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Regulators May Next Target Wall Street Bankers

May 9, 2003 | Wall Street Journal

Securities regulators are looking into the actions of investment bankers in their stock-research probe, focusing on former Salomon Smith Barney unit of Citigroup Inc. (C), Friday's Wall Street Journal reported.

Securities regulators first set their sights on stock analysts.

As regulators look further up the Wall Street food chain to assess culpability for misconduct alleged in the recent $1.4 billion stock-research settlement, they are weighing the actions of investment bankers, who allegedly pressured analysts at their firms to keep positive ratings on stocks that they wanted to downgrade.

Investors are impatient for "charges against managers who supervised the research and investment-banking divisions of the banks," said Sen. Richard Shelby (R., Ala.), who chaired a Senate Banking Committee hearing on the pact on Wednesday.

Among the companies expected to come under the most scrutiny is Salomon. That is where the highest penalties were assessed for allegedly fraudulent research. And that is the firm where regulators mentioned that two investment bankers Eduardo Mestre and John F. Otto Jr. allegedly pressured the firm's former star telecommunications-stock analyst, Jack Grubman, in 2001.

A Citigroup spokeswoman said none of the individuals at the firm were available for comment. Noting that regulators have said they "are still looking at supervisory issues," she added that Citigroup "will cooperate with any further inquiry," but couldn't comment further.

Neither Mr. Mestre, head of investment banking, nor Mr. Otto, head of telecom banking, were cited by name in the civil complaints filed by regulators. But both were cited by their titles at the time in the regulatory complaints filed on April 28 by the Securities and Exchange Commission, the National Association of Securities Dealers and the New York state attorney general, according to people familiar with the case.

Salomon, since renamed Citigroup Global Markets (now that the research and retail-brokerage and retail-brokerage operation has been split off into a new Smith Barney unit), is one of three firms charged with issuing fraudulent research. But Citigroup's settlement payments of $400 million were twice those of the other two firms charged with fraud, Merrill Lynch & Co. and the Credit Suisse First Boston unit of Credit Suisse Group. And Mr. Grubman paid penalties of $15 million to settle related charges against him, compared with $4 million for former Merrill analyst Henry Blodget. None of the participants admitted or denied wrongdoing, as part of the pact.

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