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‘We Are Making Great Progress’

Apr 30, 2003 | Newsweek

On Monday, prosecutors announced an unprecedented $1.4 billion settlement with 10 of the nation’s top investment firms and released hundreds of pages of evidence from their months-long investigation—including interoffice memos and e-mails—that is likely to cost the firms even more in investor lawsuits.

INVESTORS HAD ACCUSED the firms of knowingly issuing positive ratings on companies that didn’t deserve them in order to lure additional investors and attract more investment-banking business. In many cases, the companies’ stock prices later plummeted—and occasionally the companies themselves collapsed—costing individual investors billions of dollars. Of the sum collected from the firms, about $387.5 million will go to repaying investors who file claims with the government (though lawyers are likely to seek many times that amount in court). The firms also agreed to pay $487.5 million in penalties, $432.5 million to fund independent research and another $80 million for investor-education programs.

Three of the firms—Citicorp’s Salomon Smith Barney, Merrill Lynch and Credit Suisse First Boston—were accused of fraud. Five others (Bear Stearns, Goldman Sachs, Lehman Brothers, Piper Jaffray and UBS Warburg) were charged with issuing “exaggerated†research reports. The largest fine of $400 million was levied on Citicorp, which employed telecom analyst Jack Grubman, one of two analysts barred for life from the securities profession as part of the settlement. Grubman agreed to pay $15 million in fines, while Henry Blodget, the former Internet analyst at Merrill Lynch who was also barred, will pay $4 million to settle charges against him.

Among the firms, Credit Suisse First Boston and Merrill Lynch will each pay $200 million; Morgan Stanley will pay $125 million; Goldman Sachs Group will pay $110 million; and Lehman Brothers Holdings, J.P. Morgan Chase, Bear Stearns and UBS Warburg will pay $80 million each. U.S. Bancorp Piper Jaffray will pay $32.5 million. Though the settlement is the largest ever, the fines are just a fraction of what Wall Street firms made during the period for which they were investigated. Neither the analysts nor any of the firms have admitted or denied wrongdoing under the terms of the settlement, but the firms have agreed to reforms including: adding barriers between analysts and investment bankers, using three independent sources of research before making recommendations, and hiring independent monitors to oversee the changes.

Meanwhile, New York State Attorney General Eliot Spitzer, who has taken a lead role in investigating the Wall Street firms, has vowed to continue to pursue cases against individual executives. NEWSWEEK’s Barrett spoke with Spitzer about the settlement. Excerpts:

NEWSWEEK: Are you satisfied with this settlement?

Eliot Spitzer: I’m thrilled with it. It does an enormous amount to address the structural problems that existed in the system, and it has produced a record for the public to absorb that will permit a recovery by victims of the frauds that have been perpetrated on the public. We are continuing to move forward with cases against individuals. So at every level of the objectives we laid out, we are making great progress.

Were you surprised by the evidence you uncovered during the investigation that showed just how much analysts’ ratings were affected by pressure from the investment side and even, in some cases, from the firm’s top executives?

At first, yes, I was surprised. But as time went on, less so, as I became convinced that what we were seeing was endemic to the industry.

Do you feel like the reforms agreed upon—basing analysts’ pay on the quality and accuracy of their research, posting data on the analysts’ performance for investors, and disclosing the firm’s investment relationships, for example—are sufficient in themselves to fix the problem?

I expect so, and I hope so.


Critics have complained that this settlement alone is not enough to change the system. Do you see this as a starting point?

With respect to some of the issues, this is more than a starting point. With respect to the structural reforms we want, it is, to a great extent, an end point—for now anyway. When it comes to restitution for individuals, I think there will be an ongoing process of litigation based upon the records we have established. And when it comes to individual liability, this is very much a work in progress.

The 10 firms involved in this settlement can no longer be investigated on the specific charges addressed in this case, but individual executives don’t have that protection, right?

The firms are immune from investigations in some areas, yes. They can be investigated, but this settlement brings closure to the investigations on these particular issues. If there was an entirely distinct problem we need to take a look at—though I hope that doesn’t happen—obviously we’d do it.

Could Citicorp CEO Sandy Weill—who agreed under this settlement to limit contact with analysts following disclosures that he tried to persuade telecom analyst Jack Grubman to change his rating on AT&T’s stock from neutral to positive—face further charges as an individual for failing to properly supervise his research department?

I just can’t say. Obviously, when it comes to individuals, we’ll either make a case or not. It would be wrong for me to announce that someone is under investigation.

How many individuals are you investigating at this point?

I don’t even want to say. All I can say is that both my office and the range of offices that have jurisdiction—from the National Association of Securities Dealers to the New York Stock Exchange to the Securities and Exchange Commission and the U.S. Attorney General’s Office—are involved in this process.

Now that you’re released hundreds of pages of evidence showing clearly that some firms—Merrill Lynch and Citicorp’s Salomon Smith Barney, for example—issued fraudulent research on some companies, and others issued reports with “exaggerated or unwarranted claims,†you’ve opened the door to more investor lawsuits.

I will be surprised if there aren’t a substantial number of lawsuits.

Is it tough to have an office down on Wall Street these days?

There is no question I’ve lost some friends now, but I like to think I’ve made a few more, too. Honestly, more people come up to me and say, “Thank you, you’re doing a great job. We needed this change.†Given that most people like to be nice to other nice folks, I think it’s less likely they’ll come up and yell at me. But the reception has been overwhelmingly affirmative, quite frankly.


Many of your predecessors did not devote as much attention to reforms on Wall Street, though the 1921 Martin Act gives the attorney general of New York jurisdiction over securities trading. Why is that?

We have been more active here, perhaps, than other [attorneys general] have been in the past. We have a whole slew of cases that are an outgrowth of this settlement. But we will continue to be active in other areas, too. My office also does everything from Internet to environment to health-care to civil-rights cases.

What about your plans for the future? At the press conference, when you urged lawmakers in Congress to do their part now and close loopholes that might allow firms to write off the fines, SEC chairman William H. Donaldson commented: “Spoken like a man whose Hill is in Albany and not in Washington.†Any plans on running for governor?

It’s too far off—I’m not going to worry or think much about it now. I’ve got to do my job, and I’ll worry about that down the road.


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