“For years, research analysts at many Wall Street firms have written self-evaluations at bonus time to trumpet their roles in helping to win lucrative stock-and-bond underwriting and merger business,” writes Charles Gasparino in today’s Wall Street Journal.

“Now, those internal documents could come back to haunt some Street firms.”

“New York Attorney General Eliot Spitzer, having won a settlement from Merrill Lynch & Co. over its analysts’ potential conflicts of interest, has been collecting internal evaluations and analyst employment contracts and other compensation-related material. The move could have sweeping consequences for other securities firms currently under scrutiny. The latest focus of his probe: the twocompanies that dominated the boom in telecommunications and technology stocks, Citigroup Inc.’s Salomon Smith Barney unit and competitor Morgan Stanley.”

“While Mr. Spitzer used embarrassing internal e-mails as evidence of possible conflicts at Merrill Lynch, the documents of other firms to be scrutinized include end-of-year memos, routinely written by both research analysts and investment bankers as part of the bureaucratic process of determining annual bonuses. The tone and content of such memos, which cut to the heart of the way Wall Street did business in the 1990s, could also raise conflict-of-interest issues, some Wall Street executives fear.”

“So far, people at Morgan Stanley and Salomon have said they have studied their internal e-mail traffic, and they don’t believe that they face the same problem as Merrill. At that firm, executives had to apologize for e-mails in which Internet-stock research analysts privately trashed stocks that received higher public ratings. Mr. Spitzer, contending that Merrill kept rosy ratings on the same stocks in hopes of winning banking business from them, used the e-mails to get Merrill to agree to pay a $100 million fine and make changes in its research process.”

“A spokesman for Mr. Spitzer said “we will go wherever the facts lead us.” A spokeswoman for Salomon Smith Barney didn’t have any comment on the nature and direction of the Spitzer investigation. Officials at the firm said they aren’t worried about conflicts that may surface in how analysts were paid, saying there wasn’t any direct link between specific deals and researchers’ bonuses. A spokeswoman for Morgan Stanley said that there is ‘no direct link between investment-banking revenue and analyst compensation.’ “

“The documents being scrutinized by Mr. Spitzer’s office could be damaging because their use was so common and so widespread. Indeed, many of the major firms on Wall Street during the bull market of the late 1990s wooed analysts with multimillion-dollar contracts based on their ability to generate investment-banking fees. And many firms, in evaluating analysts during bonus time, scrutinized the analysts’ roles in helping their firms win banking business.”

“Mr. Spitzer has broad authority under the New York state law known as the Martin Act to prosecute Wall Street firms for conflicts of interest that were commonplace involving analysts’ research, people in his office and legal experts said. Under federal securities laws, prosecutors need to show criminal “intent” when filing cases that analysts misled investors with overly optimistic research.”