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Wall Street Firms Near Settlement

Deal on Reforms Could Come Next Week

Apr 18, 2003 | The Washington Post

Nearly four months after securities regulators and Wall Street's biggest firms announced a historic $1.4 billion "agreement in principle" to end multiple probes into allegedly conflicted stock research, sources said a final deal could be signed as soon as Wednesday.

Regulators and lawyers for the firms have haggled for months over precise language in the settlement, with the firms seeking to avoid increased legal liability. "The firms have been very interested in the potential ramifications of the language in other [legal] arenas. One phrase or line could mean a lot," one regulator said of the often arduous talks.

The most significant remaining issue, the sources said, is whether anything in the language would preclude Wall Street banks from asking insurance companies to cover costs of the settlement or any private securities litigation or arbitration judgments or settlements arising from the agreement. Another argument centers on whether the cost of the settlement will be tax-deductible.

At issue are regulators' claims that big Wall Street firms misled investors by issuing inflated research reports on companies to generate lucrative investment banking fees. Regulators have also alleged that several of the firms doled out hard-to-get shares in hot initial public offerings to executives at companies that were also big banking clients.

The firms have denied wrongdoing. But as part of the preliminary settlement announced in December they agreed to fines and other payments and to fundamentally alter the way they do business. In particular, they agreed to much stronger separations between investment banking and research. They also said they would pay for research for clients produced by firms that do no investment banking and presumably face no conflicts of interest. The firms also agreed to a ban on allocating IPO shares to executives at public companies.

As part of the final settlement, regulators said three firms Citigroup's Salomon Smith Barney unit, Merrill Lynch & Co. and Credit Suisse First Boston Corp. will be charged with committing fraud against investors. But the regulators agreed to drop the fraud charges in the final settlement, the sources said, in exchange for the firms' agreeing to reforms.

Merrill Lynch reached a separate settlement with New York Attorney General Eliot L. Spitzer last year but is being included again because the final version includes new reforms, they added.

Other firms, including Goldman Sachs Group Inc. and Morgan Stanley & Co., will be accused of lesser violations of industry rules, regulators said. Deutsche Bank, originally part of the global settlement, will reach a separate agreement later. The delay occurred because Deutsche Bank acknowledged this month that it recently provided regulators with e-mails that the firm failed to turn over last year.

Sources familiar with the matter said the Securities and Exchange Commission has given firms until Monday at 5 p.m. to sign and deliver documents agreeing to final terms. An SEC vote would then take place Tuesday, with a final announcement Wednesday. An SEC spokesman declined comment.

Last-minute squabbles over language could still cause a delay, sources said. The formal announcement probably will be made at SEC headquarters in Washington, which would be important symbolically. That's because Spitzer has been the driving force behind probes that led to the settlement. And Wall Street firms, federal regulators and some Republicans in Congress have complained that Spitzer usurped the SEC's traditional authority to regulate the securities industry. Spitzer has said he stepped in to crack down on abusive practices because other regulators failed to do so.

One source said the final settlement might include language saying regulators do not intend for insurance companies to cover settlement or litigation costs, or for the fines to be tax-deductible. But this source said that this language will not have the force of law and that the insurance issue will have to be decided in court. The Internal Revenue Service will have to decide the question of deductibility.

In addition to formal documents detailing charges, the final agreement is expected to spell out exactly how and when Wall Street investment bankers would be able to interact with analysts. The broad outlines have been known for months and will include a ban on analysts attending "pitch meetings," where firms seek investment-banking business, or "roadshows," where bankers visit wealthy investors to try an entice them into buying upcoming public offerings.

The final settlement will also specify how firms will buy and distribute third-party research, and include the names of independent monitors, two of whom will be assigned to each firm to oversee compliance with the settlement. The firms would be allowed to pick their own monitors, if regulators approve. Some choices were rejected, adding to the delays. In addition to arguments over precise language in the formal complaints, several firms are worried about inconsistency in the way potentially damaging internal documents are released. Spitzer has promised to release all of his findings regarding allegedly biased research at Salomon Smith Barney, including e-mails and other documents.

In part because the global settlement does not provide any immediate relief to investors, Spitzer has said he wants to provide a "road map" for shareholder lawsuits and arbitration claims. But it is not clear how much information other states that conducted probes plan to release. This has some firms worried that they might suffer more damage to their reputations than their rivals.

Firms also expressed concern over whether subsidiaries or overseas branches would be covered by the agreement. And they worried about possible language that would effectively stop them from conducting business in individual states.

Christine A. Bruenn, president of the North American Securities Administrators Association, which represents state regulators, said the settlement would not preclude the firms from conducting business in the states. But Bruenn could not guarantee that the agreement, and documents released in support of it, would not come back to haunt firms in courts and securities arbitration proceedings.

"Ultimately you can't make everyone happy," she said. "There are a lot of investors out there who lost lots of money and we do hope this ultimately helps them."


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