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Wall St. Pact May Be Near

Spitzer Sees Deal To End Probe Into Research Conflicts

Dec 18, 2002 | The Boston Globe

A global settlement with Wall Street firms accused of trading glowing stock research for investment banking business could come as early as this week, officials who work with New York Attorney General Eliot Spitzer said yesterday evening.

Spitzer, appearing on a panel about corporate responsibility at the John F. Kennedy Library last night, said he was hopeful that ''either all or some subset of the firms'' would strike a deal soon. ''There are some trapdoors that remain,'' he said.

Spitzer, along with the Securities and Exchange Commission, has led an industrywide investigation of research practices. A settlement would include combined fines of more than $1 billion for Wall Street's biggest banks, as well as changes in business practices. Firms in the probe include Citigroup Inc.'s Salomon Smith Barney, Credit Suisse, Morgan Stanley, and Goldman Sachs Group Inc., and others. Merrill Lynch & Co. already settled with Spitzer for $100 million earlier this year.

The practice of hyping research surged during the competitive bubble years, prosecutors and regulators have charged, as analysts floated positive reports on firms they privately said were ''dogs.'' In the most extreme cases, analysts had to seek permission from investment bankers to release negative reports - or were told to keep quiet about current or prospective clients.

Investigators in Massachusetts who have led the investigation into Credit Suisse First Boston Corp. were doubtful that all the parties would agree so soon. The investment firms are locking horns over the new rules and over the amounts of the fines, officials involved in the case said.

Most of the companies are facing fines of about $50 million, while Salomon and Credit Suisse each could be forced to pay as much as $100 million, the officials said. But several firms are balking, either because they believe the fines are too high or because they don't want to pay more than a rival and suffer greater dents in their reputations.

None of the Wall Street firms has admitted to any wrongdoing.

Massachusetts Secretary of State William F. Galvin, whose office brought a fraud case against Credit Suisse in October, said in an interview yesterday, ''The uniformity, which would be fundamental to any so-called global settlement, has been somewhat elusive up to now.''

Galvin is likely to back off his initial insistence that Wall Street firms completely separate their banking and research units, because such a solution, the firms have argued, would be too costly and unrealistic. But Galvin is adamant that new standards must be put in place to improve the likelihood that individual investors are getting objective stock analysis.

Galvin's office charged that the New York investment firm routinely made pitches to new clients with promises of favorable research. E-mail messages exchanged by Credit Suisse employees that have been made public have embarrassed the firm. In one case, Frank Quattrone, Credit Suisse's technology banking chief during the boom, asked an analyst in November 2000 about his new coverage of a San Jose, Calif., company, Agile Software Corp.

''What have we extracted from them on banking side to get this coverage?'' Quattrone asked.

The proposed standards would end the practice of paying analysts for helping to bring in banking clients, as well as ensure that investement bankers do not have a say in what analysts write.

Disclosure also could figure prominently in the new order, regulators said. They envision forcing firms to print the obvious on analyst reports: That the analyst's firm provides banking services to the company, and therefore could be biased.

''Honesty is the objective,'' Galvin said.

Last night, Spitzer urged institutional investors, including mutual fund firms, to take a more active role in the policing of corporate America. Appearing on the panel with Orin Smith, CEO of Starbucks Corp., Richard Donahue, former president of Nike Inc., and Harvard Business School professor Rosabeth Moss Kanter, Spitzer said many of this year's corporate scandals and Wall Street excesses occurred ''because institutional investors never stood up.''

He also chided the fund business for opposing the disclosure of proxy votes, which the SEC has proposed.

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