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Triple-Teaming Wall Street

Oct 4, 2002 | The New York Daily News

State and federal regulators and enforcement officials are joining forces to come up with a global framework to settle a host of conflict of interest charges against investment banks, people familiar with the agreement said.

Harvey Pitt, chairman of the Securities and Exchange Commission, state Attorney General Eliot Spitzer, and representatives of the National Association of Securities Dealers will work together in an effort to transform the way Wall Street does business.

Regulators in different states and in different jurisdictions have been pursuing their own probes into questions about analysts' conflicts of interest and the doling out of shares of hot stocks to favored clients.

Some regulators and enforcement officers have proposed a formal separation of research and investment banking, which would prevent firms from hyping the stocks of investment banking clients.

The regulators, in consultation with industry officials at Citigroup and other leading banks and brokerages, will discuss safeguards against Wall Street excesses of the boom years, which left numerous companies bankrupt while draining retirement and savings plans of small investors and employees.

Officials from the SEC, Spitzer's office, and the NASD declined to comment on the announcement of the joint operation, which is expected today.

Spitzer, who reached a global settlement with Merrill Lynch earlier this year that required the firm to pay $100 million, recently sued several telecom execs who received hot stocks from Salomon Smith Barney.

In that suit, filed against former WorldCom CEO Bernie Ebbers, among others, Spitzer revealed internal Salomon Smith Barney E-mails that criticized the research of Jack Grubman, the former star telecom analyst.

"In my 16 years in the brokerage business," one Salomon Smith Barney broker wrote, "never have I received such misguided, horrific recommendations from an analyst."

Grubman became a lightning rod for conflicts of interest on Wall Street after several of the companies touted by him declared bankruptcy.

Pitt and the SEC have been discussing reforms for investment banks. These could include requiring execs to disclose to their own boards all shares of stock they receive from investment banking firms with which their company does business.

Bringing together the regulators could speed up the process and lead to a resolution for Citigroup and others.

Citigroup shares have fallen 37% since the beginning of the year, even though the firm's profits have weathered the slowdown in investment banking.

For its part, Citigroup has been working towards a quick settlement, and even met with representatives from several regulators' offices in recent weeks.

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