Wall Street Agreement to Allege `Fraud,' Spitzer Says (Update5)
By Ed Leefeldt
New York, April 3 (Bloomberg) -- The $1.4 billion settlement of claims Citigroup Inc., Credit Suisse First Boston, Merrill Lynch & Co. and eight other securities firms misled investors with biased stock research will say some of the firms committed fraud, said New York State Attorney General Eliot Spitzer.
Including allegations of fraud in the settlement, likely to be completed within weeks, will make it easier for investors and others to collect damages in private lawsuits against the firms, securities lawyers said.
``This is the largest fraud ever perpetrated on the investing public,'' Spitzer said at a meeting of the New York City Bar Association. Using the term fraud may invigorate shareholder lawsuits against the firms, securities lawyers said.
Each of the 11 firms in the settlement, which capped more than a year of investigation and negotiation, will sign separate deals. Joseph Borg, director of the Alabama Securities Commission, said in an interview that the banks most likely to be accused of fraud are the ones paying the biggest fines. Citigroup, Credit Suisse First Boston and Merrill paid the steepest penalties.
Including fraud in the settlement ``could reduce the burden of proof against the investment banks and either create more litigation or make the current litigation against them more successful,'' said Ron Geffner, a former enforcement attorney at the Securities and Exchange Commission who is now with Sadis & Goldberg LLC in New York.
Citigroup spokeswoman Leah Johnson declined to comment. Credit Suisse spokeswoman Victoria Harmon, Goldman Sachs Group Inc. spokesman Lucas Van Praag and Merrill Lynch & Co. spokesman Mark Herr declined to comment.
Reserves
The firms, which have together set aside more than $3 billion to pay for the settlement and related lawsuits, have fought against attempts to include settlement language that may increase their legal liability and damage their reputation.
Other areas of disagreement that have delayed final agreement included the extent of the disclosure of firms' internal information and documents.
Spitzer said the final agreement was ``99 percent done'' and will contain ``all the evidence'' against the firms. ``Once the settlement is done, people can issue their own litigation, which I think is critically important,'' he said.
The settlement, announced on Dec. 20, requires securities firms to wall off analysts from the investment bankers who unduly influenced their recommendations. It also bans brokerages from providing access to shares of initial public offerings to executives in return for investment banking business.
Among the 11 investment banks that agreed to the settlement, Citigroup would pay $400 million, the largest amount. Credit Suisse First Boston and Merrill Lynch are paying $200 million each, with the rest of the firms paying lesser amounts. The penalties include $900 million in fines, $450 million to fund independent research and $85 million for investor education for a total cost of more than $1.4 billion.
Merrill was the first to settle, reaching an agreement on a $100 million fine in May 2002. In the December settlement, Merrill agreed to pay an additional $100 million, for independent research and investor education.
Weill Criticized
Spitzer, who led the investigation, has already accused Citigroup and its chief executive, Sanford Weill, of fraudulent behavior.
``He is chairman of the company that is paying perhaps the largest fine in history for perpetrating one of the biggest frauds on the investing public,'' said Spitzer on March 22 when Weill was nominated to join the board of the New York Stock Exchange, one of the self regulatory organizations that is a party to the settlement. Weill withdrew his nomination after Spitzer objected.
The NASD, the industry's own watchdog, has charged Frank Quattrone, the former head investment banker of Credit Suisse's technology unit, with violating rules when he pressured analysts to issue positive research reports of clients. He's being investigated by federal and state prosecutors, according to NASD documents.
The NASD is also probing Kevin McCaffrey amid claims that he failed to supervise analysts such as Jack Grubman, Citigroup's telecom analyst, while McCaffrey was head of U.S. stock research.
Risks
``There is huge exposure in the private lawsuits,'' said James Cox, a law professor at Duke University. Securities class action lawsuits are up 31 percent in 2002 from the previous year, according to the Stanford Law School Securities Class Action Clearing House, and the magnitude of the settlements has also increased, with five settlements in excess of $200 million since 1995.
Milberg Weiss Bershad Hynes & Lerach LLP, a New York law firm, has a lawsuit in U.S. District Court in Manhattan alleging that 55 investment banking firms and 309 companies manipulated their initial public offerings and defrauded investors. On Feb. 19, Judge Shira Sheindlin denied the investment banks' motion to dismiss the suit. Attorney William Lerach could not be reached for comment.
Henry Hu, a corporate and securities law professor with the University of Texas, said a fraud claim against firms in the Wall Street settlement may affect individual arbitration complaints. ``They may influence how much a customer gets,'' Hu said.
Encourage Plaintiffs
Alan Bromberg, a law professor at Southern Methodist University in Dallas, said that while a simple allegation of fraud in the settlement wouldn't be conclusive, it would encourage plaintiffs to file. It might also help defendants get past a motion to dismiss and provide a better support for the claim, he said.
Investment banks are fighting any language that could leave them further exposed to civil lawsuits, such as the disclosure of detailed documentation that would give plaintiffs' lawyers a road map for future lawsuits, said securities regulators involved in the negotiations.
``Firms are dickering over language in the settlement documents and what is released,'' said Tony Taggart, Utah's top securities regulator. ``They're all trying to negotiate the weakest document possible.''
Spitzer told the New York City Bar Association that he wanted all the ``smoking guns'' to come out in the settlement.
No Cover Up
``I felt since day one that the one thing I couldn't do was cover up,'' Spitzer said. He said his determination caused a breakdown in talks with Merrill last spring. Merrill subsequently settled in May, agreeing to pay fines and make restitution of $200 million.
Spitzer also released e-mails showing that Citigroup's Weill helped former analyst Jack Grubman get his children into an exclusive nursery school while pushing for the analyst to ``take a fresh look'' at AT&T Corp. At the time, Citigroup was seeking investment-banking work from the phone company to help it sell shares in its wireless unit.
``The evidence will all come out,'' said Spitzer. ``Every bit of it will come out. Nothing will be held back.''
This evidence will make it ``less likely'' that U.S. District Judge Gerard Lynch, the New York federal judge presiding over the nine lawsuits pending against Citigroup's Salomon Smith Barney unit for analyst wrongdoing, will throw out the lawsuits, said Marcel Kahan, a securities law professor at New York University's School of Law.
The analyst litigation, split into nine cases pinned to each of the nine technology companies that Salomon analysts allegedly hyped, could be dismissed if Lynch decides there isn't enough evidence. If he allows them to proceed to trial, shareholder lawyers may gain access to Citigroup's internal documents.
``It's probably cheaper to get it this way,'' said Kahan. ``You have it all, you have it together. Spitzer will have done some of the work for them. For Citigroup, it may make a motion to dismiss moot now.''
The nine cases are divided among the shareholders of WorldCom Inc., Global Crossing Ltd., AT&T Corp., Metromedia Fiber Network Inc., Williams Communications Group Inc., Winstar Communications Inc., Level 3 Communications Inc., XO Communications Inc., and Rhythms Netconnections Inc.
U.S. District Judge Barbara Jones in January consolidated 77 suits against Salomon, before stepping down from the cases on Feb. 4 because she owns shares of AT&T Corp., the subject of one of the nine suits.
Spitzer told the New York City Bar Association that he didn't want to ``tar all the firms with the same brush'' and that only a few would face allegations of fraud.
Other firms that are part of the global research settlement are Bear Stearns Cos., Deutsche Bank AG, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Morgan Stanley, UBS Warburg LLC and U.S. Bancorp.
Last Updated: April 3, 2003 19:26 EST |
