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Wall Street deal inked
Ten firms agree to change behavior, pay more than $1.4B, as regulators drop probe.
December 20, 2002: 7:16 PM EST
By Jake Ulick, CNN/Money Staff Writer

NEW YORK (CNN/Money) - The nation's biggest securities firms agreed Friday to pay $1.435 billion to end a probe alleging that tainted stock research duped investors into buying dangerously over-hyped shares during the '90s bull market.

Eliot Spitzer at Friday's news conference  
Eliot Spitzer at Friday's news conference

Citigroup's (C: Research, Estimates) Salomon Smith Barney suffered the biggest hit, $400 million, while agreeing with nine rivals to change the way it conducts business by separating stock research from investment banking.

The firms, including Credit Suisse First Boston and Goldman Sachs (GS: Research, Estimates), also accepted a ban on giving IPOs to executive officers they do business with. They also must fund independent research and education for investors enduring a third year of stock market declines.

The deal, announced Friday afternoon at the New York Stock Exchange by federal and state regulators, ends an embarrassing period for the banks and brokers accused of conflicts of interest that may have enabled the stock market bubble.

Evidence against them could fuel a rash of investor lawsuits against the securities firms. But Friday's settlement also appeared to lift a cloud off the banks' stock prices, which in the case of Morgan Stanley began Friday's session down 28 percent on the year.

Richard Grasso, president of the NYSE, said the agreement "will benefit America's 85 million investors, and go a long way towards restoring American trust and confidence" in financial markets.

Of the money, $450 million will be used to fund research while $85 million will go toward investor education. The biggest chunk, $900 million, will go to the regulators, who may attempt investor restitution. But officials said that process could be complicated by the difficulty of determining who, exactly, lost money and for what reason.

The firms neither admitted nor deny charges that they had duped investors.

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The nine weeks of talks to iron out the deal stem from allegations that stock research was essentially a marketing tool to lure investment banking clients. E-mails leaked to the press have showed that securities analysts, because of pressure from their bosses, publicly touted stocks they privately disparaged.

Other revelations showed that high-ranking investment banking clients made millions of dollars by selling shares of hot IPOs that allegedly were handed out as business perks.

Critics contend that investors, intoxicated during the stock market's money-making years, ignored well-known conflicts between research and banking.

But Eliot Spitzer, the New York State attorney general who led the talks, said the settlement helps those "who might not understand the ways of Wall Street."

"It's about making sure retail investors get a fair shake," Spitzer said. "The one thing they deserve is honest advice and fair dealing."

Individual amounts

Credit Suisse will pay $200 million, and Goldman Sachs is doling out $110 million in amounts that the regulators said were determined by the evidence against them. Bear Stearns (BSC: Research, Estimates), Deutsche Bank, J.P. Morgan Chase (JPM: Research, Estimates), Lehman Brothers (LEH: Research, Estimates) and UBS Warburg were hit with $80 million in penalties apiece. Morgan Stanley (MWD: Research, Estimates) must give up $125 million.

And Merrill Lynch (MER: Research, Estimates), which agreed to pay $100 million in May to settle New York State's charges that its research analysts publicly hyped stocks they privately ridiculed, is kicking in another $100 million for independent research and investor education.

In a statement, Citigroup said the settlement is neither evidence against the firm nor an admission of wrongdoing.

"We share with our regulators the goal of restoring investor confidence," Citigroup said. "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. We are a stronger company as a result."


The deal prohibits compensating stock analysts for bringing in investment banking deals, putting up walls between the units. It also bars analysts from accompanying investment bankers on pitches and road shows.

For a five-year period, each of the brokerage firms must contract with no fewer than three independent research firms that will provide research to the brokerage firm's customers.

The deal requires that each firm have an independent consultant, chosen by regulators, with final authority to procure independent research from independent providers.

Each firm will make public its analysts' stock ratings and price target forecasts to allow for more accountability of stock picks.

"It will at least give investors some confidence that something is being done," Jack Bogle, founder and former chairman of the Vanguard Group, told CNNfn.

The fines will not break these companies financially. Goldman Sachs, for example, earned $2.11 billion in the fiscal year ended November on nearly $14 billion in revenue.

Still, the deal comes during a tough time for the securities industry, which has been cutting tens of thousands of jobs to save money during a stock market slump that has kept companies from going public and doing deals. Morgan Stanley Thursday said net income in its latest quarter fell 21 percent.

Grubman fined?

Friday's announcement did not include any charges against individuals. But Salomon Smith Barney's former star telecom analyst, Jack Grubman, has reached a settlement with the New York attorney general's office that bars him from the securities industry for life and fines him $15 million, Spitzer said Friday afternoon.

The investigation revealed that Grubman's boss, Citigroup CEO Sanford Weill, asked the analyst to take a fresh look at AT&T. Grubman, who was seeking Weill's help in getting his children into a prestigious nursery school, eventually upgraded the stock.

At the same time, Weill was said to be trying to win the help of AT&T CEO Michael Armstrong, a Citigroup board member, to help Weill win a boardroom power struggle. Both men denied any wrongdoing.

With the stock market heading for a third year of declines for the first time since 1941, regulators have been trying to shore up the sagging investor confidence partially responsible for the selloff.

The chief financial officers of Enron and WorldCom have been arrested, while the accounting firm that signed off on both companies' books, Arthur Andersen, was convicted of obstructing justice.

President Bush signed the Sarbanes-Oxley bill earlier this year which, among other things, creates a board to police the accounting industry.

But the forces that combined to craft Friday's deal may have been the most extensive. In addition to the New York attorney general and the NYSE, the Securities and Exchange Commission, the North American Securities Administrators Association and the NASD were behind the talks.

Investors snapped up shares of companies involved in the deal Friday. Shares of Goldman Sachs rose $1.56 to $71.86 Friday, Merrill Lynch gained 30 cents to $40.14, and Bear Stearns advanced $1.38 to $61.83. Citigroup shares rose $1.14 to $38.14, Lehman Brothers climbed $1.27 to $56.35, Morgan Stanley rose $1.74 to $42.04, and J.P. Morgan gained $1.54 to $24.87. Credit Suisse Group (CSR: Research, Estimates) gained 15 cents to $21.75 and UBS AG (UBS: Research, Estimates) climbed 17 cents to $49.60.

The settlement excludes two smaller firms, US Bancorp Piper Jaffray and Thomas Weisel Associates, which are continuing to negotiate.  Top of page

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