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'Historic' Fine for Brokers

Wall Street firms to pay $1.4B in settlement on tainted reports

Apr 27, 2003 | NEWSDAY Wall Street's day of reckoning is expected to come Monday as federal and state regulators announce a deal to end investigations that 10 major brokerage houses produced biased research, harming investors who bought stocks based on the tainted reports.

The firms, including Morgan Stanley, Goldman Sachs and Lehman Brothers, are to collectively pay $1.4 billion to cover the settlement, an amount regulators say is a historic fine for brokerage firms.Investigators charge that especially during the technology boom years of the late 1990s, brokerage houses pressured research analysts to produce misleading reports so their firms could secure lucrative investment banking business.

The final deal is expected to be announced at the Securities and Exchange Commission headquarters in Washington. Regulators are to release documents to show how analysts kept recommending stocks of companies so their firms could win business to advise them on mergers, public offerings and other deals.

"It's a watershed agreement," said Lance Myers, senior counsel with the law firm Holland & Knight, who has been following the settlement talks. "The message that this will send is that Wall Street, just like corporate America, will have to clean up its act to restore investor confidence."Citigroup Inc., whose Salomon Smith Barney unit in particular had been criticized for producing glowing reports on start-up telecommunications firms that later went bankrupt, will be forced to take additional remedies, a source familiar with the settlement said.

Citigroup, along with Credit Suisse First Boston and Merrill Lynch & Co., are all going to be charged with fraud, a source said. That should make it easier for individual investors and lawyers suing to recoup losses based on biased research and obtain punitive damages, Myers said.

Late last year, the firms settling had agreed to change many of their practices by separating analyst compensation from research, agreeing to provide independent research reports to clients and paying for investor education.

A host of regulators have been investigating Wall Street practices, including New York Attorney General Eliot Spitzer, the SEC, National Association of Securities Dealers, New York Stock Exchange and state regulators who are members of the North American Securities Administrators Association.

Deutsche Bank was part of the preliminary agreement last year but it is unclear if it will be included in the final settlement.

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