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10 Securities, Brokerages To Pay $1.4B In Penalties

Dec 20, 2002 | Albany Business Review Ten major Wall Street securities and brokerage companies will pay more than $1.4 billion in penalties, restitution and money to finance investor education programs under the terms of a "global settlement" reached with state and federal regulators that was announced Friday in New York City.

The investor education monies will be placed in an escrow fund.

The deal also requires security industry companies to sever the links between their research and investment banking branches.

New York Attorney General Eliot Spitzer joined Securities and Exchange Commission Chairman Harvey Pitt, North American Securities Administrators Association President Christine Bruenn, NASD Chairman and CEO Robert Glauber and New York Stock Exchange Chairman Dick Grasso in announcing the deal.

Spitzer has been investigating Wall Street improprieties since the Enron scandals broke last year.

The global settlement concludes a joint investigation the regulators launched in April into the influence of investment banking interests on securities research conducted by brokerage firms. Spitzer concluded that companies issued incorrect research reports that made company performance look better in order to secure investment banking business.

The settlement is designed to bring reform to the industry and bolster investor confidence in the integrity of equity research.

Included in the terms of the agreement are:

A requirement for brokerage companies to cut the links between their investment banking businesses and research business. This includes analyst compensation and ends the practice of analysts accompanying investment banking employees at pitches and road shows.

Brokerage firms will not allowed to allocate lucrative Initial Public Offering shares to corporate executives and directors who can influence investment banking decisions.

An obligation to furnish independent research. Each of the brokerage firms will be required to contract with no less than three independent research firms that will provide research to the brokerage firm's customers.

An independent consultant ("monitor") for each firm will be chosen by regulators. This guarantees that investors get access to objective advice.

Disclosure of analyst recommendations. Each firm will make public ratings and price target forecasts. This will allow for evaluation and comparison of analyst's performance.

"This agreement will permanently change the way Wall Street operates," Spitzer said. "Our objective throughout the investigation and negotiations has been to protect the small investor and restore integrity to the marketplace."

"We are confident that the rules embodied in this agreement will do so. The cooperation among my colleagues at the SEC, NASAA, NYSE and NASD has enabled us to reach this important agreement," he said.

The agreement must be approved by the Securities and Exchange Commission and SEC Chairman Pitt said he would recommend approval.

"This agreement represents the dawn of a new day on Wall Street. Our goal and the goal of this agreement are simple: investors, not investment banking fees, come first," said NASAA President Chris Bruenn. NYSE Chairman and CEO Dick Grasso said investors need to know that the firms they do business with act only with the highest standards of honesty and Integrity.

The companies participating in the deal and the amounts they will pay out are:

Bear Stearns & Co., LLC ($80 million).
Credit Suisse First Boston Corp. ($200 million).
Deutsche Bank, ($80 million).
Goldman Sachs, ($110 million).
J.P. Morgan Chase & Co. ($80 million).
Lehman Brothers Inc. ($80 million).
Merrill Lynch & Co. Inc. ($200 million).
Morgan Stanley ($125 million).
Salomon Smith Barney Inc. ($400 million).
UBS Warburg LLC ($80 million).

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