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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 |
Commission File Number: 1-6862 |
Credit Suisse First Boston (USA), Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) Eleven Madison Avenue New York, New York (Address of principal executive offices) |
13-1898818 (I.R.S. Employer Identification No.) 10010 (Zip Code) |
(212) 325-2000
(Registrant's telephone number, including area code)
Reduced Disclosure Format
The Registrant meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format.
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: 61/8% Notes due 2011 |
Name of each exchange on which registered: New York Stock Exchange |
|
| Accelerated Return Equity Securities (ARES)SM due November 30, 2004 Linked to the S&P 500® Index Five-Year Contingent Protection Securities due September 30, 2008 Linked to the S&P 500® Index Five-Year Contingent Protection Securities due November 26, 2008 Linked to the S&P 500® Index |
American Stock Exchange American Stock Exchange American Stock Exchange |
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes o No ý
Because the registrant is an indirect wholly owned subsidiary of Credit Suisse Group, none of the registrant's outstanding voting stock is held by nonaffiliates of the Registrant. As of the date hereof, 1,100 shares of the Registrant's Common Stock, $.10 par value, were issued and outstanding and held by Credit Suisse First Boston, Inc.
Documents Incorporated by Reference: None
CREDIT SUISSE FIRST BOSTON (USA), INC.
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2003
Cautionary Statement Pursuant to The Private Securities Litigation Reform Act of 1995
We have made in this Annual Report on Form 10-K, including, without limitation, in "Legal Proceedings" in Part I, Item 3 and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, and from time to time may otherwise make in our public filings, press releases or other statements, forward-looking statements concerning our operations, economic performance and financial condition, as well as our future plans and strategic objectives. Such forward-looking statements are subject to various risks and uncertainties, and we claim the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those anticipated herein or in any such other filings, releases or statements because of a number of factors, including, without limitation, those detailed in "Business—Certain Factors That May Affect Our Results of Operations" in Part I, Item 1, those discussed elsewhere herein, and in other public filings and press releases. These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. Forward-looking statements are typically identified by the use of future or conditional verbs such as "will," "should," "would" or "could," and by words or phrases such as "believe," "expect," "intend," "estimate" and similar expressions. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the results indicated in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements except as otherwise required by applicable law.
(i)
OVERVIEW
We are a leading integrated investment bank serving institutional, corporate, government and high-net-worth individual clients. We provide our clients with a broad range of products and services, which include:
We are the product of a business combination. On November 3, 2000, our indirect parent, Credit Suisse Group, or CSG, acquired Donaldson, Lufkin & Jenrette, Inc., or DLJ. CSG is a global financial services company, providing a comprehensive range of insurance, banking and investment banking products. Credit Suisse First Boston LLC, CSG's principal U.S. registered broker-dealer subsidiary (formerly known as Credit Suisse First Boston Corporation), became a subsidiary of DLJ, and DLJ changed its name to Credit Suisse First Boston (USA), Inc. When we use the terms "we," "our" and the "Company," we mean, after the DLJ acquisition, Credit Suisse First Boston (USA), Inc. and its consolidated subsidiaries and, prior to the DLJ acquisition, DLJ and its consolidated subsidiaries.
CSG operates through two business units, the Credit Suisse Financial Services business unit and the Credit Suisse First Boston business unit, or CSFB. Credit Suisse First Boston, a Swiss bank, is our indirect parent and consists principally of CSFB. We are part of CSFB, which consists of the institutional securities and financial services businesses. The institutional securities business provides financial advisory and capital raising services and sales and trading for users and suppliers of capital around the world. The financial services business provides international asset management services to institutional, mutual fund and private investors and financial advisory services to high-net-worth individuals and corporate investors.
For 2003, the businesses of CSFB ranked:
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We file annual, quarterly and current reports and other information with the Securities and Exchange Commission, or SEC. Our SEC filings are available to the public over the internet on the SEC's website at www.sec.gov. You may also view our annual, quarterly and current reports on our website at www.csfb.com (under "Company Information") as soon as is reasonably practicable after the report is electronically filed with, or furnished to, the SEC. The information on our website is not incorporated by reference into this Annual Report.
OPERATIONAL STRUCTURE
We operate and manage our business through two segments: the Institutional Securities segment, which provides financial advisory and capital raising services and sales and trading, and the Financial Services segment, which consists of the operations of Private Client Services, a financial advisory business serving high-net-worth individuals and corporate investors.
The Institutional Securities segment is operated and managed through three operating divisions:
The Financial Services segment consists of Private Client Services, a financial advisory business serving high-net-worth individuals and corporate investors with a wide range of CSFB and third-party investment management products and services.
Effective January 1, 2004, our operations were reorganized to move the private equity and private fund groups to the Financial Services segment, which was renamed Wealth & Asset Management. The operations of Institutional Securities now include debt and equity underwriting and financial advisory services and the equity and fixed income trading businesses. The discussion below presents our segments as organized and managed in 2003.
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PRODUCTS AND SERVICES
Our principal products and activities by business segment are set forth below:
Institutional Securities
Equity and Fixed Income
Investment Banking
Financial Services
Private Client Services
Institutional Securities
Equity
We engage in a broad range of equity activities for investors around the world, including sales, trading, brokerage and market-making in U.S. and international equity and equity-related securities, equity derivatives, convertible securities, forwards, futures and options, traded on exchanges and over the counter. We also engage in proprietary trading activities when we identify market opportunities in the price or value attributed to assets, companies, industries or economies. Equity-related activities include:
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trading and block trades on behalf of clients and customers. CSFB is a member of most of the major exchanges in the United States, Europe and Asia.
Fixed Income
We engage in trading a broad range of financial instruments, including U.S. Treasury and government agency securities, foreign sovereign government securities and U.S. and foreign investment-grade and high-yield corporate bonds, money market instruments, foreign exchange and mortgage-backed and other asset-backed securities. We offer a full range of derivatives products for the financing, risk management and investment needs of our customers. Our fixed income business covers sovereign government, corporate and institutional customers. We generate net revenues from our fixed income business in the form of commissions and spreads. We earn greater spreads in less liquid markets than we do in large, highly liquid markets. We also take proprietary positions through market making and trading in fixed income securities and derivatives. In addition, CSFB syndicates loans and enters into commitments to extend credit to investment-grade and non-investment-grade borrowers through branches of Credit Suisse First Boston.
Key fixed income products and channels include:
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Prime Services. We also engage in dealer-to-dealer financing and cover proprietary and client short positions through securities borrowing and lending arrangements. We finance certain equity positions through stock lending and equity repurchase agreements and make margin loans to customers. We participate in these transactions globally and have an established prime brokerage business to attract client borrowings of cash and securities. We facilitate multi-currency financing, clearance, settlement and custody of securities transactions and provide brokerage services for our customers on major futures and options exchanges worldwide, providing flexible solutions for client needs and enabling clients to use more than one broker for the execution of trading strategies but one prime broker for efficient margining and consolidated position reporting.
