Wall Street firms to pay $1.44 billion to settle allegations

Saturday, December 21, 2002

NEW YORK -- The nation's 10 biggest brokerages agreed Friday to pay $1.44 billion and fundamentally change the way they do business to settle allegations they misled investors by hyping certain companies' stocks.

The moves are aimed at restoring public confidence in the stock recommendations made by Wall Street firms.

The settlement calls for the firms -- including Citigroup, Goldman Sachs and Credit Suisse First Boston -- to pay steep fines; separate their stock-research and investment-banking operations entirely; and pay for independent stock research that would complement their own analysts' work.

Federal and state regulators began investigating the brokerages after small investors lost millions of dollars on stocks that analysts had advised them to buy but had privately ridiculed. Investigators say the brokerages hyped the stocks of companies they wanted as investment banking clients.

In agreeing to the fines, the brokerages neither admitted nor denied the charges.

"Every investor knows that the market involves risk," said New York state Attorney General Eliot Spitzer, who led the inquiry. "Nobody expects a guaranteed profit. But what every investor expects and deserves is honest investment advice -- advice and analysis that is untainted by conflicts of interest."

Still, it remains unclear how much the settlement -- one of the largest ever won by regulators -- will do to compensate investors for losses or punish individual executives and analysts.

"I don't think it's going to restore trust," said Paul Lapides, director of the Corporate Governance Center at Kennesaw State University in suburban Atlanta. "The settlement is like telling a bank robber if he gives the money back, he doesn't have to do jail time."

Citigroup's Salomon Smith Barney brokerage unit will pay the largest fine: $300 million. But Citigroup chief executive Sanford Weill won a guarantee he would not be prosecuted.

Credit Suisse will pay $150 million. Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Morgan Stanley, Lehman Brothers, Deutsche Bank and UBS Warburg will each pay $50 million.

In May, Merrill Lynch, the nation's largest brokerage, agreed to a settlement that included a $100 million fine and the separation of its analysts from investment banking.

Spitzer uncovered documents and e-mails showing that Merrill Lynch analysts privately used words like "disaster" and "dog" to describe some stocks while publicly recommending that investors buy the companies' shares.

The amounts of the fines were based on the evidence collected against the firms, officials said. It was not clear how much of the fines will go to a restitution fund for investors.

In addition to the $900 million in fines, the 10 firms also will pay $450 million for independent research for investors and $85 million for a nationwide investor-education program.

Spokesman for many of the firms did not immediately respond to requests for comment. But some portrayed the settlement as move forward for the industry.

"We share with our regulators the goal of restoring investor confidence," Citigroup said in a written release. "We have faced the difficult issues of the past several months head-on, and we have implemented new practices and standards that are leading the industry."

Sam Hayes, a professor of finance at the Harvard University Business School, agreed.

"It's an important day for investors, and I think from this point forward they ought to be able to follow the recommendations of the professionals on Wall Street with a lot more confidence," he said.

Spitzer said regulators are also nearing a settlement with Jack Grubman, Citicorp's star stock analyst, that would include a $15 million fine and a lifetime ban from the industry.

Grubman boasted in e-mail messages he raised his rating on AT&T's stock to help Weill curry favor with AT&T chief executive C. Michael Armstrong, a Citigroup board member. Weill admitted asking Grubman to review AT&T's rating, but said it had nothing to do with influencing Armstrong.

Grubman also has been accused of being too close to executives at companies he covered.

Under the settlement, analysts will be barred from being paid for stock research by their firms' investment banking arms. And they will not be allowed to accompany investment bankers "on pitches and road shows" to lure investment banking clients.

The agreement also bars brokerages from doling out initial public offerings of hot stocks to corporate officers who could influence a company's investment banking decisions.

And it requires firms to provide independent research to investors by contracting with no fewer than three independent research firms.

Shares in many of the brokerage firms closed higher Friday. Citigroup gained $1.14 to close at $38.14 on the New York Stock Exchange. J.P. Morgan Chase rose $1.54 to $24.87, Morgan Stanley was up $1.74 to $42.04 and Goldman rose $1.56 to $71.86.

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