The biggest banks on Wall Street face more than $10 billion US worth of civil lawsuits as investors clamour for compensation over the massive losses they claim to have incurred by following biased research written by top telecoms and dot-com analysts.
The massive potential liabilities are estimated by senior independent investment analysts on Wall Street and dwarf the actual sums set aside by the banks to settle the stock research scandal with the U.S. authorities and the reserves they hold to pay for litigation.
Citigroup, the biggest financial services company in the world, is expected to be the hardest hit, with analysts expecting the group to face lawsuits worth $7 billion US in the next three years.
The company has already agreed to pay $400 million US in the so-called “global settlement” struck with Eliot Spitzer, the New York attorney-general, the Securities and Exchange Commission and other U.S. securities regulators.
The company has also announced that it will set aside a further $900 million US to settle litigation related to the investment-research scandal and other issues such as the Enron bankruptcy.
Brad Hintz, a senior investment banking analyst at Sanford C Bernstein, one of the few independent firms of analysts on Wall Street, said: “We have identified what potential litigation there is out there. We can see the number of clients these banks have who could have a claim, we know how much the stocks they bought fell and we know what previous settlements have been. On this basis, we can calculate the biggest liability these banks face.”
Much of the Citigroup research by Hintz, who is the former chief financial officer of Lehman Brothers, focuses on massive losses by clients of Salomon Smith Barney who were advised to buy shares of AT&T, a telecoms company.
It has been alleged that Jack Grubman, the disgraced former telecoms analyst at SSB, wrote investment research which was biased in favour of AT&T under pressure from Sandy Weill, the Citigroup chief executive.
Citigroup neither admitted nor denied wrongdoing in the case when it agreed to pay the global settlement.
Merrill Lynch comes a close second to Citigroup, with a potential $4 billion US worth of lawsuits waiting to be filed, according to the Wall Street research.
CSFB, which announced this week it would charge $450 million to its accounts for future litigation, also faces potential lawsuits stretching into the billions of dollars.
JP Morgan Chase, meanwhile, which paid $80 million US into the global settlement, has set aside a total $900 million US to pay for possible litigation. Most of the firm’s provision is expected to cover lawsuits related to the collapse of Enron.
Firms such as Bear Stearns and Lehman Brothers, which also participated in the global settlement, but with much smaller payments than their big investment banking counterparts, are not expected to face large numbers of lawsuits because of the nature of their business.
But Morgan Stanley, UBS Warburg, Goldman Sachs and Deutsche Bank, who have yet to quantify any potential litigation against them from disgruntled investors, are unlikely to escape the expected barrage of lawsuits.