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Citigroup, Wall Street Firms Settle With Regulators

Apr 28, 2003 | Bloomberg

Citigroup Inc., Credit Suisse First Boston and eight rival securities firms will agree today to pay $1.4 billion in the biggest-ever settlement for violating securities laws, capping two years of investigations into conflicts of interest in Wall Street research.

The agreement, completing a deal reached in December, will be announced at a press conference in Washington, said Joseph Borg, director of the Alabama Securities Commission. Citigroup, Credit Suisse First Boston, and Merrill Lynch & Co. will pay the biggest penalties, a total of $800 million. The firms also agreed to change the way they supervise and compensate analysts.

``The question is not are things better today or even next week or next month, but will they be better six months from now or a year from now,'' said New York Attorney General Eliot Spitzer, who led the probe by state and federal authorities. ``Frankly, I do not know the answer to that.''

Pending civil suits by investors against the firms will bring further scrutiny to their research practices, said Spitzer. Disclosure of the firms' internal e-mails and other correspondence is likely to provide ammunition for those lawsuits and for authorities probing abuses in sales of shares in initial public offerings during the 1990s Internet boom.

``I expect a substantial body of civil litigation,'' said Spitzer, whose initial investigation of Merrill Lynch analysts sparked probes that led to the global settlements.

Biggest Portion

Former Merrill Lynch Internet analyst Henry Blodget will pay $4 million in penalties and be barred from the securities industry for life as part of the settlement, the Wall Street Journal said in its ``Heard on the Street'' column, citing people familiar with the agreement. Under the terms of the settlement, Blodget won't admit or deny wrongdoing, the newspaper said. Blodget, contacted by e-mail, made no comment, the paper said.

Citigroup will pay $400 million, the largest penalty. Credit Suisse and Merrill Lynch will pay $200 million each, Morgan Stanley will pay $125 million, Goldman Sachs Group Inc. will pay $110 million, Lehman Brothers Holdings Inc., J.P. Morgan Chase & Co., Bear Stearns Cos., and UBS Warburg will pay $80 million each, and U.S. Bancorp Piper Jaffray will pay $32.5 million.

The payments include fines, restitution to investors and funding for independent research. The $875 million in fines has to be paid now. The $432.5 million for research and the $80 million for investor education will be spread over the next five years.

Deutsche Bank AG and Thomas Weisel Partners LLC, which had signed tentative agreements with authorities, have yet to complete them.

California regulators removed Deutsche Bank after the bank told regulators it couldn't find key documents related to its research practices. Quarrels over language prompted Thomas Weisel to drop out, according to California regulators.


Financial firms have set aside $3.1 billion to pay for the costs of litigating and settling claims, including the settlement agreement, according to the Securities Industry Association. Nine of the 10 companies in the settlement earned a combined $12.2 billion in the first quarter of 2003. UBS has not yet reported first-quarter earnings.

As a group, their shares have gained 6 percent since the preliminary agreement was signed on Dec. 20, while the Dow Jones Industrial Average has dropped 2.4 percent.

Citigroup's German shares today rose 0.25 euro to 35.05 euros at 1:15 p.m. in Frankfurt. Shares of Credit Suisse Group, the second-largest Swiss bank and parent of Credit Suisse First Boston, fell 0.8 percent to 30.30 euros in Switzerland.

Final Agreement

``To be sure, $1.4 billion is a large number,'' said James Cox, professor of corporate and securities law at Duke University Law School. ``But it pales by comparison with the harm these practices caused investors.''

From its peak in March 2000, the value of U.S. stocks has dropped by $7.5 trillion.

The settlement amount topped Prudential Securities Inc.'s $1 billion fraud settlement in 1993 and a $1 billion agreement by Nasdaq Stock Market dealers in 1996 on price-fixing charges.

The final agreement was reached after negotiations among the firms and Spitzer, the Securities and Exchange Commission, the New York Stock Exchange, the NASD and regulators from New Jersey, Massachusetts, California, Connecticut, Utah, Alabama and Washington.

The accord was intended to change sales practices on Wall Street that critics say helped inflate the Internet stock bubble.

Analysts such as Citigroup's Jack Grubman and Merrill Lynch's Blodget each earned more than $20 million a year as they endorsed stocks they privately disparaged. Blodget once privately described as a ``piece of sh-t,'' a stock that he was publicly touting, according to previously disclosed e-mails.

Grubman and Citigroup face at least 88 civil suits for their actions, court records show. Grubman agreed with regulators to pay a $15 million fine and be barred from the securities industry.

Independent Research

The firms' penalty includes $432.5 million to fund research from companies such as Standard & Poor's, a unit of McGraw-Hill Cos., Morningstar Inc., Sanford C. Bernstein & Co., a unit of Alliance Capital Management Holding L.P., and other firms with no investment banking ties. The 10 investment banks must make this research available to investors for five years.

Some firms have already overhauled how they supervise analysts. Merrill Lynch Chief Executive Officer Stanley O'Neal has said his firm is compensating analysts only for the services they perform for investors. Merrill has also set up a committee to monitor changes in recommendations.

Citigroup CEO Sanford Weill set up a separate retail brokerage and research unit run by former Sanford Bernstein CEO Sallie Krawcheck.

The research agreement is likely to be a prelude to further investigations and lawsuits into Wall Street misconduct during the bull market of the 1990s.

IPO `Spinning'

State and federal regulators are now probing how investment bankers and their client companies sold shares in once hot initial public offerings to company executives who could give them future business, a practice called ``spinning.''

They also are investigating the banks' agreements to buy and sell the stocks in order to keep the price of these IPOs at unrealistic levels, which is known as ``laddering.''

Frank Quattrone, the former head of Credit Suisse First Boston's technology investment banking unit, was charged last week in New York federal district court with obstruction of justice for covering up documents relating to his firm's handling of initial public offerings.

``This settlement will be further ammunition for numerous class action lawsuits that involve not only alleged research improprieties,'' said David Hendler, a banking analyst with CreditSights, an independent research firm, ``but also general misrepresentations and omissions throughout the IPO process.''

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