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Regulators Propose Fining CSFB $250 Million

Nov 23, 2002 | The Washington Post

Regulators told Credit Suisse First Boston Corp. today that it will have to pay $250 million to end probes into alleged conflicts of interest, a figure far higher than the firm had expected, according to sources familiar with the meeting.

The discussion was the first of many meetings in which regulators will inform several Wall Street firms how much they will be expected to pay to end multiple investigations by state regulators and the Securities and Exchange Commission. It was thus seen as an indicator of how tough regulators may be.

In the meeting, Credit Suisse executives told regulators -- including officials from the Massachusetts secretary of state's office, who headed the Credit Suisse part of the probe -- that they were "stunned" by the size of the proposed fine, according to an official at the firm. He noted that Credit Suisse paid $100 million earlier this year to settle a case involving its initial-public-offering practices. The firm has since revamped its internal compliance unit and hired a former SEC enforcement director, Gary G. Lynch, as general counsel.

"Why aren't we getting credit for what we've already done?" one executive at the firm asked. He said Credit Suisse would have trouble paying the fine because of declines in the stock market.

Credit Suisse was given until Dec. 11 to reply, according to sources.

The Massachusetts regulators have been investigating whether Credit Suisse misled investors with overly positive research reports intended to curry favor with investment banking clients and if it improperly awarded IPO shares to executives at companies that were also banking clients. New York Attorney General Eliot L. Spitzer; the SEC; NASD, the securities industry's principal self-regulatory body; and regulators in numerous others states are probing similar allegations of conflicts at other major investment banking and brokerage firms.

Those investigations have been an embarrassment to Wall Street, which is trying to negotiate a "global" settlement that would bring all the investigations to an end. The meeting today with Credit Suisse was part of that effort. But serious disagreements and new disclosures in the various fast-moving investigations threaten to slow any global agreement.

In recent days, officials in Spitzer's office have publicly warned Citigroup Inc. that civil or criminal charges remain a possibility if the firm does not agree to pay a large fine, as much as half a billion dollars, and make serious structural reforms. Spitzer also wants Citigroup to agree to the release of all documents and interview transcripts generated during the probe.

Spitzer, who sparked many of the current probes with his investigation into Merrill Lynch & Co. earlier this year, is looking at Citigroup's Salomon Smith Barney Inc. brokerage and investment banking unit. The probes have centered on whether former star Salomon telecommunications analyst Jack B. Grubman issued inflated reports on firms to win lucrative investment banking deals for Salomon. Investigators are also looking into whether Citigroup chief executive Sanford I. Weill may have pressured Grubman to increase his rating on AT&T Corp. stock.

Today, a Spitzer official said investigators continue to find "interesting things" regarding Salomon's operations, an apparent attempt to increase the pressure on Citigroup to accept tough settlement terms. But the official also said Spitzer would still like to settle with the firm.

"He doesn't want to kill the company," the official said.

Spitzer has come under rising criticism lately; an editorial in the New York Daily News this week said he has gone too far in his probe and has damaged the reputations of firms that are central to New York's economy. Spitzer is expected to eventually run for governor.

Meanwhile, regulators in California who have been investigating Thomas Weisel Partners LLC, an investment bank and brokerage firm, said they believe the firm was plagued by conflicts of interest and that one figure rumored as a possible fine for Weisel, $60 million, was too low.

"Weisel did some very bad things," a California official said, adding that $100 million would be a more appropriate penalty.

A Weisel official replied: "$60 million is a sizable fine, and [regulators] will have to produce evidence of wrongdoing, and my sense is they do not have it."

The California official also said the state is investigating Deutsche Bank AG and accused the firm of deleting e-mails that may have proved damaging. "E-mails have disappeared," the official said.

A Deutsche Bank spokeswoman did not return a call for comment. The California official described the state's investigation as "ongoing."

Regulators have also suggested that U.S. Bancorp Piper Jaffray Inc. may pay somewhere between $50 million and $100 million, but an official at the firm said today that people there were unaware of any damaging evidence against the company.

Conflicts also emerged today between regulators regarding how responsive Morgan Stanley has been in providing e-mails regarding the work of its star Internet analyst, Mary Meeker. Officials at the SEC and in Spitzer's office have said they are satisfied with documents produced by the firm. But other regulators have suggested that the Morgan Stanley investigation has been incomplete because the firm has inadequate e-mail retention policies. Morgan Stanley is expected to pay a fine for its e-mail policies in a separate case. Officials there insist they have given regulators everything they requested.

Meetings between regulators and other firms, including Goldman Sachs, Lehman Brothers, UBS AG and Bear Stearns, are scheduled to go forward next week. The total amount of fines could reach over $1 billion. Among other things, the global settlement is likely to put strict limits on when analysts can interact with bankers and to require that firms hire an ombudsman to purchase independent third-party research and ensure that research is distributed to Wall Street firms' retail brokerage clients.

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