In one of the largest settlement deals ever, the firms, which include Citigroup, J.P. Morgan Chase, Credit Suisse First Boston and Merrill Lynch, must pay the fine and implement sweeping structural reforms to resolve the alleged conflicts of interest between corporate banking and stock research.
“This agreement will permanently change the way Wall Street operates,” New York state Attorney General Eliot Spitzer, one of the settlement’s lead negotiators, said on Friday.
“The objective throughout this investigation has been to protect small investors by ensuring integrity in the marketplace,” Spitzer said. “Hopefully, the rules that are embodied in this potential settlement will restore investor confidence by restoring integrity to the marketplace.”
To address the alleged conflicts of interests, the settlement requires that the ten firms separate their stock research and investment banking divisions. It also bars stock analysts from being paid for equity research by their firms’ investment banking division and from attending their firms’ meetings with potential investment banking clients.
The firms must also spend $450 million over five years on independent stock analysis and information to ensure their investors receive unbiased research, and pay another $85 million for a nationwide investor education program.
The agreement requires brokerage firms to discontinue the Wall Street practice of “spinning,” or giving lucrative initial public offerings to corporate executives whose companies have investment banking business with the brokerage firms. Regulators have argued this practice could exert an undue influence on investment banking decisions.
The ten firms were not required to acknowledge any wrongdoing or admit to allegations they knowingly promoted stocks in which they had, or desired, a financial interest. No individual civil charges were brought against any stock analysts or the executives who managed them, although state and national regulators could still investigate whether some Wall Street executives or analysts violated securities laws.
The Salomon Smith Barney unit of Citigroup will pay the largest fine of $325 million, while Credit Suisse must pay $150 million. Seven other banks — Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Morgan Stanley, Lehman Brothers, Deutsche Bank and UBS Paine Webber — are expected to pay $50 million each.
Merrill Lynch, the nation’s largest brokerage firm, agreed to pay a $100 million fine as part of a settlement it reached with Spitzer last May. Merrill Lynch, which is not required to pay additional fines as part of this agreement, had similarly agreed to separate its stock research division from investment banking.
The money from the fines will be divided about evenly between the states and national regulators, which include the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange. An unspecified amount of the money will go to a restitution fund for affected investors.
The agreement comes after five months of haggling between regulators and the firms regarding the settlement amount. Spitzer had initiated investigations into Wall Street brokerage activities shortly after energy giant Enron and several other large companies declared bankruptcy, causing thousands of investors to lose millions of dollars.
As Spitzer and his office discovered serious conflicts of interest within Wall Street stock analysis and finance activities, other federal agencies joined the attorney general’s investigation.