Big egos, big dollars, turf wars, Italian dinners and press leaks set the stage for one of the most historic power struggles on Wall Street in more than 25 years.
The $1.4 billion settlement announced last week was on the verge of collapse less than seven days ago. After months of tense negotiations, federal and state regulators were ready to file lawsuits against a dozen of Wall Street’s most prestigious firms, claiming the firms issued biased stock research to curry favor with investment-banking clients and gave special access to stock offerings to executives of client companies.
At times, there was as much contention on each side of the bargaining table as there was across it.
No Wall Street firm wanted to pay more money than a rival. Meetings disintegrated into finger-pointing and tattling as each firm tried to deflect blame for the frenzied 1990s rise and fall of high-tech stocks.
On the other side, regulators were divided by penalty envy and public barbs. New York Attorney General Eliot Spitzer, who settled a framework case with Merrill Lynch in May, was known to lose his temper and start screaming. Jurisdictional power struggles threatened to derail the deal at any time. In the midst of negotiations, Harvey Pitt, chairman of the Securities and Exchange Commission, resigned under heavy criticism about his handling of the agency.
After the first round of meetings in the summer, the regulators seemed as far apart from each other as they did from the Wall Street firms, several people involved in the talks said.
”When it was clear the Wall Street firms were forming their own little cartel, that drove the regulators together in a large measure,” said Joseph Borg, director of the Alabama Securities Commission.
On Oct. 1, Richard Grasso, chairman of the New York Stock Exchange, invited Spitzer and top officials from the SEC and the National Association of Securities Dealers to a dinner at his club, Tiro a Segno. Spitzer said it looked like a scene from The Sopranos and later dinners became known as ”the meetings of the four families,” a tongue-in-cheek reference to New York’s La Cosa Nostra crime families.
But all of the agencies wanted to protect their turf, and some old wounds festered.
Meanwhile, the media got plenty of leaks and, in some cases, were used to put pressure on the firms to settle, one lead negotiator acknowledged.
At one meeting, Spitzer stood and shouted at Ted Levine, the top lawyer for UBS Warburg, saying the leaks to the press had to stop. The incident was the buzz later that day because a lot of people in the room believed Spitzer’s office was the source of many of the press leaks an assertion he denies.
In November, the regulators demanded the smaller firms pay a $75 million penalty. The firms countered with an offer of $15 million. The lines in the sand were deep, and the stakes were high. Each side dug in.
By early December, chances for a global settlement appeared dim.
On Dec. 13, regulators were close to a deal with the five largest firms: Salomon Smith Barney, Goldman Sachs, Morgan Stanley, Merrill Lynch and Credit Suisse First Boston.
But the smaller firms were still talking tough. Then Grasso called the chief executives. His message: Reaching a settlement is more important than bickering over $5 million or $10 million.
In the end, both sides agreed to a $50 million penalty. Without admitting or denying any wrongdoing, they would settle charges of unethical conduct and poor supervision, avoiding the liability-laden moniker of fraud. They would separate their research departments and hand out independent research alongside their own. Finally, they would stop allowing executives of client companies to buy shares in initial public offerings. The structural changes would be the most significant since 1975, when the NYSE deregulated commissions on stock trading.
So by Wednesday morning, the middle-tier firms were basically signed on, but not all of the big firms were, said one top negotiator, who spoke on the condition of anonymity. That didn’t happen until Wednesday night, the negotiator said.
That morning, however, Spitzer’s secretary called representatives from the five largest firms to a noon meeting at Spitzer’s office. Philip Purcell, chairman of Morgan Stanley, and about a dozen lawyers for the other firms crowded into Spitzer’s office.
The meeting lasted less than 20 minutes, but Spitzer made his point: If the firms didn’t settle, they were going to be sued, and not just in New York, but in other states, too.
Faced with mounting threats and increasing pressure to settle, the top firms signed on. Thursday night, both sides worked until midnight, faxing copies of the agreement back and forth. The deal was done.