Investment Banking
The Investment Banking division's activities include financial advisory services regarding mergers and acquisitions and other matters and origination and underwriting of equity and fixed income securities. Through the Private Equity Group, the Investment Banking division also conducts worldwide private equity investment activities. CSFB underwrites and syndicates bank lending facilities and provides bridge financing.
We maintain offices in select major cities through which investment banking activities are conducted. The Investment Banking division has established industry groups with a broad range of dedicated industry specialists. The industry group structure facilitates the delivery of specialist information and services to our clients on a global basis. The Investment Banking division's clients include U.S. and international public and private corporations, sovereign governments, supranational and national agencies and public sector entities.
Principal Investment Banking division products and services include:
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Private Equity. The Private Equity Group invests primarily in unlisted or illiquid equity or equity-related securities in privately negotiated transactions, making private equity investments across the entire capital structure, from venture capital equity to investments in the largest leveraged buyouts. In addition to debt and equity investments in companies, the Private Equity Group manages private equity funds and invests in real estate and third-party managed private equity funds. Investments are made directly or through a variety of investment vehicles. As of December 31, 2003, CSFB managed or advised funds and proprietary private equity portfolios with committed capital of approximately $30.2 billion, and the Company managed or advised funds and proprietary private equity portfolios with committed capital of approximately $23.2 billion. As of December 31, 2003, CSFB had global investments in private equity for its own account of approximately $1.9 billion and had unfunded commitments of approximately $1.6 billion. As of December 31, 2003, the Company had private equity investments for its own account of approximately $1.1 billion and had unfunded commitments of approximately $1.3 billion.
Our principal funds groups include leveraged corporate private equity funds, mezzanine investment funds, real estate investment funds, venture capital funds, secondary funds, which purchase existing interests in private equity funds and direct private equity investments, and the customized fund investment group.
Our private equity activities generate revenues through an annual management fee, generally a percentage of a fund's committed capital or invested capital. In addition, after a minimum return for investors has been achieved, we may receive an increased share of a fund's income and gains based on a percentage of the income and gains from the fund's investments. Operating income may also be derived from realized and unrealized gains or losses on the investment. Our private equity business is a long-term business, and an investment may be held for a number of years before disposition.
Effective January 1, 2004, our operations were reorganized to move the private equity and private fund groups to the Financial Services segment, which was renamed Wealth & Asset Management.
Global Investment Research
CSFB provides equity and fixed income research, economic analyses, technical market and quantitative analyses and investment strategy recommendations covering both equity and fixed income markets. CSFB's analysts, strategists and economists provide research services to institutional and high-net-worth individual clients globally through traditional and online channels.
Equity research analyzes more than 2,300 companies and a broad range of industries, with in-depth coverage of U.S. and foreign issuers and market and economic trends. Fixed income research provides comprehensive investment analysis on investment-grade and high-yield debt issuers, research on a variety of structured products, global economic analysis, macroeconomic analysis on developed and emerging market countries and fundamental and technical analysis on a wide range of securities and market sectors. For information about the regulation and management of our research activities, see "—U.S. Regulation and Supervision."
Financial Services
Private Client Services
Private Client Services provides financial advice to high-net-worth and corporate investors with significant financial resources and specialized investment needs. In addition, Private Client Services serves as a distribution channel for a wide range of CSFB and third-party investment management products and services. Private Client Services had 286 investment advisors and managed or advised clients on approximately $59 billion in assets as of December 31, 2003.
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OPERATING ENVIRONMENT AND COMPETITION
CSFB believes that the long-term outlook for leaders in the investment banking industry is generally positive, although the industry is volatile and subject to periodic market downturns worldwide or in particular geographic regions. Competition has resulted in significant pressure on margins, particularly in the cash equities businesses and equity and debt underwriting, and there has been a trend towards increased capital commitments to secure mandates. The global "bulge bracket," or top tier, investment banks are likely to be more successful than other firms, and there is continuing consolidation in the financial services industry. One of the principal macroeconomic trends affecting the investment banking industry is greater capital formation, which is produced by aging demographics, pension reforms and wealth creation. Consolidation and convergence, driven by a blurring of traditional product and geographic boundaries, deregulation and the importance of scale and efficiency, have also created benefits for global full-service providers such as CSFB. Technology has led to productivity improvements and new distribution and business models, more demanding and better-informed customers and the need to balance productivity gains with investment requirements.
The financial services business, including asset management, is viewed as a growth sector. Despite a challenging market environment, the underlying fundamentals and demographics continue to support the sector. CSFB believes that there will be positive net new asset or organic growth opportunities within this sector over the next several years. Despite this positive outlook for the business, increased competition, higher research costs, required advancements in technology, growth in client needs and globalization are trends that place greater pressure on margins and increase the need for scale within full-service asset management organizations. This growth, together with major external changes such as technological innovation and increased volatility and complexity in world markets, is changing the way the industry delivers services, manages investments and measures risk.
CSFB faces intense competition from various types of firms in all aspects of its business and throughout the world. The principal competitive factors influencing CSFB's business are its reputation in the market place, its client relationships, its mix of market and product capabilities, and its ability to attract and retain highly skilled employees.
In investment banking, CSFB competes with brokers and dealers in securities and commodities, investment banking firms, commercial banks and other firms offering financial services. There is increased fragmentation in market share, partly due to lower volumes of business and increased competition for market share. CSFB is subject to continued and increasing competitive pressure to make loans or otherwise commit capital, such as through block trades, to clients. CSFB has also experienced significant price competition in certain of its businesses, which has reduced profit margins on certain products or in certain markets. Competition from alternative trading systems is reducing fees and commissions.
In asset management, CSFB's major competitors are the asset management subsidiaries of financial services firms, U.S. mutual and institutional fund managers and European fund managers. Despite the trend towards globalization in the asset management industry, competition is most significant in individual geographic locations. For the private equity business, as private equity funds grow and proliferate, competition to raise private capital and to find and secure attractive investments is accelerating.
CSFB continues to build upon its position as a top-tier global investment bank, while seeking to improve financial results and placing high priority on controls, risk management and the firm's brand and reputation. CSFB will continue to focus on providing its clients with the highest quality of service across all business areas. Strategic priorities include being a market leader in its core businesses, seeking revenue growth opportunities, focusing on key customers across geographic regions, applying its capital efficiently to maximize returns and minimize risks, and focusing on markets and products that are profitable or that contribute to the profitability of CSFB's franchise.
