The Securities and Exchange Commission is examining whether top Wall Street executives, including Citigroup chief executive Sanford I. Weill, violated securities law by failing to properly supervise their companies, resulting in an atmosphere that permitted analysts to produce misleading stock research reports, government and industry sources said yesterday.
The allegations of biased research rocked Wall Street last year and led to a tentative $1.4 billion settlement between state and federal regulators and nine of Wall Street’s biggest firms. The SEC’s five commissioners, who have been debating the agreement in private for several days, are expected to approve it as soon as today.
Citigroup agreed to the settlement in December on the condition that Weill would not be charged on issues specifically addressed by the probe that led to the settlement. But that agreement does not preclude the SEC from scrutinizing the policies and practices of supervisors, including Weill and top executives at the other eight firms, government and industry sources said.
“Mr. Weill behaved properly, and we cannot conceive that any supervisory charges could possibly be brought against him,” Citigroup spokesman Leah Johnson said last night.
According to industry and government sources, SEC members believe the agreement does not prevent the commission from ordering its enforcement staff to probe broader supervisory issues, such as whether Weill or other executives breached codes of ethical conduct or created an environment that allowed improper behavior to take place. The SEC has asked its enforcement staff to do just that, government sources said yesterday. No conclusions have been reached by the agency, sources said.
Under securities industry rules, failure to properly supervise subordinates can result in sanctions that, in extreme cases, could result in expulsion from the business.
“We understand that the commission has asked that supervisory issues at all of the firms entering into the settlement be explored,” Johnson said.
She said that as to the investigation that the pending settlement would end, Weill has been exonerated. “After a full investigation of the research matters, the investigative teams of all of the regulators determined, and expressed in a written understanding with us, that no charges would be brought against Mr. Weill.”
New York state Attorney General Eliot L. Spitzer, who launched the first probe into conflict of interest allegations on Wall Street and was later joined by other state and federal regulators, took testimony from Weill last year. But Spitzer agreed not to pursue Weill further in exchange for Citigroup’s agreement to sign on to the $1.4 billion “global settlement.” In addition to fines, the settlement includes reforms intended to change the way Wall Street operates.
Spitzer said through a spokesman last night that he was confident that deal would be approved by the SEC.
One issue that came up in the commission’s discussion about the global settlement was Weill’s role in Salomon Smith Barney’s 1999 upgrade of its rating on AT&T Corp.’s stock, sources said. Salomon is owned by Citigroup. Shortly after the upgrade, Salomon won a lucrative role in the spinoff of AT&T’s wireless unit. Weill acknowledged last year that he asked Jack B. Grubman, Salomon’s telecommunications analyst at the time, to take a “fresh look” at AT&T. But he denied ever telling the analyst what to write. After the spinoff, Grubman downgraded AT&T’s stock.
At the time of the upgrade, Weill was in a power struggle at Citigroup with John Reed, who was co-chairman at the time. AT&T’s former chairman, C. Michael Armstrong, sits on Citigroup’s board. In an e-mail disclosed last year, Grubman wrote that he upgraded AT&T stock to help Weill win Armstrong’s support in his struggle with Reed. In return, Grubman said Weill helped get Grubman’s children into an exclusive Manhattan nursery school. Regulators learned that Weill donated $1 million in Citigroup money to the school.
At the time, Citigroup dismissed Grubman’s e-mail as “pure fantasy” and “nonsense.” Grubman disavowed the e-mail, saying he “invented a story in an effort to inflate my professional importance.” While agreeing not to pursue Weill, regulators said when the settlement was announced that they would continue to press cases against other analysts and bankers.
The U.S. attorney in Manhattan on Wednesday filed obstruction of justice charges against Frank Quattrone, a former star technology banker at Credit Suisse First Boston Corp. NASD, the securities industry’s principal self-regulatory body, has warned former Merrill Lynch & Co. technology analyst Henry M. Blodget that he will probably face civil charges. Grubman resigned from Salomon under pressure last August. In a settlement with NASD and the SEC, Grubman agreed to a lifetime ban from the securities industry and paid a $15 million fine to avoid potential charges over his research reports.
In addition to Citigroup, firms involved in the settlement include Merrill Lynch, Credit Suisse First Boston, Morgan Stanley Group Inc., J.P. Morgan Chase & Co., Goldman Sachs & Co., Lehman Brothers Inc., UBS Warburg LLC and Bear Stearns Cos. Deutsche Bank recently turned over more documents as part of the probes and is expected to reach an agreement at a later date.
Reports of the SEC’s plan to continue probing Weill and other top executives comes after a year in which the SEC was harshly criticized for failing to crack down on Wall Street and for allowing Spitzer to take the lead in investigating potential wrongdoing. It also comes as a new SEC chairman, former Wall Street executive William H. Donaldson, takes the helm of the agency and as the Bush administration gears up for a reelection campaign likely to focus in part on the struggling economy and the lack of investor confidence in the stock market.
In addition to SEC questions about whether the settlement gives a pass to top executives, members of Congress have raised concerns that firms would be able to deduct some of the settlement’s costs from their taxes or seek insurance coverage. Sources say the settlement will make it clear that the SEC does not intend for that to happen.
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