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Wall Street Banks Near Reform Deal With Officials

Dec 18, 2002 | USA Today

Wall Street investment banks Tuesday moved dramatically closer to agreement with securities regulators over fines for producing biased stock research, raising hopes that a final agreement on sweeping reforms might come as soon as Monday.

Twelve firms are expected to share close to $1 billion in fines for practices that regulators say hurt investors during the 1990s market boom.

Several firms facing midrange fines of $50 million to $75 million have dropped their previous demand for much lower fines, removing what might be the last major stumbling block in the way of an agreement.

People with knowledge of the situation say the offer goes a long way in meeting regulator demands for substantial fines and the firms' demands to be treated with some uniformity in the hope that will help their defenses in civil lawsuits by investors.

Wall Street firms are accused of misleading small investors by issuing overly positive research reports to help their banking colleagues win lucrative investment banking work during 1990s boom.

Assuming final details are reached this week as expected, a general agreement to reform Wall Street practices could be announced early next week, both sides say.

Of the 12 securities firms involved in the talks, Citigroup is expected to pay the biggest fine, $350 million, followed by Credit Suisse First Boston, $150 million. UBS Warburg, Lehman Bros., Morgan Stanley, Bear Stearns, Deutsche Bank, J.P. Morgan and Goldman Sachs would come in around $50 million each, while smaller firms U.S. Bancorp Piper Jaffray and Thomas Weisel would pay less.

Fines would still total close to $1 billion.

Proceeds would be split among federal and state regulators.

As part of the settlement, the firms also would:

Pay an additional $1 billion in the next five years to fund the distribution of independent stock research to small investors.
Separate research from investment banking.
Ban "spinning" shares in initial public offerings, a practice by which firms dole out shares of hot IPOs to the personal brokerage accounts of corporate executives who can repay the favor by handing out lucrative underwriting assignments and other business to Wall Street firms.
The industry, already in a severe slump, hopes a deal will restore investor confidence by ending a damaging investigation into Wall Street practices, triggered last year by New York Attorney General Eliot Spitzer.

Merrill Lynch earlier this year agreed to pay $100 million to settle Spitzer's charges that its Internet analysts issued misleading research about stocks of Merrill's corporate clients.

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