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CSFB is committed to complying fully with the new laws and regulations that have been enacted following the high-profile bankruptcies and corporate and accounting scandals that have so adversely affected investor confidence. As a top-tier investment firm, CSFB acknowledges its commitment to its role as a gatekeeper in the financial markets. In furtherance of that commitment, CSFB has taken steps to strengthen that role, including implementing a framework to protect the integrity and quality of its research in compliance with regulations and evolving best practices for research, compliance with restrictions on allocation of shares in initial public offerings to directors and officers of public companies and a vigorous review of ways to enhance professionalism and integrity in the conduct of its businesses. CSFB remains committed to adhering to the highest professional standards and providing top quality execution and investment performance, while developing and retaining outstanding investment professionals.
FINANCE, ADMINISTRATION AND OPERATIONS
Included within finance, administration and operations are various support departments, including treasury, controllers, credit, risk management, corporate services, information technology, tax, legal and compliance, human resources and operations. These departments support our businesses through the processing of securities, derivatives, foreign exchange and commodities transactions; receipt and delivery of funds and securities; safeguarding of customers' securities; internal financial controls, including management of global expenses, capital structure and funding; and our efforts at ensuring compliance with regulatory and legal requirements. Certain of these areas also assist in the management and monitoring of the risks associated with our business activities.
CSFB has global business continuity and disaster recovery plans should the firm's employees be unable to gain access to or use significant offices or facilities or in the event of severe disruptions to the infrastructure that supports the firm's businesses, including information technology, communications and other systems.
EMPLOYEES
As of December 31, 2003, we had 8,283 employees based in the United States and 423 employees based outside the United States. These figures include contractors as well as employees.
U.S. REGULATION AND SUPERVISION
Our business is, and the securities and commodity futures and options industries generally are, subject to extensive regulation in the United States and elsewhere. As a matter of public policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets.
In the United States, the SEC is the federal agency primarily responsible for the regulation of broker-dealers, investment advisers and investment companies, and the Commodity Futures Trading Commission, or the CFTC, is the federal agency primarily responsible for, among other things, the regulation of futures commission merchants and commodity trading advisers. In addition, the Department of the Treasury has the authority to promulgate rules relating to U.S. Treasury and government agency securities, and the Municipal Securities Rulemaking Board has the authority to promulgate rules relating to municipal securities. The Board of Governors of the Federal Reserve System, or the Board, promulgates regulations applicable to certain securities credit transactions. In addition, broker-dealers are subject to regulation by industry self-regulatory organizations, including the National Association of Securities Dealers, Inc., or the NASD, and the New York Stock Exchange, or the NYSE, and by state authorities. Because we are also engaged in futures activities, our U.S. broker-dealer affiliates are subject to industry self-regulatory organizations such as the National Futures Association, or the NFA.
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Credit Suisse First Boston LLC, or CSFB LLC, our principal wholly owned subsidiary, is a broker-dealer registered with the SEC and a number of states, the District of Columbia and Puerto Rico and with the CFTC as a futures commission merchant and commodity trading advisor. As a result of these registrations, and memberships in self-regulatory organizations such as the NASD, the NYSE and the NFA, our business is subject to overlapping regulation covering all aspects of its securities, commodities and futures activities. Such regulations cover matters including:
A particular focus of the applicable regulations concerns the relationship between broker-dealers and their customers. As a result, U.S. broker-dealers may be required in some instances to make suitability determinations as to certain customer transactions, are frequently limited in the amounts that they may charge customers and generally cannot trade ahead of their customers. U.S. broker-dealers must also make certain required disclosures to their customers.
As a registered futures commission merchant, our broker-dealer is subject to the requirements of the CFTC under the Commodity Exchange Act. These requirements include the provision of certain disclosure documents, generally impose prohibitions against trading ahead of customers and other fraudulent trading practices, and include provisions as to the handling of customer funds and reporting and recordkeeping requirements.
Our businesses include legal entities registered and regulated as investment advisers under the U.S. Investment Advisers Act of 1940, as amended, and the SEC's rules and regulations thereunder. CSFB provides asset management services primarily to individuals, corporations and public pension funds. For pension fund clients, we are subject to the Employee Retirement Income Security Act of 1974, as amended, and similar state statutes. These regulations provide, among other things, for the way in which client assets should be managed. In addition, these regulations impose limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, recordkeeping and recording requirements, disclosure requirements and limitations on principal transactions between an adviser or its affiliates and advisory clients, as well as general anti-fraud prohibitions. Finally, because some of the investment vehicles we advise are commodity pools, we are subject to the Commodity Exchange Act for such clients.
Our operations may be materially affected not only by regulations applicable to them as financial market intermediaries, but also by regulations of general application. For example, the volume of our underwriting business could be affected by, among other things, existing and proposed tax legislation,
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antitrust policy and other governmental regulations and policies (including the interest rate policies of the Board) and changes in interpretation and enforcement of various laws that affect the business and financial communities. From time to time, various forms of anti-takeover legislation and legislation that could affect the benefits associated with financing leveraged transactions with high-yield securities have been proposed that, if enacted, could adversely affect the volume of merger and acquisition and private equity businesses, which in turn could adversely affect our underwriting, advisory and trading revenues.
In 2002 and 2003, the NASD, the NYSE and the SEC adopted rules relating to the independence of research and research analysts. The NASD and NYSE rules are intended to address a number of potential conflicts of interest relating to equity research. Regulation Analyst Certification, adopted by the SEC, applies to research reports involving equity or debt securities and requires research analysts to make specific certifications in connection with both research report issuances and public appearances.
As part of changing practices in the investment banking industry and CSFB's commitment to ensuring the independence of its research, CSFB has voluntarily made a number of changes in its equity research activities, including realigning its research department to report to the Head of the Legal and Compliance Department and Vice Chairman for Research for CSFB, adopting new rules on securities ownership by analysts and implementing new procedures for communication between analysts and investment bankers. Further, pursuant to a settlement with various U.S. regulators regarding, among other things, research analyst independence, CSFB adopted internal structural and operational reforms that augment the steps it had already taken to ensure research analyst independence. See "Legal Proceedings" in Part I, Item 3.
In October 2001, the U.S. Congress enacted the USA PATRIOT Act, or the Patriot Act. The Patriot Act required the Department of Treasury to develop and adopt final regulations that impose anti-money-laundering compliance obligations on financial institutions; Treasury delegated this authority to the Financial Crimes Enforcement Network, or FinCEN, one of its bureaus. As a bank holding company, CSFB was previously subject to anti-money-laundering compliance obligations arising from the Bank Secrecy Act, or BSA.
