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Wall St., Regulators Close to Settlement

Dec 19, 2002 | Washington Post

Regulators and Wall Street firms this afternoon were putting the finishing touches on a "global settlement" that will bring to a close multiple probes into alleged conflicts of interest at the nation's biggest banks and brokerages, sources close to the matter said. The deal, which will likely be announced Friday morning, comes after two days of frenetic negotiations resolved nagging issues that at one point threatened to derail the talks.

The settlement is to be announced at a press conference either at the lower-Manhattan offices of New York Attorney General Eliot Spitzer, who has been the driving force behind the talks, or at the New York offices of the U.S. Securities and Exchange Commission, sources said. In addition to Spitzer and the SEC, the press conference will include state, federal and industry regulators who have been conducting Wall Street investigations.

Officials in Spitzer's office and with other regulators involved in the talks declined to comment today. Spokespeople for the Wall Street firms involved in the talks also declined to comment.

The deal will include fines for a dozen firms totaling about $1 billion and will require that the firms contribute nearly $1 billion more over five years to create a fund to purchase and distribute third-party stock research to their brokerage clients, sources said.

A significant percentage of the fines paid by the firms will be returned to investors who lost much of their holdings when technology and telecommunications stocks many of them strongly promoted by Wall Street analysts plummeted in the stock market crash at the end of the1990s. One source familiar with the settlement said as much as half of the fine paid by each firm will go back to investors. Details about who would run the restitution fund, and how investors would apply to have money returned to them, were not available this afternoon.

The deal will also include significant structural changes that will more formally separate analysts from investment bankers and stronger prohibitions against firms distributing shares in valuable initial public offerings to executives at firms that are also investment banking clients. Securities and Exchange Commission officials say much of the settlement could ultimately be enacted as industry rules amounting to the biggest Wall Street reform in decades. The deal will also likely include new requirements that banks disclose their analysts' track record in picking stocks.

Citigroup, parent of investment bank and brokerage firm Salomon Smith Barney, will pay the biggest fine, sources say, at $350 million. Credit Suisse First Boston will pay the second largest, $150 million. Regulators have uncovered e-mails and other documents they say show that at both firms analysts placed inflated "buy" ratings on otherwise questionable companies in order to generate lucrative investment banking business from those companies. Regulators also say both firms improperly awarded hard-to-get IPO shares to favored corporate executives.

Citigroup and Credit Suisse are both expected to release statements of apology. Spitzer, who has handled the Citigroup investigation, is expected to release a detailed account of his findings. This account will include e-mails embarrassing to Citigroup chief executive Sanford A. Weill, a source familiar with the document said, but will not include any "smoking gun" that could put Weill in legal jeopardy. Spitzer plans to end his probe into Citigroup and Weill but will continue to weigh possible charges against other individuals, notably former Salomon telecommunications analyst Jack B. Grubman.

A handful of other firms, including Morgan Stanley, Goldman Sachs, Bear Stearns, Lehman Brothers, UBS Warburg and Deutsche Bank are expected to pay around $50 million each. One source said Goldman Sachs will also be asked to pay more to fund an investor education program. A Goldman Sachs spokeswoman declined to comment. It was not clear whether other firms would also contribute to an investor education fund. Two smaller regional firms, U.S. Bancorp Piper Jaffray and Thomas Weisel Partners are expected to pay significantly less than $50 million.

The global settlement will conclude multiple Wall Street probes conducted by Spitzer, the SEC, industry self-regulatory groups and other states focusing on allegations that Wall Street analysts published bullish research reports on questionable companies that later failed, costing investors billions, in order to generate lucrative investment-banking business. The probes have also focused on whether Wall Street firms improperly awarded valuable shares in initial public offerings to executives at companies that were also investment-banking clients.

Spitzer sparked the raft of probes, which have embarrassed Wall Street and produced revelations that have shaken investor confidence, when he used New York's tough anti-fraud business law, the Martin Act, to subpoena documents from Merrill Lynch and Co. He later released a thick stack of internal Merrill e-mails in which the firm's analysts derided stocks they were publicly recommending. Merrill eventually agreed to pay $100 million to avoid criminal charges. Other regulators then began probing similar allegations, leading Wall Street to complain that they could not handle the fusillade of probes all at once. Those complaints led to an agreement between regulators to work together toward the global settlement arrangement.

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