Wall Street Firms, Regulators Settle Research Claims (Update3)
By Tom Cahill
New York, Dec. 20 (Bloomberg) -- The largest U.S. securities firms will pay about $1.4 billion to settle claims they misled customers with biased stock research, ending yearlong investigations that shook investor confidence and revealed how Wall Street sacrificed integrity in the quest for fees.
Citigroup Inc., Credit Suisse First Boston, Merrill Lynch & Co. and seven other firms will pay fines, make restitution to investors and fund independent research for their customers, said federal, state and industry regulators.
The agreement will change decades-long practices on Wall Street that contributed to the Internet stock bubble in the 1990s. It will force firms to wall off analysts from investment bankers and ban brokerages from giving shares in initial public offerings to executives with whom they do business.
``The settlement will result in significant reforms that will serve investors,'' said Stephen Cutler, the Securities and Exchange Commission's enforcement chief, who helped to negotiate the accord. ``It is intended to bring new integrity to Wall Street research.''
The agreement was made between the 10 firms and New York Attorney General Eliot Spitzer, Securities and Exchange Commission Chairman Harvey Pitt, New York Stock Exchange Chairman Richard Grasso, North American Securities Administrators Association President Christine Bruenn and NASD Chairman and Chief Executive Officer Robert Glauber.
Payments
Citigroup will pay a total of $400 million, the largest fine, in the settlement. Credit Suisse and Merrill Lynch will pay $200 million each, Morgan Stanley will pay $125 million, Goldman Sachs Group Inc. will pay $110 million, and Lehman Brothers Holdings Inc., J.P. Morgan Chase & Co., Bear Stearns Cos., UBS Warburg and Deutsche Bank AG will pay $80 million each.
Spitzer said the size of each firm's payments was determined primarily by their ``relative culpability.''
Securities firms' share prices rose after the settlement was announced, led by a 3.8 percent gain for Morgan Stanley, which rose $1.49 to $41.79 at 3:03 p.m. in New York Stock Exchange composite trading. Bear Stearns climbed 2.3 percent to $61.75, Goldman Sachs gained 1.8 percent to $71.76 and Lehman rose 1.8 percent to $56.05.
`Slap on the Wrist'
Regulators disputed suggestions that the settlement dwarfs the estimated $28 billion in investment banking fees made in 2000 during the telecommunications and technology-underwriting boom, according to a Banc of America Securities estimate.
``I don't think you can call $1.4 billion a slap on the wrist,'' said Cutler. ``It will be felt very seriously by the firms.''
The payments are the largest ever made in any legal or regulatory settlement. Previously, Prudential Securities Inc. agreed to pay $1 billion in a 1993 fraud settlement with the SEC, and Nasdaq dealers also agreed in 1996 to pay $1 billion to settle a price-fixing suit filed by shareholders.
Spitzer was reviewing Citigroup Chairman and Chief Executive Officer Sanford Weill's role in helping former Citigroup analyst Jack Grubman get his children into an exclusive nursery school and the chairman's statement that he told the analyst to ``take a fresh look'' at AT&T Corp. At the time, Citigroup was seeking work to help the phone company sell shares in its wireless unit.
Grubman may be fined $15 million and barred from the securities industry for life, Spitzer said in an interview. The former analyst ``simply will not be permitted to go back to the securities business,'' he said. ``There will not be any charges with respect to Sandy Weill.''
The regulators will publish the evidence they collected in the course of their investigations of the firms, which may help shareholders suing the brokerages, the regulators said.
`Ammunition'
``It provides a lot of ammunition for individuals,'' said William Galvin, the secretary of commonwealth for Massachusetts. Galvin said his office, which handled the investigation into Credit Suisse, was dropping its inquiry into the firm and may pursue a case against Frank Quattrone, its technology banking chief.
Citigroup and Grubman face 62 potential class actions related to research, according to a bank filing with the SEC.
The agreement won't mean investors will recover all of the money they may have lost by taking Wall Street's advice, Spitzer said. Shareholders will have to turn to class-action suits to recover what they lost, he said.
``I'm not Publisher's Clearinghouse. They are not getting a check in the mail anytime soon,'' said Spitzer, in reference to the magazine sweepstakes company. ``It would be wonderful if these funds could be returned to those that lost money, but that is a very difficult proposition.''
IPO Allocations
A centerpiece of the accord is a prohibition on giving executives ``hot'' IPO shares to gain business, a practice known as spinning, Spitzer said. ``The difficulty with spinning and the cloud it cast is enormous,'' Spitzer said.
Ebay Inc. Chief Executive Margaret Whitman quit Goldman Sachs's board after shareholders criticized her receipt of shares in IPOs managed by the firm.
Regulators began investigations into stock research as investors lost more than $8.5 trillion in stock value between March 2000 and October this year. Wall Street firms suffered as investors fled stocks amid revelations that the brokerages recommended stocks they knew were risky to get banking fees.
Spitzer, who began investigating Merrill Lynch in June 2001, put a national focus on analyst conflicts of interest in April when he released e-mails from Merrill employees, including technology analyst Henry Blodget. In one, an unidentified analyst described Internet company InfoSpace Inc. as a ``piece of junk'' while analysts had positive ratings on the companies. The firm said the e- mails were taken out of context.
In May, Merrill agreed to pay $100 million to settle the accusations.
Thomas Weisel, U.S. Bancorp
San Francisco-based Thomas Weisel Partners and U.S. Bancorp Piper Jaffray, the two smallest firms that took part in the talks with regulators, were not included in the settlement.
``The firm is being penny-wise and pound-foolish,'' said Deborah Bortner, securities administrator for Washington, which has been investigating U.S. Bancorp. ``We're going to be in a prolonged investigation of USB if they don't settle.''
Piper Jaffray's ``wrongdoing certainly matched that of the other firms,'' Bortner said. ``Their settlement offer was insufficient by quite a bit.''
Erin Freeman, a spokeswoman for U.S. Bancorp, said talks between the firm and regulators are continuing. ``While we have not yet reached a mutually satisfactory agreement in principle on all issues, as have some other of the involved firms, we will continue to work diligently toward that objective,'' she said.
The settlement is ``pretty momentous,'' said Ron Geffner, an SEC enforcement lawyer from 1991 to 1994, who's now a partner with Sadis & Goldberg. ``It's requiring Wall Street to modify its operations.''
The improprieties the 10 firms were accused of involved IPOs during the technology stock underwriting boom in 1999 and 2000. Some 556 U.S. IPOs were sold in 1999 and 444 came in 2000. Only 157 IPOs were sold this year, none with the same one-day doubling and tripling in value as they did in the dot-com boom.
``They're fighting last year's battles,'' said James Tisch, chief executive officer of Loews Corp. ``They're putting together rules to prevent spinning. There's no spinning going anymore.''
Rohini Pragasam, Deutsche Bank AG spokeswoman; Russell Sherman, a Bear Stearns spokesman; and Victoria Harmon, a CSFB spokeswoman, didn't return calls.
``From the outset, we were committed to playing a constructive role in the reform process,'' said Diana Quintero, a spokeswoman for Morgan Stanley. ``We're proud that many of the ideas we originated have been incorporated into this settlement.''
J.P. Morgan spokesman Brian Marchiony, Merrill Lynch spokesman Mark Herr declined to comment, UBS spokesman David Walker, Goldman Sachs spokesman Lucas van Praag and Lehman spokeswoman Hannah Burns declined to comment.
Citigroup spokeswoman Leah Johnson said in a statement that the settlement represented neither evidence nor admission of wrongdoing. |
