Massachusetts' top securities regulator on Tuesday said he issued subpoenas to two Wall Street investment banks as part of an investigation into whether the firms' research analysis ignored subprime lenders' mounting financial problems.
Secretary of State William Galvin said his office is seeking documents from UBS Securities and Bear Stearns about their research of firms including New Century Financial that lend money to prospective home buyers with poor credit histories.
"We've taken note of the fact that in these two cases, despite the fact that New Century restated its earnings on Feb. 7, they got an upgrade from UBS on Feb. 23 despite the fact that on March 1 New Century indicated that they were going to delay their annual report," Galvin told CNBC. "These raise some very serious questions for us. We thought we'd put this type of activity behind us, but this raises some very serious questions. Was there something else that was coloring these recommendations?"
A spokeswoman for UBS declined to immediately comment, and messages left at Bear Stearns were not immediately returned.
Galvin's announcement of a probe into Wall Street firms' possible role in growing financial distress in the subprime lending industry came hours after New Century Financial disclosed that a federal prosecutor and the U.S. Securities and Exchange Commission were seeking documents relating to accounting errors that inflated the value of its portfolio.
Galvin said his probe covers Wall Street's research into New Century as well as other lenders that also offered potentially risky mortgages that have helped fuel growing mortgage foreclosure rates in several Massachusetts communities.
Galvin said he was unaware of any other securities regulators looking into the role that Wall Street analysts may have played in failing to warn investors about certain lenders' looming financial problems.
He said it was too early to say whether he might issue subpoenas to other Wall Street firms besides UBS and Bear Stearns.
The subpoena from the Securities Division at Galvin's office seeks all documents created by any subprime lending analyst at the two firms. He's also seeking records regarding fees, commissions and other compensation earned by the firms relating to any subprime lender, and any documents sent between hedge fund clients invested in a subprime lender.
Galvin requested that the information be returned by March 27.