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SEC Warns Wall Street Banks To Cooperate

Nov 8, 2002 | USA Today

Wall Street's top investment banks were warned Thursday that all would be formally notified of possible civil securities fraud and market manipulation charges in connection with the doling out of hot initial public offerings and other practices.

Securities and Exchange Commission enforcement director Stephen Cutler issued the warning as a Morgan Stanley-led rebellion against a plan to overhaul tainted Wall Street research and IPO practices gained momentum this week following SEC Chairman Harvey Pitt's resignation and the Republicans' election sweep.

Cutler made the disclosure that all leading brokerage firms faced serious charges if they did not agree to a global reform settlement during a daylong meeting with top lawyers of Wall Street's largest firms at the New York Stock Exchange, according to people familiar with the discussions.

The SEC has already formally notified Goldman Sachs and J.P. Morgan in so-called Wells notices that they could face civil charges tied to ''laddering'' the steering of hot IPOs to investors who agree to later buy additional shares, which would tend to boost the stock price after the shares began trading.

Other big stock underwriters, such as Morgan Stanley, have argued behind the scenes that they have done nothing wrong and should not be lumped into a global settlement.

Cutler tried to dispel that notion Thursday by stressing that all parties would be issued similar warnings within days.

But the SEC and New York Attorney General Eliot Spitzer clearly face an increasingly tough struggle to sell a radical reform package that would force firms to pay up to $1 billion over five years to finance a new oversight panel to police research and subsidize independent research.

Despite weeks of talks, no final settlement is near. Parties remain far apart on which restrictions should be placed on analyst dealings with investment bankers. Fights are also expected to break out once regulators disclose, possibly as early as next week, how much each bank will have to pay in fines to settle charges of wrongdoing.

Critics argue that the cost of another layer of regulation will only lead to less and more expensive research for individual investors.

Additional proposals to completely separate Wall Street analysts from investment bankers, they add, would cut off small companies from capital markets, as most start-ups depend on Wall Street research to raise their profile with investors before IPOs

The opposition has stepped up efforts to persuade prominent Republicans, including House Financial Services Committee Chairman Michael Oxley, R-Ohio, that the Spitzer reforms are flawed.


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