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Analyze This: Wall St. To Pay The Piper

Dec 20, 2002 | WWW.CBSNEWS.COM

Some of the nation's largest brokerages are nearing agreement to pay almost $1 billion to settle conflict-of-interest allegations, one of the largest fines ever levied by securities regulators, people familiar with the talks said.

"It's a done deal," one source told CBS MarketWatch.

However, a different person cautioned that while talks "have picked up" not all firms have signed off on the pact so a pact could be delayed.

The expected settlement calls for the 12 firms to implement reforms to remove bias, sources familiar with the talks said Thursday on the condition of anonymity. One reform calls for the firms to fund independent stock research for investors that would complement their own analysts' work.

The agreement includes firms such as Citigroup, Goldman Sachs and Merrill Lynch. The largest fine was expected to be about $350 million to be paid by Citigroup, a regulatory source said.

The deal also would ban initial public stock offerings to chief executives of companies that have investment banking business with the Wall Street firms, the sources said. The deal was to be announced Friday.

CBS MarketWatch editor Tom Bemis says it appears that some of that money is going to go into restitution fund for investors.

"Relative to the kind of losses that investors have seen over last two or three years, it's trivial, but it is a large headline number, at least," Bemis said, "and there is at least the potential for some compensation in the most egregious cases."

In agreeing to the fines, the firms would neither admit nor deny charges that they had misled investors, The New York Times reported Friday.

Regulators began investigating brokerages following the decline of Enron Corp. and revelations that small investors lost millions of dollars after they were advised to buy stocks that analysts privately derided in order to bolster the stocks' value and lure the companies as investment banking clients.

A dozen major brokerages have been meeting in New York City over the last two weeks with representatives of New York Attorney General Eliot Spitzer and Steven Cutler, the enforcement director of the Securities and Exchange Commission.

The SEC and Spitzer's office declined to comment on a possible settlement. Officials at Citigroup, Merrill Lynch and Salomon Smith Barney also declined to comment Thursday.

The brokerages gave their initial support in October, but squabbles over the fines and which firms would pay how much has held up the settlement.

The biggest progress in the talks came Tuesday when smaller brokerages dropped their effort to lower their fines from a range of $50 million to $75 million, one of the sources said.

In May, Merrill Lynch, the nation's largest brokerage firm, agreed to a settlement with Spitzer's office that included a $100 million fine and the separation of its analysts from investment banking.

That is probably what will happen at the other brokerages, said Bemis.

"It looks as if there is going to be an effort to separate research from the investment banking business and maybe some move to move that outside the brokerage firms, and there will be requirements for monitoring the quality of the research and guaranteeing that independent research is also provided along with any product that comes from the brokerages themselves," he said.

Spitzer had released documents and e-mails showing that Merrill Lynch analysts privately used words like "disaster" and "dog" to describe some stocks while publicly recommending that investors buy the companies' shares.

The National Association of Securities Dealers, which polices the brokerage industry, and the New York Stock Exchange announced in October that they were tightening their rules governing analysts and stock offerings.

The other brokerages in the settlement talks include Bear Stearns, Credit Suisse First Boston, Deutsche Bank, J.P. Morgan Chase, Lehman Brothers Holdings, Morgan Stanley, UBS Warburg and U.S. Bancorp.

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