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Five Wall St. Banks Fined $8.25 Million

Regulators Say Investment Firms Failed To Keep E-Mails

Dec 3, 2002 | CBSMARKETWATCH.COM Five Wall Street investment banks were fined $1.65 million each by securities regulators Tuesday for failing to keep e-mails related to an investigation of conflicts-of-interest in stock research.

Deutsche Bank Securities, Goldman Sachs & Co., Morgan Stanley & Co., Citigroup's Salomon Smith Barney and U.S. Bancorp Piper Jaffray agreed to a consent decree with regulators, neither admitting nor denying wrongdoing. The deal was settled with the Securities and Exchange Commission, the New York Stock Exchange, and the National Association of Securities Dealers.

Shares of all the investment firms fell in trading Tuesday.

The fines come as Wall Street's leading banks are in negotiations with federal and state regulators to settle charges over their stock research practices. The talks are in the home stretch, with many of the fines expected to total hundreds of millions of dollars.

The failure of the firms to preserve e-mails was discovered as regulators sifted through e-mails connected with the conflicts-of-interest probe.

In Tuesday's action, regulators said each of the five investment firms had "inadequate procedures and systems to retain and make accessible e-mail communications" because the firms discarded or recycled the back-up tapes used to store e-mails dating back to 1999.

Federal securities laws stipulate that brokerage firms must retain e-mails, including interoffice memos and communications, for three years.

Under the consent agreement, the five investment firms must inform regulators within 90 days that they have established procedures to comply with federal securities laws and NYSE and NASD rules to preserve e-mail communications.

The NYSE, NASD and the Treasury Department will split the total $8.25 million fine. It is among the highest levied for violations of federal record-keeping requirements, regulators said.

Still, the fine pales in comparison to the $100 million that Merrill Lynch agreed to when it settled charges last spring brought by New York state Attorney General Eliot Spitzer concerning former Internet analyst Henry Blodget. The analyst publicly touted stocks on television and in research reports that he trashed in e-mails.

Even though the cases involved different charges, securities lawyers said the outcome was ironic.

"The message is if you keep e-mails that may be evidence of wrongdoing, you pay Spitzer $100 million," said Jacob Frenkel, a former SEC enforcement attorney who is now a partner at Smith, Gambrell & Russell in Washington. "If you destroy your e-mails so there is no evidence, you only have to pay market regulators $1.6 million."

Linda Thomsen, the SEC's deputy enforcement chief, said the fines were commensurate with the findings of the commission and the stock exchanges. She declined to say whether the emails were purposely destroyed to thwart federal and state investigations into Wall Street research.

Regulators found that in the instances in which the firms did keep e-mails, they were stored in an unorganized fashion.

Some firms relied on employees to maintain copies of e-mail even though there were no systems in place to ensure that would be the case. In some instances, computer hard drives were erased when individuals left the firm.

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