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| 10 Wall St. Firms
Settle With U.S. in Analyst Inquiry |
By STEPHEN LABATON
WASHINGTON, April 28 — Prosecutors announced a
settlement today with the nation's biggest
investment firms that bars the head of the largest
bank from talking to his analysts, details a far
greater range of conflicts of interest than
previously disclosed, and leaves the industry
exposed both to further regulation and costly
litigation.
The $1.4 billion settlement by 10 firms and 2
well-known stock analysts reached tentatively last
December but completed in the last few days,
resolved accusations that the firms lured millions
of investors to buy billions of dollars worth of
shares in companies they knew were troubled and
which ultimately either collapsed or sharply
declined.
The Securities and Exchange Commission, state
prosecutors and market regulators accused three
firms in particular — Citigroup's Salomon Smith
Barney, Merrill Lynch, and Credit Suisse First
Boston — of fraud. But the thousands of pages of
internal e-mail messages and other evidence that
regulators made public today painted a picture up
and down Wall Street of an industry rife with
conflicts of interest during the height of the
Internet and telecommunications bubble that burst
three years ago.
At firm after firm, according to prosecutors,
analysts wittingly duped investors to curry favor
with corporate clients. Investment houses received
secret payments from companies they gave strong
recommendations to buy. And for top executives
whose companies were clients, stock underwriters
offered special access to hot initial public
offerings.
"These cases reflect a sad chapter in the history
of American business — a chapter in which those
who reaped enormous benefits based on the trust of
investors profoundly betrayed that trust," said
William H. Donaldson, the new chairman of the
Securities and Exchange Commission. "The cases
also represent an important new chapter in our
ongoing efforts to restore investors' faith and
confidence in the fairness and integrity of our
markets."
In a reflection of regulators' concerns about the
prospect for conflicts of interest at Citigroup,
Wall Street's biggest bank, the settlement bars
its chairman and chief executive, Sanford I. Weill,
from communicating with his firm's stock analysts
about the companies they cover, unless a lawyer is
present.
But the regulators found fault with every major
bank on Wall Street.
In addition to the three firms accused of fraud,
five others — Bear Stearns, Goldman, Sachs, Lehman
Brothers, Piper Jaffray and UBS Warburg — were
accused of making unwarranted or exaggerated
claims about the companies they analyzed. UBS
Warburg and Piper Jaffray, were accused of
receiving payments for research without disclosing
such payments.
And Salomon Smith Barney and First Boston were
accused of currying favor with their corporate
clients by selling hot stock offerings to senior
executives, who then could turn around and sell
the shares for virtually guaranteed profits.
The two banks agreed to end that practice, known
as spinning.
In settling the cases, the firms neither admitted
nor denied the allegations, following the standard
practice in resolving such disputes with the
commission.
In monetary terms, the $1.4 billion in fines,
restitution and other payments equals nearly 7
percent of the industry's profits last year, which
was Wall Street's worst year since 1995. Of that
sum, $387.5 million will go to repaying investors
who file claims with the government. But armed
with the regulators' findings, lawyers are sure to
seek many times that total in private litigation.
The firms also agreed to abide by what officials
said were significant new ethics rules and to
build barriers between investment bankers and
stock analysts in hopes of relieving analysts from
the business pressures that many succumbed to
during the 1990's. For example, the compensation
of analysts is to be based on the quality of their
research, not their contribution to the firm's
investment banking business.
As part of the agreement, two analysts whose
fortunes rose with the markets, Jack B. Grubman of
Salomon Smith Barney and Henry Blodget of Merrill
Lynch, agreed to lifetime bans from the industry,
along with significant fines.
The singling out of Mr. Weill stemmed in part from
his efforts to try to influence Mr. Grubman to
change his view of AT&T — a Citigroup client that
had Mr. Weill on its board — to positive from
negative. He and Citigroup's other senior officers
— whose contacts with the banks' research analysts
are also restricted under the settlement — were
the only Wall Street executives to agree
specifically to such a prohibition. Any top Wall
Street executive directly involved in investment
banking, however, would be barred from discussions
with his company's analysts under the terms of the
agreements.
For all the anticipation of today's announcement,
the voluminous record of complaints and damaging
evidence left many unresolved questions for both
investors and the securities industry.
Continue Story on NYTimes.com>>Other hEAS=DLINE
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