Salomon Smith Barney, beset by high-profile financial scandals, will propose on Friday a detailed settlement offer to federal regulators that will include a large fine and structural reform, sources said Wednesday.
The brokerage first approached regulators about a settlement in mid-August but was told it would have to produce additional documents regarding its business practices–including the conduct of its research analysts and how the firm allocated new stock issues in recent years–before an offer would be considered, the sources said.
The proposal will be made to the Securities and Exchange Commission, the National Assn. of Securities Dealers and the New York Stock Exchange at the SEC’s offices in Washington. The regulators have told Salomon that any deal must include a financial penalty and significant structural reform.
The regulators at the meeting will include Stephen Cutler, the SEC’s enforcement chief; Barry Goldsmith, head of enforcement for NASD; and David Doherty, who heads NYSE enforcement.
The offer will be “a very serious proposal,” said one source.
Federal and state authorities are investigating whether Salomon analysts in recent years intentionally misled investors with bullish stock picks aimed primarily at winning investment-banking business. They’re also studying whether the firm doled out coveted initial public stock offerings to corporate executives to win banking work, which could violate securities laws.
Salomon, a unit of Citigroup Inc., has signaled its desire to put the probes behind it. When Citigroup CEO Sanford Weill installed Charles Prince at Salomon’s helm this month, he said in a memo to employees that Prince’s first priority was to “resolve promptly the particular issues” facing Salomon.
On Monday, Salomon agreed to pay $5 million to settle NASD charges that a former star analyst, Jack Grubman, misled investors in hyping a telecom stock.
A universal settlement would help Salomon by potentially halting the stream of bad publicity the firm has suffered this year.
A deal also would eliminate the cloud of uncertainty that has hung over the company, depressing Citigroup’s share price. The stock has plunged 40% this year, double the drop of the average bank stock.
For regulators, a universal settlement could free up limited personnel and resources for other Wall Street investigations, experts said. The agencies could claim to have acted quickly, while at the same time avoiding lengthy legal battles with uncertain outcomes.
Any settlement also could serve as a template for deals with other brokerage firms.
There is ample precedent for a deal between multiple regulators and Salomon: Credit Suisse First Boston earlier this year agreed to a $100-million fine in a joint settlement with the SEC and NASD over allegations of IPO abuses. And Merrill Lynch & Co. in the spring agreed to pay $100 million to settle stock-analyst fraud allegations brought by New York Atty. Gen. Eliot Spitzer.
In both cases, the brokerages were permitted to settle without admitting or denying guilt.
But a Salomon settlement could be more difficult because it would involve several related, though distinct, issues, said Henry Hu, a University of Texas law professor.
Salomon also would have to reach deals not only with the SEC, NASD and NYSE, but with Spitzer, whose probe of the firm has been the most far-reaching.
Prince met Tuesday with Spitzer, sources said. Massachusetts regulators last week recommended that Spitzer consider bringing criminal charges against Salomon, alleging a pattern of wrongdoing.
Regulators don’t want to give the impression that they are treading lightly on Wall Street given the firestorm of revelations over bull-market abuses of investors.
“They’d want to have something people will look at and say, ‘the government did a good job here,’ ” said John Sturc, a Washington lawyer and former SEC official.
For Salomon, one of its top priorities is structuring a settlement that would not increase its vulnerability to the mountain of lawsuits from private investors, experts said. “They will try very hard to get the F-word–fraud–left out of charges,” said Samuel J. Winer, a securities-law partner at Foley & Lardner in Washington.