The Patriot Act and the BSA have several core components. First, financial institutions, as defined by the Patriot Act, must implement an anti-money-laundering compliance program that: (1) includes policies, procedures and controls designed to detect and prevent money laundering or other suspicious activity; (2) designates anti-money-laundering compliance officers; (3) provides anti-money-laundering training to staff; and (4) ensures that an independent audit of the anti-money-laundering program is conducted on an annual basis. Second, financial institutions must implement a customer identification and verification program; for foreign bank clients, financial institutions are required to gather certain additional information about the foreign bank, including its agent for service of process in the United States. Third, financial institutions must conduct enhanced due diligence, where appropriate, for correspondent accounts for foreign financial institutions and private banking accounts for non-U.S. persons. Fourth, financial institutions must file suspicious activity reports regarding potential money laundering or other suspicious activity. Fifth, the Patriot Act created new rights and obligations pertaining to information sharing between financial institutions and the government and between and among financial institutions.
CSFB is subject to similar compliance obligations in other countries in which it operates and has implemented a global anti-money-laundering compliance program.
In addition, because we are an indirect wholly owned subsidiary of each of CSG and Credit Suisse First Boston, our activities are subject to significant bank regulatory restrictions on our operations. These restrictions are imposed pursuant to, among other enactments, the International Banking Act of 1978, or IBA, the Bank Holding Company Act of 1956, or BHCA, the Gramm-Leach-Bliley Act of 1999, or GLBA, and the regulations and interpretations of the Board and other applicable regulators. For example, pursuant to the IBA, the BHCA imposes significant restrictions on our operations and on
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our worldwide holdings of equity in companies operating in the United States. Historically, our activities were principally limited to activities that the Board found to be a proper incident to banking or managing or controlling banks or an exemption applied (such as certain "grandfather rights" accorded to segments within the Credit Suisse First Boston legal entity pursuant to the IBA). Moreover, prior Board approval was generally required to engage in new activities and to make non-banking acquisitions in the United States.
The GLBA, which was signed into law in 1999 and became effective in most respects in 2000, significantly modified these restrictions. Once the GLBA took effect, qualifying bank holding companies and foreign banks qualifying as "financial holding companies" were permitted to engage in a substantially broader range of non-banking activities in the United States, including insurance, securities, private equity and other financial activities, in many cases without prior notice to, or approval from, the Board or any other U.S. banking regulator. The GLBA does not authorize banks or their affiliates to engage in commercial activities that are not financial in nature or incidental thereto without other specific legal authority or exemption.
Certain provisions of the BHCA governing the acquisition of U.S. banks were not affected by the GLBA. Accordingly, as was the case prior to enactment of the GLBA, CSG is required to obtain the prior approval of the Board before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting shares of any U.S. bank or bank holding company.
The GLBA and the regulations issued thereunder contain a number of other provisions that could affect our operations and the operations of all financial institutions. One such provision relates to the financial privacy of consumers. In addition, the so-called "push-out" provisions of GLBA will narrow the exclusion of banks from the definitions of "broker" and "dealer" under the Securities Exchange Act of 1934, or Exchange Act. The SEC granted a series of temporary exemptions that delayed the required implementation of these push-out provisions. The narrowed "dealer" definition took effect in September 2003, and the narrowed "broker" definition is currently expected to take effect in November 2004. As a result, it is likely that certain securities activities currently conducted by Credit Suisse First Boston's New York branch will need to be restructured or transferred to one or more U.S. registered broker-dealer affiliates.
We believe that we have been in compliance in all material respects with the regulations described herein.
Capital Requirements
As a registered broker-dealer and member firm of various self-regulatory organizations, CSFB LLC is subject to the uniform net capital rule, Rule 15c3-1 of the Exchange Act. This rule requires broker-dealers to maintain a specified level of minimum net capital in relatively liquid form. Our OTC derivatives dealer subsidiary, Credit Suisse First Boston Capital LLC, is also subject to the uniform net capital rule but calculates its net capital requirements based on value at risk pursuant to Appendix F of Rule 15c3-1. CSFB LLC is also subject to the net capital requirements of the CFTC and various commodity exchanges. See Note 8 of the consolidated financial statements in Part II, Item 8.
The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain criteria, dictate the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SEC's uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital.
Compliance with net capital requirements of these and other regulators could limit those operations of our subsidiaries that require the intensive use of capital, such as underwriting and trading
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activities and the financing of customer account balances, and also could restrict our ability to withdraw capital from our regulated subsidiaries, which in turn could limit our ability to pay dividends and make payments on our debt obligations.
Certain other of our subsidiaries are subject to capital adequacy requirements. As of December 31, 2003, our subsidiaries complied with all applicable regulatory capital adequacy requirements.
CERTAIN FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS
Our businesses are materially affected by conditions in the financial markets and economic conditions generally. In addition, our businesses are exposed to a variety of risks that could materially affect our results of operations, including those described below. See "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 7A for a description of how CSFB manages risk.
Market Risk
As an integrated investment bank, we are materially affected by conditions in the financial markets and economic conditions generally in the United States and around the world. In addition, our results of operations in the past have been, and in the future may continue to be, materially affected by other factors of a global nature.
Trading and Investment Activities
Our large trading and investment (other than trading) positions in the debt and equity markets, and in private equity, mortgage and other assets, can be adversely affected by volatility in the financial markets, that is, the degree to which prices fluctuate over a particular period in a particular market, regardless of market levels. Such volatility can also lead to losses relating to our trading and hedging products, including swaps, futures, options and structured products. To the extent that we own assets, or have net long positions, in any of those markets, a downturn in those markets could result in losses from a decline in the value of our net long positions. Conversely, to the extent that we have sold assets that we do not own, or have net short positions, in any of those markets, an upturn in those markets could expose us to potentially unlimited losses as we attempt to cover our net short positions by acquiring assets in a rising market. We may from time to time have a trading strategy of holding a long position in one asset and a short position in another, from which we expect to earn operating income based on changes in the relative value of the two assets. If, however, the relative value of the two assets changes in a direction or manner that we did not anticipate or against which we are not hedged, we might realize a loss in those paired positions. Such losses, if significant, could adversely affect our results of operations.
Adverse Market Conditions
Difficult market and economic conditions and geopolitical uncertainties in 2002 and 2003 had a negative impact on our investment banking business as the slowdown in global economic growth continued. Despite improved market conditions and some signs that the economy is beginning to recover, adverse market or economic conditions could continue to reduce the number and size of investment banking transactions in which we provide underwriting, mergers and acquisitions advice and other services and therefore adversely affect our financial advisory fees and underwriting fees. Market declines in the United States and elsewhere would likely lead to a decline in the volume of securities trades that we execute for customers and, therefore, have an adverse effect on the revenues we receive from commissions and spreads. Certain of our businesses, particularly structured and credit products, high-yield and fixed income trading, have benefited in recent years from low or declining interest rates, and increasing or high interest rates may have an adverse effect on the results of these businesses. In addition, adverse market or economic conditions could negatively affect our private equity investments.
