Subject: [NEXTEL-1] Wall Street firms to pay $1.4 billion in probe

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Date: Fri, 20 Dec 2002 19:36:51 -0500

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Wall Street firms to pay $1.4 billion
Settlement ends investigation of research foibles

By Luisa Beltran, CBS.MarketWatch.com
Last Update: 3:52 PM ET Dec. 20, 2002

NEW YORK (CBS.MW) -- The top firms on Wall Street agreed Friday to give up $1.43 billion and overhaul their businesses in a landmark settlement of charges that they deceived investors with biased research.

Regulators, led by New York state Attorney General Eliot Spitzer, announced the pact Friday after months of investigation. The settlement spares top executives from prosecution.

The agreement separates investment banking from research at the firms and bans any allocation of IPO shares to executives or directors of public companies, a practice known as "spinning."

The 10 securities firms agreed to pay $900 million in fines, provide an additional $450 million to fund independent research for investors over the next five years, and spend $85 million on an investor education program.

In announcing the settlement, Spitzer, who spearheaded the investigation, said "restoring investor confidence is paramount."

"This has been about one thing," he said. "Ensuring retail investors get a fair break. Ensuring honest advice and a fair deal."

The 10 firms have agreed to a settlement in principle and there will be "some delay" before formal approval, Spitzer said. The $900 million will be split 50-50 between the states and the federal government.

"We will endeavor to use those funds for restitution to investors," Spitzer said, who estimated that New York State would receive about $40 million.

Citigroup, parent of Salomon Smith Barney, will pay the largest fine, $300 million. The investigation against the financial services firm is closed "for now," Spitzer said.

The New York AG added that there would not be more charges levied against Citigroup Chief Executive Sanford Weill.

Weill is expected to issue a public apology. When asked if any executives would make such an admission, Spitzer answered: "There will be statements issued."

The fines

Credit Suisse will pay $150 million, and the settlement includes the $100 million fine Merrill Lynch already paid in its earlier settlement with regulators. Seven other firms will each pay $50 million fines, according to a joint statement by regulators.

With the additional amounts to be paid for independent research and investor education, here's the total bill for each firm:

Citigroup (C:
news,
chart,
profile): $400 million

Credit Suisse (CSR:
news,
chart,
profile): $200 million

Merrill Lynch (MER:
news,
chart,
profile): $200 million

Goldman Sachs (GS:
news,
chart,
profile): $110 million

J.P. Morgan Chase (JPM:
news,
chart,
profile): $80 million

Bear Stearns (BSC:
news,
chart,
profile): $80 million

Morgan Stanley (MWD:
news,
chart,
profile): $125 million

Lehman Brothers (LEH:
news,
chart,
profile): $80 million

Deutsche Bank (DB:
news,
chart,
profile): $80 million

UBS Warburg (UBS:
news,
chart,
profile): $80 million

The deal ended months of negotiations between firms and regulators to end a conflict-of-interest investigation into financial research.

The agreement must still be approved by the Securities and Exchange Commission's five commissioners.

"I don't think you can call $1.4 billion a slap on the wrist," said Stephen Cutler, director of enforcement at the SEC.

The investment banks have been in talks with regulators for months regarding conflicts posed by analyst research. The investigation centers on whether firms used analyst research to win investment-banking business.

"Analysts cannot go out and troll for investment banking business," Cutler said.

He added that analyst compensation cannot relate in any way to investment banking compensation.

Two other firms, Thomas Weisel and U.S. Bancorp are not part of the pact. "We are not in the settlement as of yet," said Thomas Weisel spokeswoman Amanda Duckworth. "The regulators felt that there is greater sense to get large firms done first."

U.S. Bancorp declined comment.

Both Thomas Weisel and U.S. Bancorp are expected to sign onto the settlement, a Spitzer spokeswoman said.

No more spinning

In the practice of IPO allocation, many of the investment banks offered shares of hot new stock issues to executives at companies with which they were doing or hoped to do business. For the executives, the allocations amounted to virtually guaranteed gains. But that practice has now been banned and officials signaled that more rules could be on the way.

"You can expect more requirements [for IPOs] as we go forward in the process," said Richard Grasso, head of the New York Stock Exchange.

The Wall Street pact would also call for each of the securities firms under investigation to assign an independent monitor to distribute company research and at least two independent research reports.

Citi had been expected to face as much as $500 million in fines while CSFB had been seen paying $250 million. Citigroup's Salomon Smith Barney unit has been the target of several probes because of research provided by former telecommunications analyst Jack Grubman. Spitzer investigated whether Citigroup Chairman and CEO Sanford Weill pressured Grubman to reconsider his view on AT&T Corp. to gain lucrative investment banking business.

A damaging e-mail was also found to implicate CSFB. William Galvin, Massachusetts's secretary of the commonwealth, unveiled messages from CSFB showing that the investment bank gave favorable ratings to companies that it did business with. See story

The benchmark for the fines came from Merrill Lynch, which earlier this year agreed to a $100 million settlement after Spitzer released e-mail from former Merrill star analyst Henry Blodget. Earlier this year, the analyst was caught criticizing the same stocks he was recommending.

"Changing documents," or the actual paperwork used in developing the case will be available in about a month, a Spitzer spokeswoman said.

No criminal charges

As part of the settlement, executives would not face jail terms. However, regulators could prosecute individuals later on, Spitzer's office warned Thursday. Former Salomon telecom analyst Grubman and CSFB uber-banker Frank Quattrone are expected to face future charges.

Separately, Spitzer said Friday that regulators had reached a tentative settlement under which former Salomon Smith Barney telecom analyst Jack Grubman will resolve allegations of securities violations.

He's agreed to pay a $15 million fine and be banned for life from operating in the securities industry, Spitzer said.

Grubman was at the center of the scandals that erupted this year over conflicts of interest between analysts' stock recommendations and their firms' investment banking activities.

When asked Friday if any action would be taken against Quattrone, who heads CSFB's global technology group, Spitzer said: "I will say nothing about Quattrone."
Luisa Beltran is a reporter for CBS.MarketWatch.com in New York. Matt Andrejczak contributed to this story.

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