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Banks Fear Liabilities In Wall Street Probe

Dec 3, 2002 |

The world's leading investment banks are battling with US regulators to stave off massive legal liabilities that could stem from a settlement of investigations into Wall Street conflicts of interest.

As the two sides enter final negotiations, the banks are resisting admissions of wrongdoing and pressing the regulators to limit disclosure of evidence against them.

The banks fear that investigators' findings included in a settlement could boost class-action lawsuits filed by investors claiming they were misled by Wall Street analysts. Investment analysts and legal experts estimate damages from such suits could top $5bn. The regulators, led by New York attorney general Eliot Spitzer, want to provide ammunition for civil suits that could provide "restitution" for investors.

"The language of the findings is more critical to the banks than the fines," said Marvin Pickholz, a New York securities lawyer. "They need to leave themselves room to defend themselves from civil litigation."

Regulators hope the talks on a "global" settlement will end soon, setting the stage for a series of meetings starting on December 11 where banks will learn their punishment.

State and federal regulators, led by the Securities and Exchange Commission and Mr Spitzer, have been investigating whether banks promised overly-optimistic stock research or lucrative IPO allocations to corporate customers to win investment banking assignments.

The two sides have reached a broad agreement on a series of structural changes to prevent further abuses. The regulators have informed a dozen banks of fines totalling more than $1bn that are likely to be imposed as part of the deal. They range from as much as $500m for Citigroup's Salomon Smith Barney investment banking arm to as little as $50m for a group of other banks including Goldman Sachs, Deutsche Bank and Morgan Stanley.

This week the regulators are giving the banks a last chance to respond to specific charges against them. The precise findings in a settlement will be closely watched because they could indicate whether authorities will bring charges against individual executives after concluding the broader agreement.

The settlement talks were threatened last week by the prospect that California and Massachusetts regulators might break away from the coalition and continue their own investigations.

But Wall Street's biggest concern has been the language of a settlement and the implications for lawsuits.

Typically, banks avoid acknowledging wrongdoing when they enter into settlement agreements with regulators such as the SEC. But Mr Spitzer and Anthony Taggart, Utah's securities administrator, have pledged to publish the evidence uncovered against the banks as a way to help investors seek restitution.

As part of the talks, the regulators have begun to supply the banks with samples of the evidence against them so they will have the opportunity to defend themselves. This could also help the banks reduce their fines.

The findings against the banks in a settlement agreement could range from allegations of fraud to less severe accusations, such as failure to supervise employees properly.

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