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Citigroup To Separate Research Unit

Oct 31, 2002 | AP In a further attempt to put its house in order, Citigroup is separating its stock research from its investment banking operation.

The move is the latest in a series of steps the nation's largest financial institution has taken since August amid allegations of conflicts of interest involving Citi analysts and questionable financial transactions with failed energy trader Enron.

"Going back to August, this is part of a pattern of Citigroup management trying to take concrete steps to move forward and use its leadership position in the industry to move ahead of any broader industry settlement," said Brock Vandervliet, a banking analyst at Lehman Brothers. "They're staking out a position taking the high ground."

Asked if he expected other Wall Street firms to follow suit, Vandervliet said: "It certainly will prompt a lot of conversations among management across the Street, particularly those that have been under scrutiny more recently."

Citigroup announced Wednesday that it is creating a new unit, to be called Smith Barney, that will include both equity research and its retail brokerage business. The moved appeared aimed at eliminating potential conflicts of interest for analysts, as demanded by securities regulators and New York Attorney General Eliot Spitzer.

Smith Barney will be headed by Sallie L. Krawcheck, 37, who currently is chairwoman and chief executive officer of the independent research firm Sanford C. Bernstein, will report directly to Citigroup chairman and CEO Sanford I. Weill.

"Sallie is a strong advocate for research quality and independence," Weill said in announcing the reorganization.

In September, Weill named Charles Prince, a 52-year-old attorney, as the head of corporate and investment banking operations. He is expected to take the lead in defending the bank on Enron issues.

A month earlier, Citigroup announced it was creating a new board committee on governance. And it said that recipients of its structured finance loans would have to agree to record them as debt on their balance sheets something Enron is accused of failing to do.

Citi's latest management change came as Spitzer, the Securities and Exchange Commission and other regulators are working out details of what's been called a "global settlement" on research with Wall Street's largest brokerages and investment banks.

Darren Dopp, a spokesman for Spitzer, said the firms gave a "positive response" to the package of reforms on Wednesday.

Dopp said Citi's reorganization "appears to be an affirmative step." But he added: "On its own, it has no effect on the talks or the ongoing investigation by our office."

Dopp said Citi's effort to give analysts more independence "could complement the reforms we hope to have in place soon."

Under discussion is creation of a special pool, funded by large investment banks and brokerage houses, which would be used to finance independent stock researchers. The New York Times said that the brokerages have agreed to a general framework and a $1 billion pool.

The proposed arrangement would eliminate conflict between researchers' ratings of a company's stock and efforts by investment bankers to lure that company's business. Citi has been accused of conflict in its handling of telecommunications companies, with researchers touting specific firms that bankers had interest in cutting deals with.

In an interview with The Associated Press, Weill denied Citigroup was trying to do an end-run around the regulators.

"This is not trying to placate any regulators," Weill said. "We care about our clients. We care about the people who work for this company. We are creating a business model that will drive value for our shareholders also."

He added that "what we are doing can adapt to whatever the regulatory model will be."

The reorganization will pull the research department and private client business out of Citi's Global Corporate and Investment Bank. It also drops the "Salomon" in the Salomon Smith Barney name, which had come from the old Salomon Bros. brokerage, blended into Citi in a 1998 merger.

Krawcheck said the new Smith Barney unit will include some 12,500 financial consultants and about 300 analysts.

Those analysts, she said, will do securities research for both private and institutional clients.

Krawcheck said she hoped to make her new division "a model for the industry" and envisions "high quality, independent, very thorough research that is helpful to the clients."

Krawcheck, who holds a master's in business administration from Columbia University, began her career as an investment banker at Salomon Bros. She joined Sanford C. Bernstein which provides securities analysis for 5,000 institutional clients in 1994 and was made director of research in 1998. The company was acquired in 2000 by the Alliance Capital money management firm, and Krawcheck was named CEO of the Sanford C. Bernstein unit in June 2001.

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