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Five Brokerage Firms Fined


Dec 4, 2002 | San Jose Mercury News

Securities regulators said Tuesday that they have fined five brokerage firms $1.65 million apiece for failing to properly retain internal e-mails.

The fines, unusually steep for record-keeping violations, reflect a renewed emphasis by regulators on keeping a paper trail to detect wrongdoing. Such records have proved explosive as regulators probe alleged conflicts of interest between firms' research departments and their investment-banking units during the stock market boom.

``The record-keeping rules are a keystone of the surveillance of broker¿ and dealers by commission staff and by the securities industry's self-regulatory bodies,'' the Securities and Exchange Commission said in its order. The SEC will share the fines with the New York Stock Exchange and the National Association of Securities Dealers, which jointly brought the cases with the SEC.

State and industry regulators probing research conflicts say they've uncovered damaging proof in e-mails that were saved. They say many researchers privately called stocks they had rated ``buy'' to investors ``junk'' or other derogatory terms in private e-mails. They concealed their true opinions of the stocks so their firms and, by extension, themselves could continue to get lucrative investment-banking fees from the companies being researched, regulators allege.

The nation's largest brokerage, Merrill Lynch, agreed earlier this year to pay $100 million to settle such charges, and nearly a dozen other firms are facing additional fines stemming from a nationwide investigation.

Regulators said the five firms fined Tuesday Deutsche Bank Securities, Goldman Sachs, Morgan Stanley, Salomon Smith Barney and U.S. Bancorp Piper Jaffray violated securities rules by failing to preserve business-related e-mails in an accessible place for up to three years.

Some firms failed to ensure that employees who left didn't delete e-mails, regulators said, while others taped over backup records after a year, or failed to store e-mails in an organized fashion.

Rules for records

The firms didn't admit or deny wrongdoing in the settlement. Most said the rules for keeping e-mail documents have long been murky and that they've been cooperating with the probe.

Morgan Stanley, for instance, has said it has turned over 200,000 e-mails and 400,000 documents to regulators in the investigations.

But other firms turned over far more: Credit Suisse First Boston, which was not named Tuesday, released 2 million e-mails and more than 800,000 documents, according to people familiar with the probe. The firm is facing a $250 million fine in the global settlement for allegedly improper influence by its technology investment-banking team, led by Palo Alto-based banker Frank Quattrone, over researchers.

Critics' response

Some critics say it appears unfair that the firms that failed to keep records might get off lighter than those that followed record-keeping rules.

``I don't think they ought to be gaining an advantage for destroying records,'' said Stephen Diamond, law professor at Santa Clara University, who said criminal authorities should investigate.

So far, regulators have tentatively decided to fine Salomon Smith Barney which employed the once-powerful telecommunications analyst Jack Grubman -- $500 million for alleged conflicts between Grubman and other researchers and Salomon's investment-banking arm. Other firms including many named Tuesday face fines of $100 million or less apiece, according to people familiar with the talks.

Regulators in California's Department of Corporations are trying to rally support among other state regulators to force each firm to pay a minimum of $100 million apiece, alleging that evidence appears to show that each firm provided tainted research.

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