couldn't help but feel pressured. You are selling your bank."

Investors both large and small often rely on the recommendations of analysts, who issue buy and sell recommendations on stocks. Questions about the legitimacy of Wall Street research came into focus during the height of the Internet and telecommunications bubble. During that heady time, analysts worked closely with banking colleagues to secure profitable I.P.O. assignments from fast-growing tech companies.

Mr. Spitzer, as attorney general, spearheaded an investigation that helped solidify his reputation at the time as the "sheriff of Wall Street." He released incriminating e-mails that showed analysts privately disparaged the very companies they were publicly telling investors to buy. They also showed how influential investment bankers were in securing positive research reports for companies that were either clients of a firm or prospective customers.

In one e-mail, an investor asked Henry Blodget, then a Merrill Lynch analyst, what was so interesting about GoTo.com, an Internet company he was recommending, except for the banking fees that it generated.



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"Nothing," Mr. Blodget replied.

In another e-mail message, Mr. Blodget called InfoSpace, an Internet company that he favored publicly, "a piece of junk."

Federal regulators barred Mr. Blodget, who now runs Business Insider, a business news Web site, and Jack B. Grubman, another prominent analyst who worked at Salomon Smith Barney, from the securities industry.

In 2003, 10 Wall Street banks agreed to pay a collective $1.4 billion to resolve the government's accusations. As part of the settlement, the firms agreed to separate their banking and research departments, a move that regulators said would ensure that analysts operated more autonomously.

Analysts were also expressly "prohibited from participating in efforts to solicit investment banking business," including pitches and road shows. Over the years, that language has been incorporated into rules policed by Finra, the regulator.