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Wall Street Firms Agree To $1 Billion Settlement

Dec 20, 2002 | Mercury News

Financial regulators will announce as early as today that nearly a dozen Wall Street firms have agreed to pay almost $1 billion to settle charges that stock analysts misled investors during the technology-stock boom of the late 1990s and 2000.

The settlement was still being hammered out in New York late into the night Thursday. It is likely to require three of the most-successful Wall Street firms during the boom Citigroup's Salomon Smith Barney, Credit Suisse First Boston and Merrill Lynch to pay roughly $550 million in total fines for such practices.

Of the three, Credit Suisse was the clear tech-stock deal leader in Silicon Valley, largely because of the efforts of star banker Frank Quattrone.

Another handful of firms is expected to pay about $50 million apiece to settle the investigation. And all firms must contribute millions to pay for independent stock research free of any pressure to hype prospects they must provide in the future to their individual investors.

The settlement comes after an army of state and industry regulators has been investigating Wall Street firms for more than a year, in the wake of hundreds of technology stocks that cratered from spectacular, speculative heights.

As part of the settlement, the firms will have to further separate their research analysts from investment bankers to discourage the bankers from influencing the analysts to inflate their stock ratings. For example, analysts would be forbidden from going to ``bake-offs'' in which bankers try to persuade a company to use the firm for things like initial public stock offerings or mergers.

The settlement will also likely forbid certain practices that became prevalent during the tech IPO boom, such as awarding executives at recently public companies coveted shares of other IPOs. EBay chief Meg Whitman was among dozens of executives who came under fire for receiving shares of hot IPOs from Goldman Sachs after that firm took her company public.

Critics say such ``spinning'' looks like bribes to the executives for their business. Goldman Sachs has denied wrongdoing, and eBay in the past has declined comment on the matter.

E-mail as evidence

As part of their probe, regulators uncovered evidence that analysts promoted stocks they didn't really believe in, to win the favor of companies that could pay their firms and them by extension lucrative investment banking fees.

One internal e-mail of Oct. 12, 2000 featured a Credit Suisse First Boston tech analyst describing what he called the ``Agilent Two Step.'' He said that's a technique in which the company maintains an official ranking on the company but ``verbally everyone knows your position.''

Credit Suisse has said that regulators took such e-mail out of context.

Other e-mail previously came to light as part of an earlier $100 million settlement between New York Attorney General Eliot Spitzer and Merrill Lynch involving members of Merrill's Internet research team, led by former star analyst Henry Blodget. In one case, Blodget and his team had been saying since June 2000 that he had ``enormous skepticism'' about a recommended stock InfoSpace calling it a ``piece of junk,'' about which large investors had made ``bad smell comments.''

Still, from August 2000 to December 2000 InfoSpace which was also Merrill's investment banking client was a featured buy at the firm.

InfoSpace was downgraded Dec. 11, 2000, when it had fallen more than 90 percent from its high.

Salomon Smith Barney, which came under fire for questionable dealings between its famed telecommunications analyst Jack Grubman and several of the companies he researched, has tentatively agreed to pay $300 million in fines, said people familiar with the talks, and to publicly apologize for poor research practices. Regulators had originally sought $500 million from the firm.

Credit Suisse First Boston is expected to pay $150 million, down from $250 million originally sought. The company was investigated for allegedly letting technology investment bankers led by Palo Alto-based Quattrone wield too much power over research analysts.

Merrill Lynch will be required only to pay the $100 million it previously agreed to pay to Spitzer, sources said.

Neither Quattrone, who was recently subpoenaed by Massachusetts regulators to testify about the matter, nor any other individual executives are expected to be named in the settlement. The settlement could preclude Quattrone's subpoena.

Regulators have said they reserve the right to bring separate charges possibly criminal charges against any individuals they believe violated the law. However, Spitzer has said publicly that he will not pursue criminal charges against Citigroup Chairman Sanford Weill.

Using the fines

One matter that remained unclear Thursday night was how much, if any, of the fines would be earmarked to pay back investors harmed by relying on tainted research. Several members of Congress on Thursday urged regulators to use their funds for restitution. House Financial Services Committee Chairman Michael G. Oxley, R-Ohio, said in a news release that regulators should ``ensure that appropriate funds are returned to investors who were misled by tainted Wall Street research.'

But several state regulators said privately that they had hesitations about using the fines for investor restitution. Determining which investors were harmed directly and determining how much they should be repaid would be extremely complex, they said. And Wall Street firms might feel empowered to force aggrieved investors to settle for a share of the finite pot of money from the fines, rather than allowing investors to pursue legal cases, possibly for more money.

Thomas Weisel Partners of San Francisco and U.S. Bancorp Piper Jaffray are not expected to be named in the larger settlement, but face smaller fines in the future.

The deal had not received the blessing Thursday of the majority of the five commissioners at the Securities and Exchange Commission or regulators at the National Association of Securities Dealers, though such approval was expected soon.

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