Wall St banks pay $1.4bn to settle scandal
By Joshua Chaffin in Washington and David Wells and Adrian Michaels in New York
Published: April 28 2003 17:59 | Last Updated: April 29 2003 1:02
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Ten of Wall Street's largest investment banks signed a landmark settlement with US securities regulators on Monday, hoping to draw a line under the worst financial scandal in a generation.
The final settlement included findings of fraud against three banks - Citigroup's Salomon Smith Barney unit, Credit Suisse First Boston and Merrill Lynch. The regulators also released new evidence showing alleged conflicts of interest at other leading banks including Goldman Sachs and Morgan Stanley.
Announcing the settlement in Washington, William Donaldson, chairman of the Securities and Exchange Commission, said: "I am profoundly saddened, and angry, about the conduct that's alleged in our complaints. There is absolutely no place for it in our markets and it cannot be tolerated."
The banks were accused of betraying investors by promising companies flattering stock research in exchange for investment banking work.
Tainted research
Read the highlights of the regulators' evidence, bank by bank
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Some were also accused of bribing their corporate clients' senior executives with shares of lucrative initial public offerings in return for business.
Under the settlement, the banks, which neither admitted nor denied wrongdoing will pay $1.4bn in restitution and to supply independent research to investors.
It also requires the banks to introduce structural reforms to insulate research analysts from the influence of investment bankers.
These reforms are widely expected to end the multi-million dollar pay packets some analysts enjoyed in the bull market that were justified by the amount of investment banking business they brought in.
But on Monday it emerged that CSFB had offered an equity analyst at rival JP Morgan Chase a package that could earn him up to $4m in the first year.
In addition to Monday's fines, the banks are expected to pay billions of dollars more as a result of private lawsuits brought by aggrieved investors.
A draft settlement was first announced in December by its main architects, a coalition of state and federal securities regulators led by Eliot Spitzer, the New York attorney-general, and the SEC and the National Association of Securities Dealers.
The regulators had been haggling with the banks since then over the specific language of the allegations and the e-mails that would be released to the public. These issues were crucial to the banks because aggrieved investors are expected to use the material to bolster lawsuits.
Lawyers said the material would be very useful for those seeking to sue the banks. "This stuff is served up for the plaintiffs' lawyers on a platter," said Tom Dewey, of Dewey, Pegno & Kramarsky.
Citigroup's Salomon division came in for the harshest punishment. Its $400m payment includes a $150m fine, the largest civil penalty ever exacted by securities regulators. Along with CSFB, Salomon was found to have issued "fraudulent research reports" to investors, and to have awarded stock in "hot" initial public offerings to executives in a position to steer their companies' banking business back to them - a practice known as "spinning", which all the banks have agreed to ban.
Regulators noted that Sandy Weill, chairman of Citigroup, asked Jack Grubman, the group's former telecommunications analyst, to "take a fresh look" at his unfavourable rating on AT&T, which later gave Salomon a lucrative banking assignment. Mr Grubman later told a friend that he had changed his rating so Mr Weill would help his children get into an elite Manhattan nursery school.
The settlement calls for millions in fines and lifetime bans from the securities industry for Mr Grubman and Henry Blodget, the former Merrill internet guru.
Bear Stearns, CSFB, Goldman Sachs, Lehman Brothers, Merrill, Piper Jaffray, Salomon and UBS issued research reports that were "not based on principles of fair dealing", regulators said.
Two firms, UBS and Piper, received payments for stock research from companies they covered that were not disclosed to investors.
In a new allegation, regulators said those two, plus JP Morgan, Bear and Morgan Stanley, paid other firms millions of dollars to provide research on companies whose shares they had underwritten.
In a final blow to Wall Street, the settlement bars the banks from offsetting their fines against tax or claiming them on insurance policies. |
