TOPICS > Economy

Regulators Finalize $1.4 Billion Settlement Against Wall St. Firms

BY Admin  April 28, 2003 at 4:40 PM EDT

One of the largest penalties ever levied by securities regulators, it follows a lengthy investigation by the Securities and Exchange Commission, New York Attorney General Eliot Spitzer and other regulators.

The settlement does not preclude future probes into practices by individual researchers or bankers, Spitzer said.

In addition to the monetary payment, the settlement aims to make it more difficult to breach conflicts of interest between research and investment banking departments.

As part of the settlement, firms will have to physically separate their research and investment banking divisions, stock analysts will be barred from client meetings aimed at winning underwriting business, and interaction between analysts and investment bankers will have to be chaperoned by compliance officers.

“These cases are 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,” SEC Chairman William Donaldson said 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.

Three of the most profitable brokerages during the late 1990s market boom — Citigroup Inc.’s Salomon Smith Barney unit, Credit Suisse Group’s CSFB and Merrill Lynch & Co. — settled charges of securities fraud, according to the SEC.

All 10 of the participating investment banks, including Goldman Sachs Group and Morgan Stanley, settled lesser charges of violating market regulations.

The firms neither admitted nor denied allegations that they had misled investors, although Citigroup agreed to a statement of “contrition.”

The investigation was based on internal e-mails in which the firms’ financial analysts privately derided stocks they were touting to the public.

As part of the settlement, firms voluntarily agreed to cease allocating shares of “hot” initial public stock offerings to executives of potential investment banking clients, a practice known as “spinning.”

An independent monitor will also be assigned to each firm to make sure the terms of settlement are met. An $85 million investor education program also is being created at the expense of the brokerages. Brokerages would pay $450 million over five years into the independent research fund.

The five SEC commissioners 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 against their taxes — a change from the tentative accord that had been demanded by Sen. Charles Grassley (R-Iowa) and other lawmakers, who said U.S. taxpayers should not have to pick up part of the tab.