In a pre-emptive move to address intense regulatory scrutiny, Citigroup Inc. announced yesterday that it is distancing its research analysts from its investment banking group by creating a new entity that will bear the Smith Barney name.
The new unit will still be a part of Citigroup, but is intended to remove some of the conflicts of interest that have sparked allegations of tainted stock research at the bank’s Salomon Smith Barney unit and other Wall Street brokerage firms. Citigroup hired away Sallie Krawcheck from the research firm Sanford C. Bernstein to lead the new operation. In her new role, Krawcheck will head up an operation that will include the firm’s more than 300 research analysts, retail brokerage operations and 11,000 financial consultants.
Citigroup is calling the new group Smith Barney, dropping “Salomon” from the name. A spokeswoman for the firm said the name selection is part of a yearlong branding campaign at the bank and wasn’t done to distance the company from the scandals created after high-profile analysts publicly touted Internet and telecommunications stocks during the late 1990s. The new Smith Barney unit will technically be part of Citigroup’s global corporate and investment bank umbrella, but the company’s stock and bond underwriting, investment banking and other services will not be in the same unit.
One of the other concerns raised by regulators has been the link between the compensation of analysts to investment bank business they help bring in. A Citigroup spokewoman, when asked how analysts would be compensated at the new unit, said the company earlier this year had agreed to the so-called “Spitzer principles,” which require firms to ensure research analyst pay isn’t linked to investment banking.The move to separate research analysts from investment banking was made to “restore credibility among individual and institutional investors,” Sanford Weill, Citigroup chairman and chief executive, said yesterday.
The move is one of a series of steps Citigroup has taken to try to put a string of controversies some of which are still being investigated by regulators – behind it.
Earlier this summer, Citigroup executives were grilled by Congressional investigators about the business advice it gave to scandal-ridden Enron Corp. in structuring financing deals. And earlier this month, New York State Comptroller Carl McCall alleged in a lawsuit that Citigroup’s Travelers Insurance Co. provided a company controlled by former WorldCom Inc. chief executive Bernard Ebbers with more than $679 million in secret loans to buy timber land.
Also, the House Financial Services Committee released documents detailing how top executives such as those at WorldCom were given access by Salomon Smith Barney to hot initial stock offerings in exchange, it’s alleged, for the executives’ business.
Prominent telecom analyst Jack Grubman, who critics say was too closely linked to executives of the once high-flying telecommunications stocks, many of which are now bankrupt, resigned from Salomon Smith Barney in August. Citigroup also shook up its management in early September. Investigators contend that particularly during the Internet boom years, Wall Street research analysts touted stocks in an effort to win investment banking business, including the millions in fees generated from advising companies on mergers and initial stock offerings.
“I think this is brilliant strategy by Citigroup and definitely a pre-emptive move, said Edward Cowart, who oversees $6 billion for Eagle Asset Management at St. Petersburg, Fla. “This situation had the potential of spiraling out of control. There was a chance a small one but still a chance of [New York Attorney General Eliot] Spitzer criminalizing the whole company. And that would not be right. Citi is not Enron. It’s not Andersen.”
Several Wall Street firms, including Merrill Lynch & Co. and Lehman Brothers, declined to comment on the move or address whether their firms were considering a similar separation. But several observers say that the move puts pressure on others to spin off their research departments.
“This will not put a wrench into settlement talks. If anything, it will grease them,” said David Robbins, a New York securities lawyer. “Now that Citi has conceded to do this, it will force the other companies to seriously think about it.”
Regulators welcomed the move, but said it did not change the ongoing settlement talks with Citigroup or the other firms.
“It’s a positive development,” said Marc Violette, a spokesman for Spitzer. “It might complement that work that’s going on to structure a global settlement.”