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Settlement Plan May Single Out Citigroup

Oct 11, 2002 | Washington Post New York Attorney General Eliot L. Spitzer and NASD, the securities industry's self-regulatory body, are strongly considering pursuing an individual settlement agreement with Citigroup Inc. over alleged conflicts of interest at the giant banking company despite Citigroup's pleas not to be singled out, sources said today.

Citigroup has argued that it would be unfair to force it to split its research and banking operations without making other Wall Street firms do the same. But Spitzer has concluded that this approach could lead to quicker reforms, because he thinks other Wall Street firms would swiftly adopt Citigroup's changes to avoid looking as if they were opposed to fixing the conflict-of-interest problems, a source familiar with the matter said.

An official in Spitzer's office said a deal with Citigroup could come as soon as next week. But the official also said the situation remains fluid and could quickly change.

A Citigroup spokeswoman also declined to comment, citing ongoing negotiations.

This approach appeared to represent a shift from just a week ago, when Spitzer and Securities and Exchange Commission Chairman Harvey L. Pitt, along with NASD, the New York Stock Exchange and state regulators, pledged to work together to come up with a "common plan" to address alleged conflicts involving Wall Street firms' research reports and their allocation of shares from initial public stock offerings.

It was not clear today whether the SEC would endorse using a Citigroup agreement as a precursor to settlements with other firms and ultimately to the kind of industry-wide regulatory reform the agency is seeking. An SEC spokeswoman declined to comment.

An official with the North American Securities Administrators Association (NASAA), which represents state securities regulators, said he thought reforms would ultimately be enacted on a "rolling basis," with one of two firms currently under heaviest scrutiny Citigroup's Salomon Smith Barney unit and Credit Suisse First Boston -- going first.

Under this scenario, other firms being investigated would then be presented with similar, but not identical, settlement proposals. The proposals could include slight variations to reflect the different ways big Wall Street firms operate.

"They are just not all the same," the NASAA source said, describing why a quick global settlement was unlikely. Another NASAA official said several options remain on the table and that it would be "premature" to say Citigroup will be singled out.

The one-by-one approach could reflect the flurry of reform proposals now flooding in to regulators from Wall Street firms.

For instance, sources said Morgan Stanley Dean Witter & Co. has drafted a number of proposals to clean up the conflicts that can arise when analysts cover companies that are simultaneously paying the analysts' firms millions in banking fees. But Morgan Stanley is apparently not willing to accept a total divorce of research and banking. The firm is also said to oppose a proposal floated by others to eliminate any form of "buy" and "sell" ratings.

Citigroup sources have said the firm would be willing to totally separate research from banking, but only as part of an industry-wide reform. Credit Suisse First Boston is also said to be willing to formally sever ties between banking and research.

Goldman Sachs Group Inc., meanwhile, submitted a letter to the SEC late last month opposing a proposed reform that would require analysts to personally guarantee that their reports reflect their personal beliefs. The letter, written by John W. Curtis, a Goldman managing director and general counsel for global investment research, noted that analysts' supervisors at the firm often review and "legitimately influence" reports. For that and other reasons, Goldman said it opposed having its analysts sign off on their reports.

A source familiar with the overall settlement negotiations said as many as a dozen reform proposals have come in from Wall Street and are now being reviewed. They could ultimately form the basis for individual settlements that would eventually lead to formal rulemaking to address fundamental issues. "These firms all operate somewhat differently, and the talks reflect that," said another source familiar with the current discussions.

An NASD source said any agreement with Citigroup would ultimately be part of the "regulatory framework" that governs all securities firms.

A source close to Spitzer said a scenario in which industry quickly embraces a Citigroup settlement would be modeled after an agreement Spitzer reached with Merrill Lynch & Co. in May.

At the time, Spitzer, armed with damaging internal e-mails, charged that Merrill analysts regularly wrote overly bullish research reports on companies that later failed investors millions to generate lucrative investment-banking business.

To avoid criminal charges, Merrill agreed to pay $100 million and limit interaction between bankers and analysts at the firm. Many Wall Street firms, though not all, quickly adopted the Merrill reforms, which became known as the "Spitzer principles." Any agreement between Spitzer and Citigroup would go further than the Merrill Lynch agreement and would likely include fines running into the hundreds of millions, sources said.

Citigroup, the nation's largest financial institution, is fighting investigations on a number of fronts. The bank recently agreed to pay $5 million to settle NASD charges that its Salomon Smith Barney unit issued overly positive research reports on Winstar Communications Inc. that were not supported by the company's financials. Before that, the bank agreed to pay $215 million to settle charges by the Federal Trade Commission that a subsidiary had engaged in abusive lending practices before Citigroup acquired it. The firm has also been under congressional scrutiny for its relationship with Enron Corp.

Multiple securities regulators are now probing the many bullish research reports written by former star Salomon telecommunications analyst Jack B. Grubman on firms that were also major Salomon investment-banking clients. Many of those companies later filed for bankruptcy protection or saw their stock prices evaporate.

Regulators are also probing whether Salomon engaged in improper "spinning," allotting shares in hot initial public offerings to executives in return for banking business from the executives' firms. Alleged IPO spinning is also at the heart of an investigation into Credit Suisse First Boston.

Perhaps adding to Citigroup's troubles, Grubman is now contending that he wanted to downgrade certain troubled companies but was blocked by other Citigroup officials. Last week, Spitzer filed a lawsuit demanding that certain executives who profited from hot IPO shares awarded by Salomon be forced to return the profits. Papers filed with the suit included an e-mail in which Grubman wrote to a supervisor that he wanted to downgrade several firms but did not do so after getting "huge pushback" from banking.

Citigroup Chairman Sanford I. Weill has made ending the many probes, and stopping the attendant slide in the bank's stock price, his top priority. He has already made several personnel moves in that regard, including replacing the head of Salomon and shaking up leadership at the investment-banking unit's research department.

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