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Settlement Due in Probes of Wall Street Firms

Apr 28, 2003 | Washington Post

Morgan Stanley today began to mount a defense of its star Internet analyst, Mary Meeker, on the eve of an announcement by state and federal regulators of a final settlement that would end two years of exhaustive probes into conflicts of interest on Wall Street.

New York Attorney General Eliot Spitzer is to join regulators from the Securities and Exchange Commission and other states at the SEC on Monday to announce the $1.4 billion agreement, the largest Wall Street settlement ever, sources said. The regulators plan to release stacks of documents that sources say show how analysts routinely misled investors by promoting stocks of dubious companies to generate lucrative investment banking business.

Former Merrill Lynch Internet analyst Henry Blodget will also settle conflict of interest charges as part of the agreement. Blodget will agree to pay $2 million in fines and $2 million more to be returned to harmed investors and to a lifetime ban from the securities industry.

Among the documents, regulators are to release self-evaluation memos in which Meeker bragged about investment banking revenue she helped generate for the firm, sources said. Regulators also are to produce documents showing that Morgan Stanley promised that its "dream team" of analysts would cover firms the company was helping to take public.

Morgan Stanley Group Inc. officials said today that Meeker, among the most consistent Internet evangelists during the late 1990s bull market, repeatedly warned investors that Internet shares were risky and that the bulk of online firms would fail. They also said Morgan Stanley turned down five technology firms seeking to go public for every one they accepted. And they said they never promised positive research coverage in return for banking business.

"I and the firm are proud of the work Mary has done," Morgan Stanley's global head of equity research, Dennis Shea, said in an interview today. "She consistently stuck by what were her truly held beliefs."

Wall Street has been buffeted by conflict of interest charges in the three years since the stock market bubble burst. Multiple regulatory probes have produced embarrassing revelations about the internal workings at some the nation's biggest financial services firms, including Merrill Lynch & Co., Citigroup Inc. and Credit Suisse First Boston.

On Monday, firms that have escaped much of the negative publicity in the probes can expect some criticism, sources say. In addition to the Morgan Stanley memos, regulators will have documents from Goldman Sachs & Co. and Lehman Brothers Inc., including e-mails that regulators contend would show analysts at those firms produced reports on technology and telecommunications companies that were influenced by investment banking concerns, sources said. A Goldman spokesman declined to comment. A spokesman for Lehman could not be reached for comment today.

Other firms involved in the settlement include J.P. Morgan Chase & Co., UBS Warburg LLC and Bear Stearns Cos.

The announcement of the deal would complete a remarkable collaboration by multiple regulators, including Spitzer, the SEC and the New York Stock Exchange, who were at first at odds. Last October, Spitzer and the state and federal regulators, after sparring, pledged to work together.

The regulators announced an agreement "in principle" with the firms in December, but arguments over precise wording delayed the final deal. The settlement, however, may not end legal trouble for the firms. Spitzer has said the documents released Monday can serve as a road map for shareholder lawsuits. In addition to internal documents and specific charges against the firms, ranging from fraud to minor rule violations, regulators are to release a document outlining new separations between banking and research, sources said. For example, bankers would be forbidden from influencing analysts' salaries, and analysts would be prohibited from attending meetings at which bankers seek underwriting business from corporations or try to sell security offerings to large investors, sources said.

Morgan Stanley officials defended their policies, saying analysts did nothing wrong in advising bankers on which firms to take public and that contributions to investment banking were only a small consideration in deciding analysts pay. They said some of the firm's lowest-paid analysts generated the most banking business.

They also said that regulators declined to release the portion of a self-evaluation memo in which Meeker said she was "most proud of the deals we didn't do and the wealth destruction we didn't participate in." They also said bankers sometimes complained that Meeker frustrated their attempts to do business with fledgling Internet concerns.

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