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Wall St., Regulators Near Accord

N.Y. Attorney General Presses Reluctant Firms to Take Part

Dec 19, 2002 | Washington Post

With a sharp shove from New York Attorney General Eliot L. Spitzer, Wall Street firms and regulators moved closer today to signing off on a comprehensive settlement that would end several investigations into alleged securities fraud by the nation's biggest brokerages and investment banks.

Spitzer placed a round of calls this morning to firms that have been reluctant to accept the deal, and he demanded that they tell him by this afternoon whether they would agree to the latest proposal offered by regulators, sources familiar with the matter said.

The proposal would require firms to pay about $50 million each in fines and to collectively contribute to a $1 billion fund intended to give investors access to research reports that are less likely to be distorted by conflicts of interest. The fund would be used to purchase research reports from firms that do no investment banking. The investment banks would then be required to distribute the third-party research whenever they send out reports produced by their own analysts.

By this evening, most of the firms that had been reluctant to accept the settlement, a group that includes Morgan Stanley, Goldman Sachs, Bear Stearns, Lehman Brothers, UBS Warburg and Deutsche Bank, appeared ready to agree, though a high-level source at one bank said he was not sure his firm was on board. Citigroup, parent of Salomon Smith Barney, and Credit Suisse First Boston have indicated a strong desire to sign the settlement and put an end to investigations that have produced damaging revelations about both firms. Citigroup is likely to pay $350 million under the terms of the settlement, while Credit Suisse probably will pay $150 million.

In addition to putting pressure on Wall Street, Spitzer today spoke with California Corporations Commissioner Demtrios Boutris in an attempt to win his support. California has been investigating Deutsche Bank, and Boutris had previously said he would refuse to sign any global agreement that did not require the firm to pay at least $100 million.

But Boutris agreed today to take part in the settlement if Deutsche Bank pays a $50 million fine, a California official said. A Deutsche Bank spokeswoman declined to comment, but sources familiar with the firm's position say it is likely to embrace any deal that has been blessed by Spitzer and other regulators.

Probes being conducted by Spitzer, the Securities and Exchange Commission, industry self-regulatory groups and other states have focused 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.

None of the reluctant firms are necessarily balking at the size of fines, which many can easily afford, sources said. Rather, the firms are concerned about signing any agreement that would increase their exposure to shareholder lawsuits or damage their reputations. For instance, several firms are eager to pay a uniform amount in order to ensure that trial lawyers cannot single out one firm as a worse offender than another. In addition to fines, all firms involved in the talks are expected to contribute a total of about $1 billion over five years to fund the purchase and distribution of third-party research.

Even if the issue of fines is worked out soon, other issues remain. One question centers on how much, if any, of the money generated by the settlement will be returned to investors. Officials in Spitzer's office sniped today at House Financial Services Committee Chairman Michael G. Oxley (R-Ohio), saying the restitution fund Oxley supports would require that shareholders agree not to sue Wall Street firms. Spitzer, who has focused his part of the probe on Citigroup, has pledged to release all his findings in part to help provide ammunition for shareholder suits. An Oxley spokeswoman today said the committee chairman was not involved in the settlement talks and had no opinion on whether a restitution fund should bar lawsuits.

Firms have generally agreed to structural changes that would, among other things, put far stricter limits on bankers' interaction with analysts, change reporting lines of command and strengthen current provisions that forbid firms from distributing initial public offering shares to executives in return for banking business. SEC officials have said they expect many of the structural changes included in the settlement to be made into industry rules.

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