A U.S. flag flies outside the headquarters of BlackRock Inc. in New York, U.S., on Tuesday, April 20, 2010. BlackRock Inc., the world's largest asset manager, and Blackstone Group LP's GSO Capital Partners LP are forming mutual funds to invest in loans as the London interbank offered rate rises to the highest level since August. Photographer: pfeatures
BlackRock HQ in New York © Bloomberg News

The New York attorney-general is investigating whether Wall Street banks and their equity analysts gave select fund managers early warning of changes to stock recommendations, by filling out surveys for clients that hinted of their intentions.

Eric Schneiderman said on Thursday that banks had become a target of his wide-ranging investigation into what he called “insider trading 2.0”, after earlier agreeing a settlement with BlackRock under which it agreed to cease all analyst surveys.

BlackRock, the world’s largest fund manager, ran regular polls to gather more nuanced or quantitative information than analysts publish in their formal research notes. One internal document cited in the settlement explained its intention as: “We are trying to front-run rec[ommendations]”.

Mr Schneiderman said BlackRock had agreed to “be part of the solution rather than part of the problem” by co-operating with a wider examination of relationships between fund managers and equity analysts. It will pay only the costs of the investigation, about $400,000, and has not accepted or denied wrongdoing.

By trying to make market bets ahead of changes in analyst recommendations, using information not available to all clients, fund managers are undermining market integrity, the attorney-general said.

“It creates a two-tier system that is bad for markets and bad for the economy and it has to end,” he said.

Other fund managers, private equity firms and hedge funds that survey analysts could also be pulled into the investigation, but Mr Schneiderman is believed to be focusing now on the analysts and banks themselves.

BlackRock rewarded survey participants by giving them higher rankings in annual polls on the quality of equity research, according to settlement documents. A high ranking in these awards gives banks significant bragging rights, and is reflected in analysts’ pay and bonuses, providing an incentive to co-operate.

Analysts have operated under strict rules that prevent them disclosing their views selectively to favoured clients since abuses were uncovered during the dot.com boom, and prosecutors have zeroed in on the area in recent years.

Goldman Sachs was fined $22m over analyst “huddles” for its hedge fund clients, and Citigroup paid $30m after a tech analyst passed unpublished research to clients.

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