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Citigroup To Discuss Salomon Settlement

Sep 27, 2002 | The Washington Post

Citigroup Inc. officials plan to meet with securities regulators in Washington on Friday to discuss a global settlement of multiple inquiries into possible conflicts of interest between investment bankers and analysts at the firm's Salomon Smith Barney Inc. unit, according to sources familiar with the situation.

The sources said the meeting will include regulators from the Securities and Exchange Commission, NASD (formerly the National Association of Securities Dealers) and New York Stock Exchange Inc. and would cover, among other things, a complete separation of investment banking and research at Salomon.

But industry sources said Citigroup would be unlikely to accept such a separation unless the entire securities industry makes similar changes. Government affairs officials at other Wall Street firms tonight said they did not believe any such industry-wide settlement was imminent.

Meanwhile, a source close to New York Attorney General Eliot Spitzer, who is conducting his own broad probe into activities at Salomon, said Citigroup officials met with New York state investigators today to discuss whether the attorney general would join a possible global settlement and bring his probe to a quick close as well.

As of late this evening, the source said it was unclear whether Spitzer would agree to be part of such a settlement. In the past, officials in Spitzer's office have expressed reluctance to bring their probe to an abrupt close. In recent days, officials close to the attorney general have suggested they would act soon to force certain executives to give up large profits they made by selling hard-to-get shares in initial public offerings awarded to them by Salomon during the Internet boom.

In recent weeks, Citigroup officials have expressed a strong desire to wrap up all inquiries into the Salomon unit as quickly as possible to restore confidence in the giant bank and reverse a rapid decline in the company's stock price.

Citigroup chairman and chief executive Sanford I. Weill earlier this month ousted Michael A. Carpenter as head of Salomon, replacing him with Charles Prince, the firm's chief operating officer and a trusted Weill aid with no investment banking experience. Before that move, Weill engineered the ouster of one-time star Salomon telecommunications banker Jack B. Grubman.

Grubman, who made consistently bullish reports on telecom companies that later failed, is at the center of the multiple state, federal and industry probes. Investigators have been trying to determine whether Grubman wrote intentionally misleading reports on otherwise troubled companies to generate large investment banking fees for Salomon during the stock market bubble of the late 1990s. Grubman has said he truly believed in the firms' potential and did not write rosy reports to please investment banking clients.

During the boom, Salomon became the leading banker for telecom upstarts such as WorldCom Inc., Winstar Communications Inc. and others, earning hundreds of millions of dollars by underwriting bond offerings and advising on mergers and acquisitions. At the same time, Grubman was among the best-paid analysts on Wall Street, earning at least $20 million per year for several years. He left Salomon with a $30 million severance package.

NASD earlier this week filed charges against Grubman and an assistant, saying they willfully ignored important financial shortcomings at Winstar and maintained a positive "buy" rating that misled investors. Both Grubman and the assistant vowed to fight the charges, which could lead to fines and dismissal from the securities industry.

Salomon agreed to pay $5 million to settle the issue but did not admit wrongdoing. At the time, NASD officials said their larger inquiry into conflicts of interest and IPO allotment practices at Salomon would continue.

The various probes have reverberated across Wall Street. In May, Merrill Lynch & Co., the nation's largest retail brokerage, agreed to pay $100 million and make structural changes to its research department to settle charges lodged by Spitzer, after he released e-mails in which Merrill analysts privately disparaged stocks of investment banking clients that the firm was publicly recommending investors buy.

SEC Chairman Harvey L. Pitt then pledged to examine the issue, and in May the SEC approved new rules governing analyst behavior and aiming to reduce the influence of bankers on analysts. But some critics said nothing short of formally separating research from banking would eliminate inherent conflicts at Wall Street's big firms.

Last night, former SEC chairman Arthur Levitt said he had discussed such a separation with several Wall Street executives and told them it would be the best solution. "It would be the best thing they could do, and I believe it is a trend that will be followed by the best firms on the Street," Levitt said in an interview from Hong Kong.


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