US regulators told Credit Suisse First Boston to pay US$250 million to settle investigations into whether the seventh-largest securities firm misled investors with stock research designed to win investment-banking contracts, people familiar with the situation said.
Gary Lynch, general counsel for the unit of money-losing Credit Suisse Group, told the regulators the firm couldn’t afford to pay a fine that high, the people said. Credit Suisse is scheduled to meet with regulators on Dec. 11 to continue negotiations, the people said.
“The threat of big numbers makes people more willing to listen and settle,” said Roy Smith, a former Goldman, Sachs & Co.
partner who now teaches finance at New York University. “And the industry, although reluctant, is willing to pay the money to put this to an end.”
Wall Street’s revenue this year may be its lowest since 1997 after the Standard & Poor’s 500 Index fell 39 percent from its peak in March 2000, and some firms may balk at paying fines that may reach more than US$1 billion. Credit Suisse Group, the second-largest Swiss bank, this month posted its largest quarterly loss at US$1.4 billion, and its investment-banking unit has announced 6,500 jobs cuts.
The Securities and Exchange Commission, the NASD and state securities regulators yesterday met with Lynch and lawyers from Citigroup Inc, the world’s largest bank, at the New York Stock Exchange, to discuss proposed fines. Each of 10 other firms, including Morgan Stanley and Goldman Sachs, will be told how much they should pay on Monday and Tuesday, the people said.
Victoria Harmon, a spokeswoman for Credit Suisse, declined to comment. Lynch didn’t return telephone calls for comment. SEC spokesman John Nester declined to comment.
New York Attorney General Eliot Spitzer, who started the probes into Wall Street research with an investigation of Merrill Lynch & Co, told regulators Citigroup should pay a minimum fine of US$500 million, people familiar with the deliberations said.
Spitzer said Citigroup should pay the most because Jack Grubman, a former analyst at the bank’s Salomon Smith Barney unit, raised his rating on AT&T Corp after Citigroup Chairman Sanford Weill asked Grubman in 1999 to “take a fresh look” at the telephone company.
Spitzer also is investigating Citigroup’s US$1 million donation to the 92nd Street YM-YWHA in New York, which grew out of Grubman’s request to get his twins into an exclusive preschool.
Weill has said he did nothing wrong and never tried to influence analysts’ ratings.
Darren Dopp, a spokesman for Spitzer, declined to comment.
Some lawmakers and regulators favor returning money to investors. Many say it’s virtually impossible to determine who was defrauded by biased research and then receive “restitution” leaving the use of funds still up for negotiation, state securities regulators said.
In addition to fining firms, regulators are negotiating with them about limiting conflicts of interest. They’re discussing how to minimize contact between analysts and bankers, and ensure analysts are paid for the quality of their research, not for the ability to bring in banking business.
Under a current plan, brokerages would also be required to buy research from other firms that don’t do investment banking and make those reports available to customers.
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