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Investment firms pay1 4b settlement { April 29 2003 } Original Source Link: (May no longer be active)
http://www.startribune.com/stories/535/3852758.htmlhttp://www.startribune.com/stories/535/3852758.html
Nation's biggest investment firms agree to $1.4 billion settlement
Stephen Labaton, New York Times
Published April 29, 2003 WALL29
WASHINGTON, D.C. -- Prosecutors announced a settlement on Monday with the nation's biggest investment firms that bars the head of the nation's biggest bank from talking to his analysts, catalogs 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 two well-known stock analysts, reached tentatively in December but finalized only in the past few days, resolved accusations that the firms lured millions of investors to buy billions of dollars worth of shares in companies that they knew were troubled and that ultimately either collapsed or sharply declined.
The Securities and Exchange Commission, New York Attorney General Eliot Spitzer and other 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-mails and other evidence that regulators made public on Monday 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 Donaldson, the new chairman of the Securities and Exchange Commission.
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 Weill, from communicating with his firm's stock analysts about the companies they cover, unless a lawyer is present.
In addition to the three firms accused of fraud, five others -- Bear Stearns, Goldman Sachs, Lehman Bros., 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 CSFB were accused of currying favor with their corporate clients by selling hot stock offerings to senior executives, who then could turn around to 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. In monetary terms, the $1.4 billion in fines, restitution and other payments equals nearly 7 percent of the industry's profits last year. 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.
As part of the agreement, two analysts whose fortunes rose with the markets, Jack 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 Weill stemmed in part from his efforts to try to influence Grubman to change his view of AT&T -- a Citigroup client on whose board Weill sat -- from negative to positive. He and Citigroup's other senior officers -- whose contacts with the banks' research analysts also are restricted under the settlement -- were the only Wall Street executives to specifically agree to such a prohibition. However, any top Wall Street executive directly involved in investment banking would, under the terms of the agreements, be barred from discussions with his company's analysts.
In addition to the restitution, the firms also agreed to pay $487.5 million in penalties, $432.5 million to fund independent research, and $80 million for investor education. Blodget agreed to pay $4 million and Grubman $15 million to settle the charges against them.
The fines, restitution and other penalties were divided as follows: $400 million will be paid by Citigroup; $200 million each by Credit Suisse and Merrill Lynch (which includes an earlier Merrill settlement of $100 million); $125 million by Morgan Stanley; $110 million by Goldman Sachs; $80 million each by Bear Stearns, J.P. Morgan, Lehman, and UBS Warburg; and $32.5 million by Piper Jaffray.
One of the final issues that had been negotiated involved which companies would bear the brunt of the penalties and how much might be covered by insurance polices and deductible from the firms' taxes.
Under tax law, none of the $487.5 million in penalties is deductible, and the firms agreed not to seek reimbursement under their insurance policies.
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