Tuesday, April 29, 2003

Investment firms to pay $1.4 billion


Regulators say they provided tainted analysis

The Associated Press

WASHINGTON - Ten of Wall Street's biggest firms will pay about $1.4 billion and adopt reforms to resolve allegations that they issued biased ratings on stocks to lure investment-banking business, federal and state regulators announced Monday in a bid to shore up investors' confidence.

The unprecedented industrywide settlement, calling for one of the largest penalties ever levied by securities regulators, follows a lengthy investigation by the Securities and Exchange Commission, New York Attorney General Eliot Spitzer and other state regulators, and market regulators. The settlement, based on a tentative agreement reached in December, will change the way major investment firms - including Citigroup, Merrill Lynch and J.P. Morgan Chase - do business.

The brokerage firms will have to sever the troublesome links between financial analysts' research and investment banking, pay a total $432.5 million over five years for independent stock research for their customers and fund an $80 million investor education program. A fund of $387.5 million will be set up to compensate customers of the ten firms; $487.5 million in fines will go to states according to their population.

The firms neither admitted nor denied allegations that they had misled investors, although internal e-mails showed their analysts privately had a low opinion of stocks they were touting to the public. Allegations against Merrill Lynch - the nation's biggest brokerage - Credit Suisse First Boston and Citigroup's brokerage business Salomon Smith Barney reached the level of securities fraud.

Salomon Smith Barney is paying the heaviest fine and restitution: $300 million.

The airing of the regulators' allegations could open the way for a flurry of private lawsuits against the firms by investors who believe they were defrauded - what investor advocate Barbara Roper called "the real compensation."

And the SEC could still take enforcement action against top executives of firms for failing to properly supervise analysts and investment bankers.

Said Spitzer: "It will take time, but because we put all this information in the public record, investors will be able in due course to recover the funds that they lost on false research."

SEC Chairman William Donaldson called the regulators' cases against Wall Street's powerhouses "an important milestone in our ongoing effort both to address serious abuses that have taken place in our markets and to restore investor confidence and public trust by making sure these abuses don't happen again."

At a news conference at SEC headquarters, Donaldson - a former chairman of the New York Stock Exchange and co-founder of a major Wall Street investment firm - said he was "profoundly saddened and angry" about the conduct detailed in the regulators' complaints.

Roper, the director of investor protection for the Consumer Federation of America, cautioned investors not to "rush to bestow renewed trust on Wall Street firms."

"There are too many questions that only time will answer about the ... effectiveness of the new requirements," Roper said.

Under the settlement, two former star analysts - Internet expert Henry Blodget of Merrill Lynch and telecommunications analyst Jack Grubman of Salomon Smith Barney - agreed to pay $19 million in fines and penalties and be banned permanently from the securities industry to settle fraud charges. Blodget and Grubman are neither admitting nor denying any wrongdoing.

Grubman will pay $15 million for undisclosed conflicts. He faces a lifetime ban from working for an investment firm or acting as an investment adviser, dealer or broker. His penalty can't be reimbursed or indemnified and the penalty portion can't be written off on taxes.

Blodget will pay $4 million.

At Morgan Stanley, regulators found the firm failed to manage conflicts of interests between its investment banking and research divisions and failed to properly supervise senior researchers - including another one-time star telecom analyst, Mary Meeker. Morgan Stanley will pay $50 million in penalties and restitution as well as $75 million toward the independent research fund.

The SEC filed formal complaints Monday in federal court in Manhattan against the ten firms, Blodget and Grubman, and outlined the terms of the settlement to the court.

The five SEC commissioners had discussed the settlement in closed-door meetings last week before approving it. In the final deal, the Wall Street firms will not be able to deduct any of the payments of fines against their taxes. Because that prohibition does not extend to the firms' payments to compensate investors or pay for independent research or investor education, Sen. Charles Grassley, R-Iowa, called the settlement "half a loaf."

Grassley, chairman of the Senate Finance Committee, said he was proposing legislation to more deeply restrict the firms' ability to deduct payments against their taxes so that U.S. taxpayers won't have to pick up part of the tab.

The settlement with the brokerage firms will require:

-Certain analysis from an investment house would have to be made public within 90 days after each quarter concludes to allow investors to compare the performance of analysts from different firms and promote objective rankings.

-Brokerages will be banned from giving executives and directors preferential access to shares of companies going public which they have courted as investment banking clients.

-Assigning an independent monitor to each firm to make sure the terms of settlement are met.

The settlement also requires Citigroup's head research executive, Sallie Krawcheck, to report to separate committees of the board of directors on the objectivity, independence and quality of research. No executive can be part of the meetings.

Regulators alleged that Citigroup published fraudulent and misleading research that promoted banking clients and harmed investors while ignoring strong criticism from inside the company about the quality of research.

Last May, Merrill Lynch agreed to a separate settlement that included a $100 million fine and the separation of its analysts from investment banking. Under the settlement detailed Monday, Merrill will pay an additional $100 million toward the independent research fund and the investor education program.

Other firms included in the settlement were: Bear Stearns, Goldman Sachs, Lehman Brothers, US Bancorp Piper Jaffray, UBS Warburg (now UBS Paine Webber).

Securities and Exchange Commission: www.sec.gov




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