Mired in state and federal investigations, Salomon Smith Barney has started negotiating a global settlement that could have far-reaching implications for Wall Street firms and investors.
Representatives for Salomon and its parent company, Citigroup, met late last week with New York State Attorney General Eliot Spitzer and officials for the Securities and Exchange Commission, the New York Stock Exchange and the National Association of Securities Dealers.
Salomon paid a $5 million fine to the NASD last week for issuing misleading research by its former telecom stock analyst, Jack Grubman. But Salomon is still under investigation by Spitzer, the NYSE and the House Financial Services Committee.
And Salomon isn’t alone. Almost all Wall Street investment banks are under scrutiny for allegedly issuing tainted stock research during the Internet boom.
They’re also being questioned for doling out often very lucrative IPO shares in Internet and telecom companies to executives of other companies to allegedly attract investment-banking business.
In May, Merrill Lynch paid $100 million to settle charges by Spitzer that the firm’s former Internet analyst, Henry Blodget, recommended Internet stocks that he didn’t really believe in simply because the companies were current or prospective investment-banking clients.
Salomon may have to pay at least that much to settle all of the investigations and agree as Merrill Lynch did to strengthen the so-called Chinese Wall that is supposed to separate stock research from investment banking at Wall Street firms.
At the same time, the settlement negotiations are expected to provide a blueprint for new rules for Wall Street.
As early as this week, the NYSE and the NASD are expected to submit stronger regulations for stock analysts. The proposed rules must be approved by the SEC.
”This is an indication of the direction I think the SEC will push the whole industry,” says Samuel Hayes, a professor of investment banking at Harvard Business School. Regulators and Salomon declined to comment on the settlement talks. One person familiar with the negotiations said they were in the early stages and that no deal was imminent.
All parties, however, have little time to waste. ”It is important to move quickly,” Hayes says. ”We have a stock market that is hanging on the ropes, and part of that is being attributed to a lack of confidence by the investing public.”