Another interesting enforcement piece>
By CHARLES GASPARINO and RANDALL SMITH
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- Wall Street firms are pressing securities regulators to reduce the level of fines they will pay as part of an agreement to settle allegations that they misled small investors with faulty stock research -- and they could very well get their way.
As talks come to a head this week to craft a so-called global settlement of planned civil charges over research practices during the market bubble of the 1990s, securities firms are making a variety of arguments to persuade regulators to reduce the monetary penalties that are a critical part of the pact. The result could lead to fines for Wall Street, once estimated at more than $1 billion, of $800 million to $900 million, though regulators still expect to get close to $1 billion in fines, according to people close to the inquiry.
The fines represent the last major stumbling block to completing the settlement. Major securities firms already are resigned to paying an additional $1 billion over the next five years to fund the distribution of independent stock research to small investors, and making other changes to their research practices. Under the plan, analysts will be barred from helping bankers win financings by attending pitch meetings. There also is broad agreement to ban the practice of spinning initial public offerings, in which firms dole out shares of the IPOs to the personal brokerage accounts of corporate executives who have the power of handing out lucrative underwriting assignments and other business to Wall Street firms. Under the plan, corporate executives in the position of choosing underwriters will be prohibited from getting IPO shares.
For months, regulators, led by New York Attorney General Eliot Spitzer, have said that substantial fines were the cornerstone of any global pact. Mr. Spitzer and Stephen Cutler, the Securities and Exchange Commission enforcement chief, also are seeking to use part of the money to form a restitution fund for aggrieved investors.
Mr. Spitzer in May won a $100 million fine from Merrill Lynch & Co. to settle charges involving research conflicts after uncovering e-mails from analysts, including the firm's former tech-stock star Henry Blodget, denigrating stocks that received high ratings from the firm. But in recent weeks, several Wall Street firms have made headway in arguing their cases for lower fines, using the Merrill settlement as a benchmark. And regulators appear increasingly to want to close the matter, which has taken a significant amount of resources, before year-end.
Salomon Smith Barney's parent, Citigroup Inc., for instance, which originally was targeted to pay fines exceeding $500 million, could now be required to pay $350 million to $500 million, people close to the matter say. The concession to Citigroup is important because the firm has faced criticism over the research of its former telecom analyst Jack Grubman, and evidence suggesting that its chief executive, Sanford Weill, pressured Mr. Grubman to change his rating on AT&T Corp., a corporate client, in late 1999. Each has denied wrongdoing. Meantime, Citigroup lawyers have argued that no matter what evidence is uncovered, conflicts at the firm were not five times as bad as those at Merrill.
Mr. Spitzer's office also is investigating if Salomon Smith Barney brokers helped corporate CEOs who gave the firm banking business obtain personal loans, according to people close to the matter. A spokesman for Mr. Spitzer had no comment. A spokeswoman for Citigroup had no comment. As of now, any deal with Citigroup could settle the investigation into Mr. Weill's activities, but Mr. Grubman could still face separate charges.
Other firms have used alternate arguments. Credit Suisse First Boston, which has been under government scrutiny for over a year and recently has posted operating losses, has argued that a large award could be damaging, considering its poor results. Earlier this year, CSFB, owned by Credit Suisse Group, paid $100 million to settle charges with regulators that it forced investors to pay oversized commissions in return for allocations of hot initial public offerings, and regulators had sought more than $200 million from CSFB to settle the current research probe. Now, regulators appear willing to accept about $150 million from the company, these people say.
Separately, six smaller firms have banded together in the past 10 days or so to protest potential fines against them. These firms -- Bear Stearns Cos.; the securities unit of Deutsche Bank AG; Lehman Brothers Holdings Inc.; the securities unit of UBS AG; the Piper Jaffray unit of U.S. Bancorp and Thomas Weisel Partners LLC -- haven't figured prominently in the research probe.
These smaller firms, whose proposed fines have been in the $50 million to $75 million range, are seeking a steep reduction in their proposed penalties, these people said. They are hoping to win a degree of uniformity in their treatment with regulators, with one of their goals a lack of differentiation among them that could be used against them in civil suits by investors who lost money.
By acting collectively, the firms hope to increase their bargaining power with the threat that by not participating in the settlement as a group, they could shoot a hole in the global nature of the settlement. Another argument they have made is that in some cases, regulators haven't confronted them with any evidence of what they consider damaging e-mails, as has occurred with some other firms. Regulators now appear willing to lower the fines for these firms.
Of course, the negotiations remain fluid. Investigators had envisioned announcing the global settlement this week, but that has been postponed until next week at the earliest. In addition, both Mr. Spitzer and Mr. Cutler, who has partnered with the attorney general in crafting the settlement, have made it clear to the firms that both are willing to file charges against specific firms if a global settlement fails to include investor safeguards. Mr. Spitzer, for his part, recently ordered his chief deputy in charge of the investigation, Eric Dinallo, to prepare a case against Citigroup if a settlement fails to meet his requirements.
These negotiations over several months have taken a toll on both Wall Street firms and regulators. Mr. Spitzer has said he would be willing to lower the price tag on the fines if firms would agree on "structural" reforms, such as separating research and investment banking, and funding the distribution of independent research to small investors. Mr. Spitzer also is seeking a central repository where investors can easily find how successful analysts have been in recommending stocks. |
