Regulators fined five Wall Street brokerage firms a total of $8.25 million yesterday for not preserving memos and e-mails, a discovery made as investigators probed whether analysts had issued bogus buy recommendations to win business from the companies they covered. But some observers and even some investment banks complained that the fines won’t deter future problems.
The five: Citigroup Inc.’s Salomon Smith Barney, Morgan Stanley & Co., Deutsche Bank Securities Inc., U.S. Bancorp Piper Jaffray Inc., and Goldman, Sachs & Co. agreed to pay $1.65 million each and to review and report on procedures for keeping e-mails.
Rules require the firms to keep such records for up to three years to resolve disputes and regulatory questions. “Each firm had inadequate procedures and systems to retain and make accessible e-mail communications,” the Securities and Exchange Commission, New York Stock Exchange and NASD said in a statement.
Settlement talks in the broader investigation of analysts over conflicts of interest could result in firms paying a total of more than $1 billion, and some individual brokerages could cough up as much as $500 million. A deal could come by mid-December, they have said.
Whether the missing e-mails contained embarrassing or incriminating details may never be known, and some observers wondered whether the penalty was harsh enough.
Messages uncovered earlier this year by New York State Attorney General Eliot Spitzer showed that former high-flyers like Merrill Lynch’s Henry Blodget, known for touting Internet stocks, and Salomon’s telecom analyst Jack Grubman, had publicly lauded stocks while sending messages to insiders that derided the same companies. Merrill ended up paying $100 million to settle charges that it issued overly positive stock tips – more than 50 times the fine assessed to firms that broke the rules on retaining e-mails.
“It’s rather ironic that preserved but unflattering e-mail brings a $100 million fine from the New York attorney general while destroying e-mail results in a $1.6 million fine from market regulators,” said former SEC enforcement lawyer Jacob Frenkel, a partner at Smith, Gambrell & Russell in Washington.
“The dollar amount isn’t meaningful,” said Justin Hughes, an analyst at Jeffries & Co. “It will round to less than a penny a share.”
A spokesman for New York Attorney General Eliot Spitzer, who has been investigating Merrill Lynch, Morgan Stanley and Salmon Smith Barney for conflicts of interest by stock analysts, declined to comment on the SEC fines. However, he noted the office did not encounter problems with missing emails.
“If we had seen evidence of document destruction or non-cooperation, we would have responded aggressively,” said Darren Dopp, Spitzer’s spokesman.
“There’s nothing here to indicate that this was a deliberate destruction,” said Barry Goldsmith, NASD executive vice president of enforcement.
In earlier negotiations with regulators over conflicts of interest in research, Credit Suisse First Boston complained it was penalized because it did a better job of retaining e-mails.
While Credit Suisse wasn’t charged with any record-keeping violations, regulators from the SEC, NASD and the commonwealth of Massachusetts want the firm to pay $250 million to settle charges of conflicted research. That’s the second-highest after Citigroup’s $500 million fine.
Most of the other firms, including Goldman and Lehman, were presented fines of $75 million each. Morgan Stanley was asked to pay $50 million. State and federal regulators have agreed to set fines against the 12 firms based on the relative strength of evidence against them.
Regulators are meeting with the firms next week, which will have a chance to dispute the evidence. In some cases, fines may be lowered.
In addition to the fines announced today, the firms also agreed to report to the regulators within 90 days on their procedures to comply with the rules for preserving e-mails. Regulators said while the firms did not admit or deny the allegations, they consented to findings that they had violated SEC and stock market rules.
Officials of the firms denied any wrongdoing or merely said they were glad the matter was resolved. One example: Erin Freeman, a spokeswoman for the securities unit of UB Bancorp, said in a prepared statement, “There is no allegation or finding that Piper Jaffray’s e-mail practice obstructed or impeded any investigation.”
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