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Corporate Fraud Cases Turn Spotlight On Wall Street Bankers

May 19, 2003 | AP When congressional investigators asked for records from investment bank UBS Warburg recently, they added a new twist to their examination of a particularly audacious case of alleged corporate fraud.

But the move by the House Energy and Commerce Committee, which is probing charges of insider trading and shifty bookkeeping at HealthSouth Corp., was in fact just the latest instance of turning the focus to Wall Street and the banks behind big-money business deals.

As regulators and lawmakers unravel the corporate and financial disasters that have cost investors nationwide billions of dollars, they are starting to lift a veil from the world of the big investment banks, which work far from public view.

"The role of investment banks has changed and grown in importance," said Sen. Carl Levin, D-Mich. He led an investigation last year of the business ties between some big Wall Street firms and the now-bankrupt Enron.

"Several investment banks have a lot to answer for in the Enron scandal," Levin said Tuesday. "It is time for regulators to reassess the role of investment banks and what needs to be done to oversee their conduct and restore investor confidence in U.S. markets."

As they helped drum up financial backing for the multibillion-dollar mergers and other deals of recent years, investment bankers reveled in their image as smart, swaggering risk-takers.

Now, however, there is a new poster boy: Frank Quattrone, a former investment banker indicted in New York on Monday on charges of witness tampering and obstructing federal investigations. Quattrone allegedly urged underlings to destroy documents at his firm, Credit Suisse First Boston, just as a probe was getting under way.

CSFB is a banking powerhouse, with $5.7 billion in revenue last year, that operates in 34 countries. During the high-tech boom of the late 1990s, Quattrone earned almost $100 million a year and wielded enormous influence at the helm of CSFB's technology division. He presided over lucrative first stock offerings of companies such as Amazon.com and Netscape Communications.

The charges against Quattrone carry penalties of up to 25 years in prison. His lawyer says he is innocent.

Other big investment firms have come under public scrutiny in the Enron case amid allegations that they aided the energy trader in its accounting fraud.

Merrill Lynch, the nation's largest brokerage firm, agreed recently to pay $80 million to resolve the allegations in a settlement with the Securities and Exchange Commission over the 1999 financing deals with Enron. Merrill neither admitted to nor denied wrongdoing in the accord. The SEC also charged four former senior investment bankers at the firm with helping Enron inflate profit and mislead investors. They have disputed the allegations.

UBS Warburg, CSFB, Merrill, J.P. Morgan and Citigroup's Salomon Smith Barney unit are among 10 Wall Street firms paying $1.4 billion in a settlement with regulators over analysts who misled the public by touting certain stocks to win investment-banking business.

Under the industrywide pact, which followed an investigation by the SEC and state and market regulators, two former star analysts were fined a combined $19 million and banned from the securities industry. They are Internet expert Henry Blodget of Merrill Lynch and telecommunications specialist Jack Grubman of Salomon Smith Barney.

Individual investment bankers could be next on the enforcement block. While they refuse to discuss it publicly, the regulators are believed to be looking at the conduct of investment bankers who allegedly pressured their analyst colleagues to maintain rosy stock ratings.

The next level in the chain of command: the firms' top executives. Regulators have held open the possibility of future enforcement action against them for failing to properly supervise analysts and investment bankers.

"Ongoing actions by the SEC will be directed toward supervisory" responsibilities of brokerage executives, SEC Chairman William Donaldson told the Senate Banking Committee last week.

Sen. Richard Shelby, R-Ala., chairman of the Senate Banking Committee, recently said businesses will only clean up their act when top executives feel the heat.

"Without holding executives and CEOs personally accountable for the wrongdoing that occurred under their watch, I do not believe Wall Street will change its ways or that investor confidence will be restored," he said.

In the HealthSouth case, the House Energy and Commerce Committee asked UBS Warburg to turn over documents related to, among other things, its work on a $1 billion bond sale for HealthSouth and its role in several "side" companies in which ousted HealthSouth CEO Richard M. Scrushy had a financial interest.

Since March, the $2.5 billion accounting debacle involving the medical rehabilitation company already has brought guilty pleas from 11 former executives. Scrushy's lawyers say they expect him to be indicted.

Despite HealthSouth's disclosures last year of an SEC insider-trading and accounting investigation, UBS Warburg analyst Howard Capek continued to issue favorable ratings of the company's stock and to encourage investors to buy it, the lawmakers say.

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