Six of 12 major investment banks being investigated for fraudulent research practices are threatening to derail an industrywide settlement, three state securities regulators say.
The firms are balking at fines from $50 million to $75 million each as part of a deal aimed at resolving charges that stock analysts misled investors during the 1990s.
Failure to reach a deal could further damage an industry already suffering from massive layoffs and a sharp business downturn.
Federal and state regulators have threatened civil and possibly criminal lawsuits against firms that refuse to agree to fines totaling in excess of $1 billion and reforms aimed at protecting small investors from biased stock recommendations that were used to attract investment-banking work.
”Personally, I’m really disappointed that we are getting this kind of pushback from some of the banks,” says Chris Bruenn, head of the North American Securities Administrators Association. ”There is a good chance that a global settlement is going to fall apart. If that happens, it won’t be good for the industry, it won’t be good for the markets, and it won’t be good for investors.”
The recalcitrant banks, led by Morgan Stanley, also include UBS Warburg, Lehman Bros., Deutsche Bank, U.S. Bancorp’s Piper Jaffray unit and Bear Stearns. They are offering to pay less than a third of their allotted fines, arguing there is scant evidence of wrongdoing. Some also say a final settlement should be postponed until William Donaldson, the Bush administration’s nominee to head the Securities and Exchange Commission, takes charge.
”The public, and especially firms, would be ill-advised to believe that the absence of e-mails in the press equates to a lack of evidence against the firms,” warns Tanya Solov, director of the Illinois securities department, which is investigating UBS Warburg.
The warning comes as parties gather today for three days of crucial meetings at the New York Stock Exchange. Senior Wall Street executives declined to comment on the talks.
”This is their chance to buy their peace and go home,” says Alabama securities commissioner Joe Borg, who is investigating Lehman. ”But if they want to fight, we’ll take them on, one-on-one.”
People familiar with the situation say the other six banks are keen to settle. Citigroup appears prepared to pay a fine of $350 million, down from an initial demand of $500 million.
Credit Suisse First Boston is close to paying $200 million, down from $250 million. Goldman Sachs is prepared to pay $75 million; J.P. Morgan, $50 million; and Thomas Weisel Partners, because of its relatively small size, less than $20 million.
Merrill Lynch agreed to pay $100 million in May to settle state charges.