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Regulators Work To Corral Wall Street Corruption

Oct 27, 2002 | The Olympian

Federal and state regulators who have formed a posse to corral Wall Street brokerages' unethical and illegal practices are turning up the heat.

Massachusetts, which is investigating Credit Suisse First Boston, filed a lawsuit Monday charging that analysts in the firm's Global Technology Group "disseminated biased, subjective and compromised research" favorable to the firm's clients who had paid millions of dollars in investment banking fees.

"Analysts were pressured not to downgrade a stock or to talk negatively about (a) company," the lawsuit said. "In fact, a call from company management accompanied by the threat of taking business somewhere other than CSFB, could be and was at times, enough to get an analyst terminated."

Credit Suisse First Boston is among more than a dozen major brokerages that this posse, formed by state regulators in April, have under investigation.

Efforts to coordinate these separate investigations ratcheted up Thursday with a meeting at Securities and Exchange Commission headquarters in Washington to create a template for settling each case.

Lawyers from most top Wall Street brokerages met with federal and state regulators to discuss a global settlement that would guarantee investor access to independent stock research.

Although the meeting was not conclusive, the regulators are hoping to resolve the issue within the next few weeks.

SEC spokeswoman Christi Harlan said the goal is for her agency, the New York Stock Exchange and National Association of Securities Dealers to create a unified policy.

"National regulations for these firms have to be set by the SEC and the two self-regulatory organizations," Harlan said.

New York State Attorney General Eliot Spitzer, whose investigation of Merrill Lynch led to the formation in April of a multistate task force to investigate major investment banks, also supports the effort to develop a uniform approach, according to spokeswoman Juanita Scarlett.

"We believe a global settlement is the best approach to resolve the Wall Street analysts' conflict of interests problems," she said.

The task force was formed under the auspices of the North American Securities Administrators Association, which represents regulators in each of the 50 states, Mexico and Canada's provinces.

Joseph Borg, director of the Alabama Securities Commission, described its strategy as a way to leverage resources.

"Various securities firms got farmed out to different states," said Scott Thompson, spokesman for the Utah Department of Commerce, which has been assigned to investigate Goldman Sachs. "We have talked to people from Goldman Sachs, and they've sent us boxes of information and e-mails that we're going through."

New York is handling the investigations of Morgan Stanley and Salomon Smith Barney while New Jersey's Division of Consumer Affairs is handling Bear Stearns. Elsewhere, Alabama regulators are looking at Lehman Brothers while Texas has J.P. Morgan, Illinois has UBS Warburg, and California is handling both Deutsche Bank and Thomas Weisel Partners.

Until several months ago, the nation's top securities regulator, the SEC, was not an official member of the group. SEC Chairman Harvey Pitt initially resisted joining the multistate effort. Earlier this month, the NASD and NYSE also joined.

It's still not certain whether Pitt, who has been under fire from critics such as the New York attorney general, will be able to gain task force members' confidence and take a lead in forging an agreement.

Democratic congressional leaders have called for Pitt's resignation. Pitt lobbied against the toughest provisions of the recently enacted corporate accountability law, the Sarbanes-Oxley Act of 2002, calling for creation of an independent oversight board for the accounting industry. And critics blame Pitt for Friday's split SEC vote over the members of the new oversight board, which will be chaired by William Webster, former director of the FBI and CIA.

Experts such as former SEC Chairman David Ruder, who headed the agency in the late 1980s, say the SEC must take the lead.

"There's always the question of ego that's involved in a matter like this," Ruder said. "My own view is that the SEC should be the lead regulator here and that the other regulators should listen to what the SEC says. This, after all, is a national problem, and it doesn't make sense for the state regulators to be attempting to set national policy. I have long felt that way."

Moreover, the agency is required under the Sarbanes- Oxley corporate accountability law to formulate professional ethics regulations for stock analysts and require disclosure of conflicts of interest.

The legal deadline for proposing those federal regulations is not until July. But the actions state regulators are pursuing and the ongoing lack of confidence among investors have accelerated the need to complete something by yearend.

Georgetown University Law School professor Donald Langevoort said the jurisdictional issue might not be resolved easily.

"You have no principled way of saying who has the stronger claim," Langevoort said. "Given that, it becomes a very delicate political issue. No one wants to give up control."

Spitzer leading pack

By force of personality and the aggressive action he took against Merrill Lynch earlier this year, Spitzer has become a key player.

Merrill Lynch, the nation's largest brokerage, agreed in May to pay a $100 million penalty, put into practice a series of reforms to guarantee the independence of its stock analysts and disclose any future conflicts of interest.

Merrill Lynch settled Spitzer's lawsuit after the New York attorney general released a damning array of evidence against the brokerage, including internal e-mails. Spitzer, whose investigation of Merrill Lynch began last year, now is investigating the relationship between Citigroup and its Salomon Smith Barney subsidiary regarding the allocation of stock in initial public offerings.

"Up until recently, most New York attorneys general have decided that with drugs and crime and everything that faces the state politically, there's no reason to intervene in this area when the SEC and the NASD are a strong presence," Langevoort said. "The last 12 months has changed everything. There is a strong political anger directed at investment analysts and others who haven't played by the rules."

Even if New York hasn't had a reputation for pursuing securities fraud, states in general do.

Earlier this year, Arizona reached a $217 million settlement with accounting firm Arthur Andersen regarding its role as auditor of the nonprofit Baptist Foundation of Arizona, whose elderly investors lost $570 million.

In 1993, state regulators also reached a settlement with Prudential's securities arm on allegations of defrauding investors in the sale of limited partnerships. The original $340 million payment and $31 million in fines topped $2 billion after further claims were filed.

"You don't have to be physically located on Wall Street to uncover wrongdoing and to get to the bottom of it," said Nancy Smith, director of Restore The Trust. The nonpartisan advocacy group lobbies for regulatory reforms. "The states have a rich history of attacking problems, and oftentimes they will uncover them before federal regulators. There's no need to disparage the work that state regulators do."


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