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Wall Street Deal On Broker Fines Delayed

Crusading Spitzer Continues Talks Over Penalties of US$1B

Nov 25, 2002 | National Post

A sweeping deal that would see a dozen big Wall Street investment dealers pay fines of more than US$1-billion has been delayed, Eliot Spitzer, the New York Attorney General, said yesterday.

He said the prospect of a settlement being reached this week was a "false expectation" largely raised by media and made it clear he has no intention of backing off on his investigations into conflicts of interest among the country's top brokers.

"The evidence that has come out, the totality of the evidence relating to all the firms over the past nine months as we have revealed in court papers, has been very damaging to them and to the credibility of these institutions," he said.

Talks are slated to continue today and tomorrow but break off before the U.S. Thanksgiving holiday on Thursday. Lawyers from Credit Suisse First Boston, Bear Stearns Co., US Bancorp's Piper Jaffray met with regulators on Friday.

Deutsche Bank, Goldman Sachs Group Inc., Thomas Weisel Partners and Merrill Lynch are expected to meet today while Morgan Stanley, UBS, Lehman Brothers Holdings Inc. and J.P. Morgan Chase & Co. Inc. are set for tomorrow.

Several sources have indicated Mr. Spitzer is laying out the fines he expects major dealers such as Credit Suisse First Boston, Citigroup Inc. and up to 10 others to pay for allowing or influencing their research analysts to send out falsely optimistic research reports about publicly traded companies.

Citigroup could face fines as high as US$500 million while Credit Suisse First Boston may face fines of up to US$250-million. The others are expecting fines between US$50-million and US$100-million.

The settlements will force Wall Street investment bankers to separate their investment arms from their research divisions after e-mails and other evidence uncovered by Mr. Spitzer appear to show analysts were publicly shilling to investors stocks they privately knew were largely worthless in a bid to get new underwriting business for their companies.

The most infamous case involves e-mail from Jack Grubman, the former star analyst for Salomon Smith Barney, part of Citigroup. Mr. Grubman upgraded to a "buy" his opinion of AT&T Corp. just as the company was about to spin off its wireless unit.

Besides appearing to try to win investment business for Citigroup, Mr. Grubman was looking for support from Sanford Weill, the chairman of Citigroup, to help get Mr. Grubman's twin daughters into an exclusive Manhattan pre-school. Mr. Weill had earlier asked Mr. Grubman to take a "fresh look" at his AT&T rating.

Because other states are involved in the settlement talks, a deal is not expected before mid-December at the earliest.

"The meetings are simply discussions between the Wall Street firms and the regulators. The numbers being discussed are simply for discussion purposes," said Andre Pineda, California's deputy corporations commissioner. "It's the position of California that many of the numbers are too low."

The talks have been going on for the past eight weeks between the states and the investment bankers.

The U.S. Securities and Exchange Commission has its own investigation underway but that has slowed because of turmoil at the top, including the resignation of Harvey Pitt, its chairman, who was accused of being too close to the industry he was suppose to regulate.

Mr. Spitzer insisted yesterday his intention was not to upstage Washington regulators but that he had no choice.

"I would prefer that these issues be dealt with by Congress, by the SEC," he said. "But they didn't."

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