Wall Street Braces For Damning Evidence
Neil Weinberg, 02.21.03, 8:54 AM ET
NEW YORK - Wall Street firms are bracing for the release by U.S. regulators in the next few weeks of detailed evidence to support allegations that they foisted tainted stock research on retail clients, which lead to a $1.4 billion settlement last December. Release of the evidence of alleged analyst conflicts of interest is the subject of feverish behind-the-scenes lobbying inside the industry and threatens to set off a new avalanche of bad publicity and private litigation for the besieged companies.
The U.S. Securities and Exchange Commission, New York State Attorney General Eliot Spitzer and other authorities are likely to file court documents within a few weeks outlining the laws they believe the Wall Street firms broke and offering evidence to support their claims, according to Darren Dopp, a spokesman for Spitzer's office (the SEC declined comment).
"The evidence will show blatant conflicts of interest," Dopp said, referring to the alleged practice of compensating analysts for flattering the companies they cover in a bid to land investment banking deals. "It will further embarrass many brokerage firms that swore they were not engaging in such behavior."
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Spitzer may also be looking to the evidence as a face-saving measure. In acting as point man in pushing through the $1.4 billion settlement, the elected official was criticized for using as leverage the threat of criminal prosecutions--a violation of state ethics rules--and for misquoting and taking out of context e-mail messages between analysts and others. Spitzer attributed comments to Henry Blodget, once an analyst at Merrill Lynch (nyse: MER - news - people ), for example, that were actually made to him by a client.
Under the December agreement, Salomon Smith Barney, a unit of Citigroup (nyse: C - news - people ), agreed to the largest payment of $400 million. It was followed by Merrill Lynch and Credit Suisse Group's (nyse: CSR - news - people ) Credit Suisse First Boston at $200 million each, Morgan Stanley (nyse: MWD - news - people ) at $125 million and Goldman Sachs (nyse: GS - news - people ) at $110 million. The firms neither admitted nor denied wrongdoing, but did agree to separate research from investment banking, offer clients independent research and ban the issuance of shares in initial public offerings to executives and directors of corporate clients.
The firms also now face hundreds of suits in which clients are seeking compensation for losses via arbitration in front of the National Association of Securities Dealers or New York Stock Exchange. Many of the cases charge the firms with causing the losses by plying biased stock research. The release of details of how analysts were compensated and how they interacted with investment bankers could bolster such claims and spark new ones.
The employment contract of former Salomon Smith Barney telecom analyst Jack Grubman granted him compensation both for bringing in specific investment banking deals and for generating stock trading volume in the issues he covered, according to an attorney familiar with the document. A spokesman for Grubman declined to comment. Salomon Smith Barney did not respond to a request for comment.
Wall Street firms have been lobbying feverishly to limit the release of evidence, and the court filings are likely to contain certain employment details but not entire contracts, people familiar with the matter say. They have also been battling their own liability insurers, who have asked regulators to explicitly state that the $1.4 billion settlement is nonrecoverable. On that score, at least, Wall Street appears likely to get its way and have the insurers' request turned down. Some policies state that they will pay for both client restitution and fines over misconduct, while others cover only payouts to clients. |
