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Team Ready To Reform Wall St.

Oct 3, 2002 | USA Today Securities and Exchange Commission Chairman Harvey Pitt and New York Attorney General Eliot Spitzer are expected to announce that they are teaming to force reform on Wall Street.

A deal could be announced as early as this morning, people with knowledge of the situation say.

The union would bring together a Republican-appointed SEC chairman who has been widely criticized for his cozy ties to business and an ambitious Democratic prosecutor who has dusted off a powerful state securities law, the 1921 Martin Act, to take on Wall Street with a shoestring staff.

Working together, Pitt and Spitzer could simplify the reform process and share resources as well as publicity.

''On the surface, there will be cooperation,'' says Duke University securities professor James Cox. ''What will be interesting to see is who does what and where.''

While the many details have yet to be hammered out, Pitt and Spitzer are expected to agree to pursue a global settlement with Wall Street investment banks aimed at eliminating conflicts of interest in stock research and initial public offerings.

The reforms are unlikely to demand a complete separation of the banks from their brokerages' much-criticized stock analysts, but are expected to be comprehensive.

Until now, Spitzer and Robert Morgenthau, the Manhattan district attorney, have used the Martin Act, a broad law barring fraud in the sale or offering of securities, to help regulate Wall Street. Their efforts have been more aggressive and have drawn more attention than those of the SEC and the National Association of Securities Dealers' regulatory division.

In his boldest move yet to tackle Wall Street practices that hurt small investors, Spitzer on Monday sued five current and former telecom executives, including former WorldCom CEO Bernard Ebbers, seeking the return of more than $1.5 billion in allegedly ill-gotten profits from stock sales.

According to people with knowledge of the situation, Pitt phoned Spitzer the next day in an effort to forge a common front in fighting Wall Street abuses.

Spitzer agreed to link arms, provided he was given assurances that the SEC was serious about reform.

Wall Street research departments have come under intense scrutiny in recent months. Of particular concern is the possibility that analysts who privately criticized certain stocks were still recommending them so that their firms could continue to collect hefty investment-banking fees.

Another concern is that coveted shares of IPOs might have been doled out as favors to investment-banking customers.

Citigroup investment-banking unit Salomon Smith Barney met last Friday with the SEC and stock exchange officials to resolve numerous investigations. Salomon, which is also engaged in ongoing talks with Spitzer, is willing to agree to sweeping reform but wants rivals to commit as well, people with knowledge of the talks say.

The SEC approved rules in May forcing stock analysts to reveal more about their ties to the companies they research. In July, the Sarbanes-Oxley Act set rules to make analysts more independent.

Merrill Lynch agreed in May to pay $100 million to settle conflict of interest charges leveled by Spitzer.

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