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Wall Street Deal Inked

Ten firms agree to change behavior, pay more than $1.4B, as regulators drop probe

Dec 20, 2002 | CNN/Money

Ten of the nation's biggest securities firms agreed Friday to pay $1.435 billion in fines to end a probe alleging that tainted research duped investors into buying over-hyped stocks during the '90s bull market.

Eliot Spitzer at Friday's news conference
Citigroup's Salomon Smith Barney unit was hit with the biggest fine, $400 million, while agreeing with its rivals to change the way it conducts business by separating stock research from investment banking.

The firms, including Credit Suisse First Boston and Goldman Sachs, also agreed to a ban on giving IPOs to executive officers of public companies. They will also will fund "independent" research and investor education.

The deal, announced Friday afternoon at the New York Stock Exchange by federal and state regulators, ends an embarrassing period for the banks and brokers accused of enabling the stock market bubble that popped nearly three years ago.

Richard Grasso, president of the NYSE, said the agreement "will benefit America's 85 million investors and go a long way to restoring American trust and confidence" in financial markets.

Of the fines, $450 million will be used to fund research, while $85 million will go toward investor education. The biggest chunk of money, $900 million, will go to the budgets of state regulators, who may attempt investor restitution.

The nine weeks of talks to iron out the deal stemmed from allegations that stock research was essentially a marketing tool to lure investment banking clients. E-mails leaked to the press have suggested investors were deceived by securities analysts who, because of pressure from their bosses, publicly touted stocks they privately disparaged.

Other revelations showed that high-ranking investment banking clients made millions of dollars by selling shares of hot IPOs that were allegedly handed out as business perks.

Critics contend that investors, intoxicated during the stock market's money-making years, ignored the well-known conflicts between research and banking.

But Eliot Spitzer, the New York State attorney general who led the talks, said the settlement is designed for those "who might not understand the ways of Wall Street."

"It's about making sure retail investors get a fair shake," Spitzer said.

Credit Suisse will pay $200 million, and Goldman Sachs is doling out $110 million. Bear Stearns, Deutsche Bank, J.P. Morgan Chase, Lehman Brothers and UBS Warburg were each hit with $80 million fines. Morgan Stanley was fined $125 million. Merrill Lynch agreed to pay $100 in May to settle New York State's charges that its research analysts publicly hyped stocks they privately ridiculed.

Under the deal, compensating analysts for bringing in investment banking deals will be prohibited along with the practice of analysts accompanying investment banking personnel on pitches and road shows.

For a five-year period, each of the brokerage firms will be required to contract with no fewer than three independent research firms which will provide research to the brokerage firm's customers.

The deal requires that each firm has an independent consultant, chosen by regulators, with final authority to procure independent research from independent providers.

Each firm will make public its analysts' ratings and price target forecasts to allow for the accountability of stock picks.


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