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Regulators Settle With Wall Street Firms

Dec 20, 2002 | Washington Post

The nation's largest brokerages have agreed to a fine to resolve conflict-of-interest allegations, in one of the largest settlements ever levied by securities regulators, officials said Friday.

Under the settlement, Wall Street firms will pay $900 million in "retrospective relief" for investors, $450 million to fund independent research and $85 million for what regulators called "investor education".

The practice of "spinning" giving shares of initial public offerings to favored clients will also be banned.

In addition, stock analysts will be banned from investment road shows and deal pitches, or meetings where brokers recommend deals to potential clients.

The settlement calls for 10 firms, including Citigroup, Goldman Sachs and Credit Suisse First Boston, to sever the links between research and investment banking and to fund independent stock research for investors that would complement their own analysts' work.

Citigroup's Salomon Smith Barney unit will pay the heaviest fine: $325 million.

Credit Suisse will pay $150 million. Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Morgan Stanley, Lehman Brothers, Deutsche Bank and UBS Paine Webber will each pay $50 million, according to a joint statement by regulators.

In May, Merrill Lynch, the nation's largest brokerage firm, agreed to a settlement that included a $100 million fine and the separation of its analysts from investment banking.

The settlement excludes two smaller firms that had raised objections to the settlement this week.

"In the end, this case was about one thing: ensuring that small investors get a fair shake," said New York Attorney General Eliot Spitzer, who spearheaded the investigation. "The people on Main Street must have confidence in the people on Wall Street. This agreement will help rebuild that confidence."

Under the settlement, analysts will be barred from being paid for equity research by investment banking arms.

The agreement will also:

Require firms to provide independent research to investors by contracting with no fewer than three independent research firms. A monitor will be appointed with final authority to procure independent research from independent analysts.

Require disclosure of rating and price target forecasts within 90 days to allow for evaluation and comparison of performance by analysts.

It was not clear how much of the fines will go to a restitution fund for investors.

In agreeing to the fines, the firms would neither admit nor deny charges that they had misled investors.

Spitzer and Securities and Exchange Commission began investigating brokerages following the decline of Enron Corp. and revelations that small investors lost millions of dollars after they were advised to buy stocks that analysts privately derided in order to bolster the stocks' value and lure the companies as investment banking clients.

The two sides had been meeting for months, with talks intensifying in a series of meetings in New York City over the last two weeks with representatives for Spitzer and Steven Cutler, the enforcement director of the SEC.

The brokerages gave their initial support in October, but squabbles over the fines and which firms would pay how much had held up the settlement.

Spitzer had released documents and e-mails showing that Merrill Lynch analysts privately used words like "disaster" and "dog" to describe some stocks while publicly recommending that investors buy the companies' shares.

The National Association of Securities Dealers, which polices the brokerage industry, and the New York Stock Exchange announced in October that they were tightening their rules governing analysts and stock offerings.


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