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Wall Street Firms Face $1 Billion In Fines Over Misleading Investors

Dec 20, 2002 | Bloomberg News

Citigroup Inc., Credit Suisse First Boston and eight of the other largest securities firms agreed to pay about $1 billion to settle claims they misled investors with stock recommendations to win investment banking contracts, people familiar with the situation said.

The agreement with the Securities and Exchange Commission, New York Attorney General Eliot Spitzer and other regulators calls for the firms to pay fines and restitution to investors, and to provide funding for independent research for their customers, the people said.

The settlement brings some of the biggest changes to the way Wall Street does business since the Securities and Exchange Commission was formed in 1934. The reforms include the separation of stock analysts and investment bankers, and a ban on brokerages dispensing shares in initial public offerings to company executives with whom they do business, the people said.

"It's pretty momentous," said Ron Geffner, an SEC enforcement lawyer from 1991 to 1994, who's now a partner with Sadis & Goldberg. "It's requiring Wall Street to modify its operations."

Regulators began investigations into stock research as investors lost more than $8.5 trillion in shares between March 2000 and October this year. Wall Street firms suffered a loss of investor confidence and brokerage business because of revelations they recommended stocks they knew were risky to get banking fees.

"The settlement will go a long way to create a structure for independence," said Richard Moore, treasurer of North Carolina and sole trustee of the state's $55 billion public pension fund. "This will make the job of the large and small investor alike much easier."

Banks involved in the settlement include Citigroup, Morgan Stanley, Merrill Lynch & Co., J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Credit Suisse First Boston, Bear Stearns Cos., Deutsche Bank AG, UBS Paine Webber Group Inc. and Lehman Brothers Holdings Inc.

Regulators will hold a press conference at 1 p.m. New York time to discuss the settlement, the people said.

Spokespeople for Merrill Lynch, Morgan Stanley, Goldman Sachs and CSFB declined to comment. Spokespeople for Citigroup, J.P. Morgan, Deutsche Bank, Lehman Brothers and Bear Stearns didn't return calls.

The shares of Credit Suisse Group rose 0.45 Swiss francs to 31.45 francs ($22.06) at 11:35 a.m. local time. They've declined 56 percent this year. Deutsche Bank shares advanced 67 cents to 46.46 euros ($47.64). Citigroup shares traded in Germany fell 15 cents to 36.05 euros.

People familiar with the pact stressed that it is "an agreement in principle" and won't be final until papers are filed in court, probably next month.

The largest fine, about $300 million, will be paid by Citigroup, whose chairman Sanford Weill asked telecommunications analyst Jack Grubman to review his rating on AT&T Corp. in 1999.

Citigroup and Grubman face 62 potential class actions related to research, according to a bank filing with the SEC. Grubman's upgrade of AT&T as Citigroup was seeking an assignment to help sell initial shares of the telephone company's wireless unit is part of Spitzer's investigation.

Credit Suisse First Boston, whose technology investment banking chief Frank Quattrone used to oversee a group of analysts, will pay $200 million, including a fine of $150 million, plus $50 million to fund research, the people said. The remaining firms will pay $50 million each, they said.

The fines will be divided among U.S. states and the Securities and Exchange Commission, which plans to set up a system for returning some money to investors.

Executives at the securities firms won't be prosecuted, the people said. Grubman, who left Citigroup's Salomon Smith Barney unit earlier this year, may be charged after an accord is reached, Spitzer said earlier this week.

Wall Street remains a business rife with conflicts and this agreement won't change that, some investors said.

"I'm not holding my breath that this is the big answer," said Beth Young, a corporate governance consultant to pension funds. "The fines will be symbolically important but not huge for these institutions."

Spitzer, who rode the investigation from obscurity to the covers of national magazines and television appearances, was criticized by some for using the probe for political gain.

"I don't call it a ãreform,"' said Roy Smith, a professor at New York University's business school and a former Goldman Sachs partner. "These are punitive measures to address problems in the industry in a crude way without regard to existing legislation."

Another question is whether investors even read independent research or would make wiser decisions with it, Smith said. Most research departments are financed by investment banking fees, making a true separation difficult.

"The dilemma of Wall Street is still on the table," said Michael McKeon, a managing partner of financial services at consultant Booz Allen & Hamilton Inc. "If they eliminate any conflicts of interest and separate research from investment banking, how do you pay for research?"

The settlement also will include a record of findings that lays out evidence gathered in the probes and investigators' conclusions, which would help plaintiffs suing the firms.

Since Spitzer announced his investigation of analysts in April, hundreds of suits have been filed claiming shareholders lost money as a result of misleading analyst statements.

Analysts' e-mails and other evidence uncovered by Spitzer's investigation of Merrill and the other banks have also bolstered more than 300 potential fraud class actions accusing the banks of rigging initial public offerings of stock. The IPO lawsuits are pending in federal court in New York.

Merrill Lynch this year agreed to pay $100 million to settle charges by Spitzer's office based on e-mails from Internet analyst Henry Blodget.

Spitzer released e-mails in which Blodget described Internet companies such as InfoSpace Inc. as a "piece of junk," while analysts maintained positive ratings on the companies. The firm has said the e-mails were taken out of context. Merrill Lynch is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.

San Francisco-based Thomas Weisel Partners and U.S. Bancorp, the two smallest firms that took part in the talks with regulators, aren't part of the settlement, people involved said.

"We don't understand why we're not part of the settlement to be announced," said Amanda Duckworth, a spokeswoman for Thomas Weisel. "One view is that the regulators felt it was more important to deal with the big firms first."

Erin Freeman, a U.S. Bancorp spokeswoman, declined to comment.

The regulators include Spitzer, the U.S. Securities and Exchange Commission, the New York Stock Exchange, the NASD and the North American Securities Administrators Association, which represents state securities regulators.

For investors in securities firms themselves, the settlement was welcomed.

"It's nice to get the issue behind us," said Steve Wharton, who helps Loomis Sayles & Co. manage $10 billion in stocks, including about 2.6 million Citigroup shares. "As it becomes clear individual CEOs won't be indicted, that is positive."


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