The Wall Street Fix
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the global settlement - an overview

On April 28, 2003, the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE), New York State Attorney General Eliot Spitzer and other state regulators announced a final $1.4 billion settlement agreement reached with 10 Wall Street firms in their investigation into Wall Street conflicts of interest.

In the settlement, the 10 firms agreed to make significant structural changes designed to insulate their research departments from their investment banking departments. Among these changes are:

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  • They agreed to physically separate the research and investment banking departments within an investment bank to prevent the exchange of information between the divisions.

  • They agreed that from now on, senior management would set the firm's research budget without taking investment-banking revenues into consideration.

  • They agreed to not directly or indirectly link research analysts' compensation to investment banking revenues.

  • They agreed that the investment banking side would have no input into analysts' ratings on a corporate banking client.

  • They agreed to prohibit research analysts from soliciting investment-banking business.

Two of the most well known analysts, who came to symbolize the conflicts of interest of the 1990s bull market, were fined and banned for life from the securities industry. Henry Blodget of Merrill Lynch was ordered to pay $4 million in fines and Jack Grubman of Salomon Smith Barney was ordered to pay $15 million as part of the terms of the settlement. In addition, Sanford I. Weill, CEO of Citigroup, was banned from talking to his firm's analysts about their research outside of the presence of company lawyers.

The settlement agreement required the firms to set up contracts with at least three independent research firms to make independent research available to their customers. In addition, seven of the firms agreed to pay $80 million to fund investor education programs, and $387 million of the $1.4 billion was designated to a restitution fund for investors.

The ten firms also voluntarily agreed to ban the practice known as "spinning" -- the allocation of hot initial public offering (IPO) stocks to corporate banking clients. The settlement singled out Salomon Smith Barney and Credit Suisse First Boston as particularly having engaged in this practice.

Here is a breakdown of the individual firms payments in regards to the settlement:

Payments in Global Settlement Relating to Firm Research and Investment Banking Conflicts of Interest

Firm

Penalty
($ Millions)

Disgorgement
($ Millions)

Independent Research
($ Millions)

Investors Education
($ Millions)

Total
($ Millions)

Bear Stearns

25

25

25

5

80

CSFB

75

75

50

0

200

Goldman

25

25

50

10

110

J.P. Morgan

25

25

25

5

80

Lehman

25

25

25

5

80

Merrill Lynch

100*

0

75

25

200

Morgan Stanley

25

25

75

0

125

Piper Jaffray

12.5

12.5

7.5

0

32.5

SSB

150

150

75

25

400

UBS

25

25

25

5

80

Total

487.5

387.5

432.5

80

$1387.5

*Payment made in prior settlement of research analyst conflicts of interest with the states securities regulators.
Source: SEC

 

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published may 8, 2003

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