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Brokers Settle Analysts' Bias Case

$1.4 billion penalty meant to change culture

Apr 29, 2003 | The Atlanta Journal-Constitution Seeking to change the culture of Wall Street, regulators Monday announced a $1.4 billion settlement with 10 large investment firms accused of issuing biased stock research to win business from corporate clients.

"Analysts will resume the role of gatekeeper and shed the recently acquired identity of cheerleader or marketer," William Donaldson, chairman of the Securities and Exchange Commission, said at a news conference in Washington detailing the settlement.

Although the financial penalty is the largest in Wall Street history, Donaldson said the reforms laid out in the settlement will be more important than the fines. They include:

• Firms will be required to furnish investors with independent research at no cost to help them make more informed decisions.

• Analysts no longer will be allowed to solicit business or accompany investment bankers when they're making pitches.

• Certain analysis will have to be made public within 90 days after each quarter to allow investors to compare the performance of analysts from different firms.

• Investment firms will be prohibited from "IPO spinning," the allocation of preferential access to shares from initial public offerings of stock.

Regulators hope that these reforms, which amount to an entirely new process for disseminating stock research, will help restore faith in brokerages and markets after a string of corporate scandals.

"Investors understand that risk is part and parcel of investing," said Attorney General Eliot Spitzer of New York. "But we demand there be integrity in the research."

He pointed out that the settlement was part of a civil action but didn't rule out the possibility that criminal charges might be filed in the future. The role of stock analysts is to evaluate companies and make recommendations to investors about their financial futures. These analysts typically work for investment banking firms, which raise money for companies by various means, including offering their stock to the public.

A wall is supposed to separate the analysts from their companies' investment banking operations. But critics have charged that some companies have based analysts' compensation in part on how much investment banking business they help to win.

About $487 million of the settlement is in fines, with the heaviest penalty of $150 million to be paid by Citigroup's brokerage unit Salomon Smith Barney. Merrill Lynch will pay more than $100 million.

Under the terms of the deal, the 10 firms will set aside about $387 million for distribution among aggrieved investors. The distribution plan, whose details are not settled, is subject to court approval and likely will be unable to compensate investors for all their losses.

Stephen Cutler of the SEC's enforcement division said that the regulators' actions are not intended as a substitute for private litigation to recover losses.

"Much of the evidence we've cited will be available to [investors] for the purposes of litigation," he said. The best part of the probe, said Boyd Page, a senior partner with the law firm of Page Gard Smiley and Bishop in Atlanta, is that the large volume of e-mails and internal documents amassed by regulators will help individual investors recover losses through arbitration or class-action lawsuits.

In particular, the settlement highlighted the alleged misdeeds of two celebrity analysts.

Merrill Lynch researcher Henry Blodget, accused of fueling the dot-com stock bubble of the late 1990s, will be fined $4 million and be barred from the securities industry for life. Another star analyst, Jack Grubman of Salomon Smith Barney, will pay $15 million.

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