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Wall St. Faces $1B In Fines

Federal, State Regulators Discuss Penalties For Financial Practices Said to Compromise Research

Nov 26, 2002 | CNNfn

C that firms would pay to end probes into allegations of tainted stock research.

The fines have been given out on a tiered system with Merrill Lynch's $100 million settlement, announced in May, as the benchmark, according to sources involved in the negotiations.

Merrill settled conflict-of-interest charges with the New York Attorney General's office but did not admit any wrongdoing. New York regulators say Merrill Lynch paid out its $100 million settlement on Tuesday.

Citigroup's Salomon Smith Barney unit, considered to have the most violations, has been told it could face fines as high as $500 million, according to a source.

The company is being investigated for misleading investors with research slanted to lure investment banking business.

Federal and state regulators are trying to prove that analysts hyped stocks to win investment banking business. They are also disturbed by allegations that banks dolled out lucrative initial public offerings to retain and win clients.

Credit Suisse First Boston faces a fine of $200 million. It is believed that Bear Stearns, Goldman Sach, JP Morgan Chase, and UBS Warburg are facing $75 million fines each; Thomas Weisel a $60 million fine; and Morgan Stanley (MWD: Research, Estimates) a $50 million fine.

According to sources close to the matter, California-based Thomas Weisel and US Bancorp's Piper Jaffray unit, based in Minnesota, had more violations than Merrill Lynch. But since they are smaller firms, they would not be able to pay the $100 million fine that Merrill could afford.

"These talks were held in confidence and we will not have anything to say until a settlement is reached," said a spokeswoman for Thomas Weisel. The other banks have not returned calls.

Brokerage stocks have tumbled this year under the cloud of investigations by state and federal regulators and Congress. The probes come amid a drastic slowdown in the investment banking and brokerage business that has led to thousands of layoffs.

After the Merrill settlement, various state regulators were given specific firms to investigate, since there would be too much work for one regulator to handle.

California was assigned Deutsche Bank and Thomas Weisel Partners. Representatives from the Securities and Exchange Commission, market regulatory organizations and a coalition of state securities regulators have been meeting since Friday with lawyers for top Wall Street banks.

"The penalty for analyst conflicts established by the Merrill settlement was $100 million," said California Corporations Commissioner Demetrios Boutris. "Letting firms negotiate down may allow them to justify their bad behavior as the cost of doing business. State regulators must send the message that if you defraud investors you must be punished."

No final settlement, which could include changes in how research departments operate, has been reached.

The firms now have a few weeks to digest and negotiate these fines. The regulators and firms will meet again on Dec. 11.

Representatives for Bear Stearns; Citigroup; CSFB, a unit of Swiss-based Credit Suisse Group; J.P. Morgan; and Thomas Weisel declined comment.

Representatives for Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS, the investment banking arm of Swiss bank UBS AG, were not immediately available. A representative for the SEC declined to comment. A spokeswoman for the New York Attorney General's office was not immediately available for comment.

Financial institutions have made several voluntary changes. Citigroup has said it will separate investment banking from research, while most brokerage houses have included lengthy disclosures in their research notes. The number of "sell" ratings on stocks has grown.

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