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If a private equity investment in a company or an investment fund substantially declines in value, we may potentially lose some or all of any management or similar fees, may not receive any increased share of the income and gains from such investment (to which we are entitled when the return on such investment exceeds certain threshold returns), may be obligated to return to investors previously received excess carried interest payments and may lose our pro rata share of the capital invested in that company and other companies in the same fund. Further, it may become more difficult to dispose of the investment. Even investments that are performing well may prove difficult to exit in weak initial public offering markets. In certain circumstances, depending on the size of the investment, the nature of the company's problems or other factors, we may become involved in disputes or legal proceedings relating to the investment, and our reputation or our ability to sponsor private equity investment funds in the future could be adversely affected.
Our results could also be adversely affected by a downturn in particular sectors. In the real estate sector, we finance and acquire principal positions in a number of real estate and real estate-related products for major participants in the commercial and residential real estate markets, and we securitize and trade in a wide range of real estate and real estate-related products, including agency mortgage-backed securities. In addition, in the past we have made, and in the future we may make, significant commitments to provide investment banking advisory and underwriting services to certain sectors such as technology and telecommunications, and decreasing economic growth generally with respect to these sectors has negatively affected our operating income and may continue to do so in the future.
Terrorist attacks, military conflicts and economic or political sanctions could continue to have a material adverse effect on economic and market conditions, market volatility and financial activity, including in businesses in which we operate.
Large and Concentrated Positions
We could be exposed to increased losses in activities such as arbitrage, market-making, block and proprietary trading, private equity and underwriting. We have committed substantial amounts of capital to these businesses, which may require us to take large positions in the securities of a particular company or companies in a particular sector, country or region. The trend in all major capital markets is toward larger and more frequent commitments of capital. These concentrations of risk could increase our losses due to our sizable securities holdings.
Hedging Strategies
If any of the instruments and strategies we use to hedge our exposure to various types of risk is not effective, we may incur losses. Many of our strategies are based on historical trading patterns and correlations, and unexpected market developments may affect our hedging strategies in all market environments or against all types of risk. We may only be partially hedged or our hedging strategies may not be fully effective in mitigating our risk. In addition, gains and losses resulting from ineffective hedges are recorded in principal transactions-net in our consolidated statements of operations, and this may lead to volatility in our reported earnings.
Increases to Other Risks
In addition to the potentially adverse effects on our businesses described above, market risk could exacerbate the other risks that we face. For example, if we were to incur substantial trading losses, our need for liquidity could rise sharply while access to liquidity could be impaired. In conjunction with a market downturn, our customers and counterparties could also incur substantial losses of their own, thereby weakening their financial condition and increasing our credit risk to them.
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Credit Risk
We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. This risk may arise, for example, from holding securities of third parties as collateral; entering into swap or other derivative contracts under which counterparties have long-term obligations to make payments to us; and extending credit to our clients through margin loans or other arrangements.
In recent years, we have significantly expanded our use of swaps and other derivatives and we may continue to do so, both in types of products and in volume of transactions, in particular through our OTC derivatives dealer subsidiary. As a result, our credit exposures have increased, and may continue to increase, in amount and duration. In addition, we have experienced, due to competitive factors, pressure to assume longer-term credit risk, to extend credit against less liquid collateral and to price derivatives instruments more aggressively based on the credit risks that we take.
Although we regularly review credit exposure to specific clients and counterparties and to specific industries, countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to foresee or detect, such as fraud. We may also fail to receive full information with respect to the trading risks of a counterparty. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions because the commercial soundness of many financial institutions may be closely related as a result of credit, trading, clearing or other relationships between institutions. This risk is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearinghouses, banks, securities firms and exchanges with which we interact on a daily basis, and could adversely affect us.
Country, regional and political risks are components of market risk as well as credit risk. Financial markets and economic conditions generally in the United States and around the world have in the past been, and in the future may continue to be, materially affected by such risks. Economic or political pressures in a country or region, including those arising from local market disruptions, currency crises and monetary controls, may adversely affect the ability of clients or counterparties located in that country or region to obtain foreign exchange or credit and, therefore, to perform their obligations to us. The political, economic or other circumstances of the countries in which we operate may have an adverse impact on our results of operations.
Liquidity Risk
Liquidity, or ready access to funds, is essential to our businesses. We depend on continuous access to the debt capital and money markets to finance day-to-day operations. An inability to raise money in the long-term or short-term debt capital markets, or an inability to access the repurchase and securities lending markets, could have a substantial negative effect on our liquidity. Our ability to borrow in the debt markets could be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative views about the financial services industry generally. In addition, lenders could develop a negative perception of our long-term or short-term financial prospects if, for example:
If we were unable to borrow in the debt capital markets, or access the repurchase and securities lending markets, we would likely need to liquidate assets, such as our investment and trading portfolios, to meet maturing liabilities. Our ability to liquidate portfolios could be adversely affected by a market
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downturn. In certain market environments, such as when there is market volatility or uncertainty, overall market liquidity may decline. In a time of reduced liquidity, we may be unable to sell some of our assets, or we may have to sell assets at depressed prices, either of which could adversely affect our results of operations. In addition, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.
Regulatory and other legal restrictions may limit our ability to transfer funds freely either to or from our indirect parent, Credit Suisse First Boston, our subsidiaries and other affiliates of those companies. In particular, a substantial number of those entities, including our broker-dealer subsidiaries, are subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in certain circumstances. These laws and regulations may hinder our ability to access funds that we need to make payments on our obligations.
Our borrowing costs and our access to the debt capital and money markets depend significantly on our credit ratings. These ratings are assigned by ratings agencies, which may reduce or withdraw their ratings or place us on "credit watch" with negative implications at any time. Credit ratings are important to us when competing in certain markets and when seeking to engage in longer-term transactions, including OTC derivatives. A reduction in our credit ratings could increase our borrowing costs and limit our access to capital markets. This, in turn, could reduce our liquidity and negatively impact our operating results.
