US regulators have alleged securities fraud by Credit Suisse First Boston and Citigroup’s Salomon Smith Barney investment banking unit as part of their “global” settlement of conflicts of interest on Wall Street.
The record of findings, which may not be released for several weeks, will deal another blow to reputations already tarnished by scandals over stock research and initial public offering abuses.
CSFB and Salomon declined to comment. People familiar with the negotiations said that as part of the agreement both banks were expected neither to admit nor deny the findings, lessening the potential impact in private investor lawsuits.
Regulators may also issue fraud findings against other banks, these people said.
A coalition of state and federal securities regulators and a dozen leading Wall Street investment banks have been haggling over the evidentiary findings as they try to conclude a landmark $1.5bn settlement they announced in December to resolve abuses committed during the bull market.
The regulators led by Eliot Spitzer, New York attorney-general, the Securities and Exchange Commission and the National Association of Securities Dealers took the unusual step of announcing the settlement before it was approved officially.
Under the deal, banks will pay large fines and institute new safeguards in their stock research and IPO practices to protect investors from potential conflicts of interest.
Lawyers from the two sides are continuing to work on specific language on a numer of thorny issues, including what sort of contact research analysts will be permitted to have with investment bankers.
The deal also calls for regulators to release specific findings against each bank as a way to help investors recoup their losses in court or arbitration hearings.
The banks had been pushing for lesser findings, such as failure to supervise employees properly, as a way to spare embarrassment and limit their liability.
The wording of the documents will be crucial. Fraud findings would have narrow use in a court trial because the banks will not admit to the charges, securities lawyers said. But they may be used by plaintiffs’ lawyers to fight pending motions to dismiss the cases before trial, possibly leading to costly settlements.
The findings may also be used as evidence in industry arbitration panels, which are less stringent.
“When a government regulator makes a finding of fraud, that is highly pursuasive evidence in an arbitration case,” said Jacob Zamansky, a New York securities lawyer.
Salomon and CSFB were hardest hit by the settlement, having to pay $400m and $200m respectively. Some of their most prominent employees during the bull market now face sanctions.
Jack Grubman, the former Salomon telecoms analyst, would be barred from the securities industry for life under one possible settlement.
Frank Quattrone was placed on leave as the head of CSFB’s technology banking group a week ago amid suspicion that he attempted to have staff destroy documents.