Citigroup Inc. could be required to publicly apologize for faulty stock research by the firm’s analysts, but Chief Executive Sanford I. Weill is likely to avoid facing separate charges in a broad regulatory inquiry into whether the nation’s big brokerage firms misled small investors with overly optimistic research on investment-banking clients, people familiar with the matter say.
The financial-services giant will likely agree to pay a fine of about $300 million to $350 million and perhaps will spend as much as $100 million more for independent research to settle the inquiry, according to people close to the inquiry.
Whether the apology comes from Citigroup or Mr. Weill personally has yet to be determined, people familiar with the matter say. Any settlement, however, wouldn’t preclude separate charges against Jack Grubman, the former star telecom analyst at Citigroup’s Salomon Smith Barney unit who has been at the center of the case.
The settlement is significant for Citigroup and Mr. Weill. Regulators, led by New York Attorney General Eliot Spitzer, had been investigating, among other things, whether Mr. Weill had prodded Mr. Grubman to upgrade his rating of AT&T Corp., a corporate client, in late 1999, as well as his involvement with other ratings of such clients. Each has denied wrongdoing, but Mr. Weill has acknowledged asking Mr. Grubman to take a “fresh look” at AT&T’s stock. A Citigroup spokeswoman declined to comment, as did a spokesman for Mr. Spitzer. Neither a spokesman for Mr. Grubman, nor his attorney, Lee Richards, returned calls for comment.
Despite finding evidence suggesting Mr. Weill’s involvement in the ratings process, investigators from Mr. Spitzer’s office were unable to find evidence that would show definitively that Mr. Weill knew the firm was releasing false or misleading ratings, according to people close to the matter.
The developments come as regulators near a broader settlement with five large Wall Street firms, including Citigroup, over misleading research that could include fines totaling nearly $1 billion, and several hundreds of millions more to fund independent analysis for small investors, the people say. The other firms that tentatively have signed off on the broad outlines of an accord are Credit Suisse Group’s Credit Suisse First Boston unit, Morgan Stanley, Goldman Sachs Group and Merrill Lynch & Co.
In May, when Merrill settled an inquiry by Mr. Spitzer’s office into faulty research, the firm’s chairman, David Komansky, was required to make a public apology to investors.
Reaching a “global” pact that would encompass the 11 largest firms on Wall Street has become more elusive, as a group of smaller securities firms continues to balk at any deal with regulators, these people add. These smaller firms including Lehman Brothers Holdings Inc., Bear Stearns Co., UBS AG, and Deutsche Bank AG’s securities unit have resisted being included in the broad probe, believing they are being unfairly maligned for the improprieties at major players, such as Citigroup. Investigators led by the New York attorney general and the Securities and Exchange Commission are prepared to file separate charges against these firms if they don’t agree to the terms, the people say.
In any case, regulators said they were making some inroads in nudging some of the smaller firms to join the bigger pact. For instance, regulators believe they have made progress getting Lehman to pay a $50 million fine, as well as an additional $30 million to fund the purchase of independent research. Though the final numbers could change, regulators believe that at least two other firms, UBS and Deutsche Bank, could join the pact with similar payment plans.
Deutsche Bank and UBS declined to comment. Lehman couldn’t immediately be reached.
The lengthy negotiations underscore the difficulty in constructing such a global settlement given the conflicting interests on Wall Street. And additional questions remain, including whether aggrieved investors will receive any money collected as part of the package. Yesterday, House Financial Services Committee Chairman Michael G. Oxley urged negotiators to make returning money to defrauded investors a priority in the Wall Street global settlement talks. Said Rep. Oxley: “Once the global settlement is in place, the acid test of its success will be whether it returns money to the investors who lost money as a result of biased research. It should not be a Christmas gift for state treasuries.”
Investor restitution is a particularly sensitive issue. Some consumer advocates criticized the Merrill deal because the $100 million fine went to the states, not investors. Yet, restitution funds aren’t easy to administer because determining who will receive money and how much is complicated. And the process could take years.
Citigroup has come under the most intense scrutiny, by far. Regulators have focused on the research calls of its former top-ranked telecommunications analyst, Mr. Grubman, and the activities of Mr. Weill over Mr. Grubman’s upgrade of AT&T in late 1999 before Salomon was appointed by the firm to help underwrite a lucrative stock deal. Mr. Weill is an AT&T board member, but he has announced plans to step down.
In a January 2001 e-mail, Mr. Grubman wrote to a money manager that he raised his rating of AT&T to help Mr. Weill “nuke” John Reed as Citigroup’s co-chairman during a power struggle in early 2000. In exchange, Mr. Grubman said in the message, Mr. Weill helped get his children into the 92nd Street Y, an exclusive Manhattan nursery school. Mr. Spitzer has said to key officials in the attorney general’s office that he will release all the evidence involving Mr. Weill and others at the firm when the case is settled to assist investors who may seek to recover damages from the firm over its stock research.
Messrs. Weill and Grubman deny there was a quid pro quo involving the Citigroup donation to the Y, the subsequent admission of the Grubman twins and Mr. Grubman’s rating on AT&T. Mr. Weill confirmed intervening to help the twins but said his intentions were “grossly distorted” in Mr. Grubman’s e-mail. Meanwhile, Mr. Grubman said his rating had nothing to do with the twins’ application, and that he fabricated the claim “in an effort to inflate my professional importance.”