Operational Risk
Operational risk is the risk of adverse effects upon our businesses as a consequence of conducting operations in an improper or inadequate manner, or as a result of external factors. In general, our businesses face a wide variety of operational risks. We face risk arising from organizational factors, such as change of management and other personnel, data flow, communication, coordination and allocation of responsibilities. Policy and process risk arises from weakness in or non-compliance with policies and critical processes involving documentation, due diligence, settlement and payment. Technology risk stems from dependencies on information technology and the telecommunications infrastructure and risks arising from e-commerce activities. We face risks arising from human error and external factors such as fraud. Finally, we face risks from physical threats to our or our third-party suppliers' facilities or employees and business disruption. In particular, if there is a disruption in the infrastructure supporting our businesses and/or the areas in which they or third-party suppliers are situated, such as interruptions in electrical, communications, transportation or other services, our ability to conduct our operations may be negatively affected. Any of such risks could have an adverse effect on our results of operations.
Our businesses are exposed to risk from potential non-compliance with policies on securities transactions and settlements and payment processes. There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur. Misconduct by employees could include engaging in unauthorized activities or binding us to transactions that exceed authorized limits or present unacceptable risks, which, in either case, may result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use or disclosure of confidential information, which could result in regulatory sanction and serious reputational or financial harm. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.
We also face operational risk from potential losses caused by a breakdown in information, communication, transaction settlement, clearance and processing procedures. As an integrated investment bank, we rely heavily on our financial, accounting and other data processing systems, which are varied and complex. If any of these systems does not operate properly or is disabled, including as a
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result of terrorist attacks or other unforeseeable events, we could suffer financial loss, a disruption of our businesses, liability to our clients, regulatory intervention or reputational damage. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.
Legal and Regulatory Risks
We face significant legal risks in our businesses, and the volume and amount of damages claimed in litigation, regulatory proceedings and other adversarial proceedings against financial services firms are increasing. These risks include disputes over the terms of transactions in which we act as principal, disputes concerning the adequacy or enforceability of documents relating to our transactions, potential liability under securities or other laws for materially false or misleading statements made in connection with securities and other transactions in which we act as underwriter, placement agent or financial advisor, potential liability for the "fairness opinions" and other advice we provide to participants in corporate transactions, and disputes over the terms and conditions of complex trading arrangements. We also face the possibility that counterparties in complex or risky trading transactions will claim that we improperly failed to tell them of the risks or that they were not authorized or permitted to enter into these transactions with us and that their obligations to us are not enforceable.
We face risks relating to investment suitability determinations, disclosure obligations and performance expectations with respect to the products or services we provide, which could lead to significant losses or reputational damage. We have in place policies and practices to monitor and, to some extent, control the risks that may arise in delivering products or services to clients. We attempt to ensure that any investment or risk management product or service we provide to our clients is appropriate based on our relationship with that client.
We are also subject to claims arising from disputes with employees for, among other things, alleged discrimination or harassment. These risks often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time.
As a participant in the financial services industry, we are subject to extensive regulation by governmental agencies, supervisory authorities and self-regulatory organizations. Such regulation is becoming increasingly more extensive and complex. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us. These regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements, and restrictions on the businesses in which we may operate or invest. Despite our best efforts to comply with applicable regulations, there are a number of risks, particularly in areas where applicable regulations may be unclear. The authorities have the power to bring administrative or judicial proceedings against us, which could result, among other things, in suspension or revocation of our licenses, cease and desist orders, fines, civil penalties, criminal penalties or other disciplinary action that could materially harm our results of operations. Such proceedings could also result in serious reputational harm. Such authorities have increased resources and are choosing to bring more enforcement actions against companies in our industry.
It is inherently difficult to predict the outcome of many of the litigations, regulatory proceedings and other adversarial proceedings involving our businesses, particularly those cases in which the matters are brought on behalf of various classes of claimants, seek damages of unspecified or indeterminate amounts or involve novel legal claims. In presenting our consolidated financial statements, management makes estimates regarding the outcome of legal, regulatory and arbitration matters and takes a charge to income when losses with respect to such matters are probable and can be reasonably estimated. Charges, other than those taken periodically for costs of defense, are not established for matters when losses cannot be reasonably estimated. Estimates, by their nature, are based on judgment and currently
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available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel and other advisers, our defenses and our experience in similar cases or proceedings.
In addition, the SEC and other federal and state regulators are increasingly scrutinizing complex, structured finance transactions and have brought enforcement actions against a number of financial institutions in connection with such transactions. In some of those actions, clients of the financial institutions are alleged to have engaged in accounting, disclosure or other violations of the securities laws, and the financial institutions are alleged to have facilitated these improprieties by entering into transactions with the clients. While CSFB has policies and procedures intended to ensure that all transactions, including structured transactions, into which we enter comply with applicable laws and regulations, it is possible that certain of these transactions could give rise to litigation or enforcement actions.
Changes in laws, rules or regulations affecting our operations, or in the interpretation or enforcement of such laws, rules and regulations, may adversely affect our results. We may be materially affected not only by regulations applicable to us as an integrated investment bank, but also by regulations of general application. For example, our businesses have been, and are likely to continue to be, affected by, among other things, existing and proposed tax legislation, adoption of new accounting standards, antitrust and competition policies, corporate governance initiatives and other governmental regulations and polices and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities. These new laws and initiatives affect us directly and indirectly through their effect on the activities of our clients. In particular, the Sarbanes-Oxley Act of 2002 and rules of the SEC, the NYSE and the Nasdaq National Market, or NASDAQ, have significantly altered the duties and obligations relating to, among other things, corporate governance and financial disclosure for SEC-reporting companies. To the extent that private companies elect not to engage in initial public offerings, or IPOs, in order to avoid being subject to these provisions, our equity new issuances business and our potential for exiting certain private equity investments may be adversely affected. In addition, these requirements have diverted the focus of some companies from capital markets transactions, such as securities offerings and acquisition or disposition transactions, and as long as such diversion exists, our investment banking business may be adversely affected.
For a description of the legal proceedings and regulatory examinations to which we are subject, see "Legal Proceedings" in Part I, Item 3.
Competition and Conflicts of Interest
We face intense competition that could affect our business and results of operations. Consolidation, both in the form of mergers and acquisitions and by way of alliances and cooperation, is increasing competition. New competitors, including internet-based financial services providers and non-financial companies, are entering the market. Competition in this environment is based on many factors, including the products and services offered, pricing, distribution systems, customer service, brand recognition, perceived financial strength and the willingness to use capital to serve client needs. Consolidation has created a number of firms that, like us, have the ability to offer a wide range of products. Some of these firms may be able to offer a broader range of products than we do, or offer such products at more competitive prices. U.S. federal financial reform legislation significantly expands the activities permissible for financial services firms in the United States. This legislation may accelerate consolidation, increase the capital base and geographic reach of our competitors and increase competition in the financial services industry, which could adversely affect our results of operations. For further information relating to the regulation of our businesses, see "—U.S. Regulation and Supervision."
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In the highly competitive environment arising from globalization and convergence in the financial services industry, a reputation for financial strength and integrity is critical to our ability to attract and maintain customers. Our reputation could be harmed if we fail adequately to promote and market our brand. Our reputation could also be damaged if, as we increase our client base and the scale of our businesses, our comprehensive procedures and controls dealing with conflicts of interest fail, or appear to fail, to address conflicts of interest. Furthermore, our reputation could in the future be damaged as a result of, among other things, employee misconduct, a decline in results, adverse legal or regulatory action against us or a downturn in financial markets or the financial services industry in general.
Our performance is largely dependent on the talents and efforts of highly skilled individuals. Competition in the financial services industry for qualified employees is intense. We also compete for employees with companies outside the financial services industry. Competition with non-financial services companies in particular may intensify when compensation within our industry decreases in adverse markets or economies. We have devoted considerable resources to recruiting, training and compensating employees. Our continued ability to compete effectively in our businesses depends on our ability to attract new employees and to retain and motivate our existing employees.
We compete with brokers and dealers in securities and commodities, investment banking firms, commercial banks and other firms offering financial services. Investment banking has also experienced significant price competition in certain of its businesses, which has reduced profit margins on certain products or in certain markets. In addition, as private equity funds grow and proliferate, competition to raise private capital and to find and secure attractive investments is accelerating.
We face competitive challenges from new trading technologies. Securities and futures transactions are now being conducted through the internet and other alternative, non-traditional trading systems, and it appears that the trend toward alternative trading systems will continue and probably accelerate. A dramatic increase in computer-based or other electronic trading may adversely affect our commission and trading revenues, exclude our businesses from certain transaction flows, reduce our participation in the trading markets and the associated access to market information and lead to the creation of new and stronger competitors. We may also be required to make additional expenditures to develop or invest in new trading systems or otherwise to invest in technology to maintain our competitive position.
Acquisition Risk
Acquisition of financial services businesses has been an important element of CSFB's strategy, and, when appropriate, CSFB expects to consider additional acquisitions in the future. Even though CSFB reviews the records of companies it plans to acquire, such reviews are inherently incomplete and it is generally not feasible for CSFB to review in detail all such records. Even an in-depth review of records may not reveal existing or potential problems or permit CSFB to become familiar enough with a business to assess fully its capabilities and deficiencies. As a result, CSFB may assume unanticipated liabilities, or an acquisition may not perform as well as expected. CSFB faces the risk that the returns on acquisitions will not support the expenditures or indebtedness incurred to acquire such businesses, or the capital expenditures needed to develop such businesses.
Integration Risk
We and CSFB face the risk that we will not be able to integrate acquisitions into our existing operations effectively. Integration may be hindered by, among other things, differing procedures, business practices and technology systems, and difficulties in adapting an acquired company into our organizational structure. If we are unable to address these challenges effectively, our results of operations could be adversely affected.
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Our principal offices consist of the following properties:
| Location |
Owned/Leased |
Lease Expiration |
Approximate Square Feet |
||||
|---|---|---|---|---|---|---|---|
| New York City, New York | |||||||
| Eleven Madison Avenue(1) | Leased | 2017 | 1,483,000 | ||||
| One Madison Avenue(2) | Leased | 2020 | 1,173,000 | ||||
| 315 Park Avenue South | Leased | 2017 | 220,000 | ||||
In addition, we lease approximately 832,000 square feet for our other offices in the United States. The leases for these properties expire at various dates through 2025. For additional information on our leases, see Note 16 of the consolidated financial statements in Part II, Item 8.
In 2003, in connection with the sale of the Pershing unit, we transferred approximately 1,134,000 square feet of domestic and international regional office space, including offices leased in Jersey City and Florham Park, New Jersey and owned in Florham Park, New Jersey.
We believe that our existing facilities are adequate for our current and future needs.
We are involved in a number of judicial, regulatory and arbitration proceedings (including those described below and actions that have been separately described in previous filings) concerning matters arising in connection with the conduct of our businesses. Some of these actions have been brought on behalf of various classes of claimants and, unless otherwise specified, seek damages of material and/or indeterminate amounts. We believe, based on currently available information and advice of counsel, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition but might be material to operating results for any particular period, depending, in part, upon the operating results for such period. We intend to defend ourselves vigorously against all of the claims asserted in these matters.
In re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation
Since November 1998, several lawsuits have been filed in the U.S. District Court for the Southern District of New York against CSFB LLC, an affiliate and numerous other brokerage firms, alleging that the defendant broker-dealers conspired to fix the "fee" paid for underwriting certain IPO securities by setting the underwriters' fee or "spread" at 7%, in violation of the federal antitrust laws. The lawsuits purport to be class actions brought on behalf of classes of persons and entities that purchased and issued securities in those IPOs.
In February 1999, the district court consolidated the various cases in a single litigation, captioned In re Public Offering Fee Antitrust Litigation. On April 29, 1999, the defendant underwriters filed a motion to dismiss the complaint as a matter of law.
Meanwhile, beginning in August 2000, several other complaints were filed on behalf of issuers of stock in IPOs containing the same allegations of an industry-wide conspiracy to fix IPO underwriting fees. By order dated April 10, 2001, the district court consolidated the issuer complaints.
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On February 14, 2001, the district court dismissed the purchaser plaintiffs' claims on the ground that those plaintiffs lacked legal standing to assert antitrust claims. By order dated December 13, 2002, the U.S. Court of Appeals for the Second Circuit vacated the district court's decision and remanded the action to the district court for consideration of the additional grounds for dismissal asserted in the motion to dismiss.
On July 6, 2001, the issuer plaintiffs filed a consolidated issuer complaint, naming numerous defendants, including CSFB LLC and the Company, under the caption In re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation. On September 28, 2001, the defendants moved to dismiss the consolidated issuer complaint. On September 25, 2002, the district court denied the defendants' motion to dismiss and defendants sought leave to file an interlocutory appeal of that decision. On January 17, 2003, the district court issued an order deferring a ruling on the defendants' motion until the district court reached a decision, upon remand, of the motion to dismiss the consolidated purchaser complaint.
On March 26, 2003, defendants filed a motion to dismiss in both the consolidated issuer and consolidated purchaser cases on the grounds of implied immunity. The district court denied that motion in an order dated June 26, 2003.
By order dated February 24, 2004, the district court granted defendants' motion to dismiss the plaintiffs' claims for damages in the consolidated purchaser case, but denied defendants' motion to dismiss plaintiffs' claims for injunctive relief in that case.
Governmental/Regulatory Inquiries Relating to IPO Allocation/Research-related Practices
In early 2002, in connection with industry-wide investigations into research analyst practices and certain IPO allocation practices, CSFB received subpoenas and/or requests for information from the following governmental and regulatory bodies: (1) the New York State Attorney General, or NYAG; (2) the Massachusetts Secretary of the Commonwealth Securities Division, or MSD; (3) the SEC; (4) the NASD; (5) the NYSE; and (6) the United States Attorneys' Office for the Southern District of New York, or SDNY. The SEC, NASD and NYSE have conducted a joint investigation.
CSFB cooperated fully with these investigations and produced a significant volume of documents, consisting primarily of e-mails, compensation-related information and research reports. During these investigations, the NASD, NYAG and MSD took testimony from various present and former employees of CSFB. The investigations focused primarily on equity research independence and the allocation of certain IPO shares to senior executives of the firm's clients (a practice that regulators have referred to as "spinning").
On April 28, 2003, CSFB and other Wall Street firms finalized a global settlement with a coalition of state and federal regulators and self-regulatory organizations to settle these investigations, or the Global Settlement. Consistent with an agreement in principle that had first been announced in December 2002, CSFB agreed, without admitting or denying the allegations, to pay a total of $200 million, consisting of (a) $150 million to settle enforcement actions based on alleged violations of certain federal and state securities laws and NASD and NYSE rules and (b) $50 million to fund independent, third-party research to clients over five years. CSFB also agreed to implement significant, industry-wide procedural and structural reforms to its business practices relating to both research analyst independence and the allocation of shares in IPOs.
On October 31, 2003, the U.S. District Court for the Southern District of New York approved the Global Settlement. The "state" portion of the Global Settlement consists of CSFB's agreements with each of the state regulators within the North American Securities Administrators Association, or NASAA; CSFB has officially executed its settlement agreements with nearly all of the NASAA members and continues to negotiate the final terms of its agreements with the balance.
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On May 30, 2003, CSFB (and the other banks that participated in the Global Settlement) received a subpoena from the SEC and a document request from the NYSE, each of which seeks e-mails of a number of employees and certain other documents relating primarily to equity research. (The NASD issued a similar request but has since withdrawn that request.) The SEC and NYSE requests are part of those entities' investigations into whether individual employees (rather than CSFB itself) should be held liable for supervisory or other failures in connection with equity research practices during the time period that was the subject of the investigations discussed above. CSFB has produced documents responsive to the SEC and NYSE requests.
CSFB is not aware of any material developments in connection with the previously disclosed investigation by the NYAG of whether potential wrongdoing by individuals occurred during the time period covered by the Global Settlement.
Additionally, CSFB is not aware of any material developments in connection with the previously disclosed governmental and regulatory inquiries concerning the firm's preservation and production of documents in 2000 in response to then-pending investigations into the firm's allocation of shares in IPOs and subsequent transactions and commissions.
Litigation Relating to IPO Allocation/Research-related Practices
Since January 2001, CSFB LLC, an affiliate and several other investment banks have been named as defendants in a large number of putative class action complaints filed in the U.S. District Court for the Southern District of New York concerning IPO allocation practices. On April 19, 2002, the plaintiffs filed consolidated amended complaints alleging various violations of the federal securities laws resulting from alleged material omissions and misstatements in registration statements and prospectuses for the IPOs and, in some cases, follow-on offerings, and with respect to transactions in the aftermarket. The complaints contain allegations that the registration statements and prospectuses either omitted or misrepresented material information about commissions paid to investment banks and aftermarket transactions by certain customers that received allocations of shares in the IPOs. The complaints also allege that misleading analyst reports were issued to support the issuers' allegedly manipulated stock price and that such reports failed to disclose the alleged allocation practices or that analysts were allegedly subject to conflicts of interest. On July 1, 2002, CSFB LLC, an affiliate and other defendants moved to dismiss the consolidated class action complaints. On February 19, 2003, the district court denied the motion as to CSFB LLC, an affiliate and the other defendant investment banks, as well as with respect to certain issuer and individual defendants. In June 2003, the plaintiffs in this litigation announced a proposed settlement of their claims against the issuer defendants and the issuers' officers and directors named in the litigation. On September 2, 2003, the plaintiffs filed an omnibus motion for class certification in all of these actions. By agreement among the parties and the district court, six cases were selected as focus cases for class certification purposes. The underwriter defendants opposed class certification in the six focus cases on February 24, 2004. Briefing on the class certification motion is expected to conclude on April 12, 2004.
Since March 2001, CSFB LLC and several other investment banks have been named as defendants in a number of putative class actions filed with the U.S. District Court for the Southern District of New York, alleging violations of the federal and state antitrust laws in connection with alleged practices in allocation of shares in IPOs in which such investment banks were a lead or co-managing underwriter. The amended complaint in these lawsuits, which have now been consolidated into a single action, alleges that the underwriter defendants have engaged in an illegal antitrust conspiracy to require customers, in exchange for IPO allocations, to pay non-competitively determined commissions on transactions in other securities, to purchase an issuer's shares in follow-on offerings, and to commit to purchase other less desirable securities. The complaint also alleges that the underwriter defendants conspired to require customers, in exchange for IPO allocations, to agree to make aftermarket purchases of the IPO securities at a price higher than the offering price, as a precondition to receiving
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an allocation. These alleged "tie-in" arrangements are further alleged to have artificially inflated the market price for the securities. On May 24, 2002, CSFB LLC and the other defendants moved to dismiss the amended complaint. On November 3, 2003, the district court granted the motion to dismiss and dismissed the action with prejudice as to all defendants. On December 3, 2003, the plaintiffs filed a notice of appeal to appeal the district court's decision.
On November 15, 2002, the Company was sued in the U.S. District Court for the Southern District of New York on behalf of a putative class of issuers in IPOs for which its affiliate, Donaldson, Lufkin & Jenrette Securities Corporation, or DLJSC, acted as underwriter. The complaint alleges that the issuers' IPOs were underpriced, and that DLJSC allocated the underpriced IPO stock to certain of its favored clients and subsequently shared in portions of the profits of such favored clients pursuant to side agreements or understandings. This purported conduct is alleged to have been in breach of the underwriting agreements between DLJSC and those issuers. On September 12, 2003, the Company filed a motion to dismiss the complaint. By order dated March 9, 2004, the district court denied the Company's motion to dismiss as to three of plaintiff's claims, but granted the motion as to plaintiff's claim for unjust enrichment.
Several putative class action lawsuits have been filed against CSFB LLC in the wake of publicity surrounding various governmental and regulatory investigations that led to the Global Settlement. Thus far, cases have been brought against CSFB LLC in the U.S. District Courts for the Southern District of New York and the District of Massachusetts on behalf of purchasers of shares of Atmel Corporation, Agilent