- The Washington Times - Saturday, December 21, 2002

Wall Street's largest investment houses yesterday agreed to major reforms and a record $1.4 billion in fines and investor restitution to settle charges they deceived clients to gin up profits.

The agreement, won by federal and state securities regulators investigating abuses on Wall Street that contributed to the 1990s stock market bubble, orders the most significant restructuring of the securities business since the securities laws were enacted in the 1930s.

"Every investor knows that the market involves risk," said New York Attorney General Eliot Spitzer, who led the investigations and embarrassed the big banks by revealing internal e-mails in the spring that showed they were trashing many high-tech stocks privately even as they touted them to investors.

"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," he said at a press conference at the New York Stock Exchange, where the settlement was announced.

Merrill Lynch, Citigroup, Morgan Stanley, Bear Stearns and other big brokerages that often have lured small investors with promises of integrity, safety and profits, must erect a wall between employees who provide investment advice and investment bankers whose job is to raise fees through the sale of stocks and bonds for corporate clients.

The brokerages also are prohibited from giving corporate clients first shot at buying new stock offerings, a practice known as "spinning" that enabled CEOs such as Bernard Ebbers of WorldCom Inc. and Meg Whitman of EBay Inc. to make millions in profits not available to ordinary investors.

Mr. Spitzer's aggressive inquiry into industry abuses since 2001spawned other state investigations and forced the Securities and Exchange Commission to open a broad inquiry in April.

After complaints from Wall Street, the regulators agreed this fall to seek a universal settlement that would not impose a state-by-state patchwork of regulations on the industry.

Negotiated by SEC enforcement chief Steven Cutler and outgoing SEC Chairman Harvey Pitt, the pact still must be approved by the full commission before taking effect.

Mr. Spitzer said he expects the settlement will "permanently change the way Wall Street operates." Regulators also hope it will help to restore the trust of small investors disillusioned by revelations of deception and unfair dealing on Wall Street.

"This settlement marks a vital step in restoring investor confidence," said Robert R. Glauber, chairman of the National Association of Securities Dealers. "It underscores that the industry's highest duty is to investors."

New York Stock Exchange Chairman Richard Grasso said reviving trust is crucial if regulators are to help lift stocks out of the deep funk that has led to three straight years of losses since the stock market peaked at the end of the bubble era in March 2000.

Announcement of the settlement helped to spur a stock rally yesterday, particularly among the battered shares of the financial firms. The Dow Jones Industrial Average rose 147 points to 8,512.

"We share with our regulators the goal of restoring investor confidence," Citigroup said in a release. "We have faced the difficult issues of the past several months head-on."

Citigroup's Salomon Smith Barney brokerage unit will pay the heaviest fine, $300 million. But Citigroup Chief Executive Sanford Weill won a guarantee from Mr. Spitzer that he would not be prosecuted.

Credit Suisse First Boston will pay $150 million. Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Morgan Stanley, Lehman Brothers, Deutsche Bank and UBS Paine Webber will each pay $50 million, according to a joint statement by regulators.

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

The total of $900 million in fines paid by the 10 firms will be supplemented by $450 million in payments over five years for independent research for investor clients, and $85 million for a nationwide investor-education program.

The fines will be divided evenly between the states and the SEC, which is expected to set up a restitution fund for investors. The states, which are experiencing record budget deficits, are free to decide how they will use their share of the funds.

Two smaller investment firms, U.S. Bancorp Piper Jaffray and Thomas Weisel Associates, still are in negotiations with the regulators and are expected to pay smaller fines of about $20 million apiece.

While the regulators agreed not to prosecute Mr. Weill, they are nearing a settlement with the company's former star telecommunications analyst, Jack Grubman, that would bar him from the securities business and fine him $15 million, Mr. Spitzer told reporters.

Mr. Grubman, who touted telecommunications stocks like WorldCom right up to the point of bankruptcy, boasted in e-mail messages that he raised his rating on AT&T's stock to help Mr. Weill curry favor with AT&T's chairman.

Mr. Weill admitted asking Mr. Grubman to review AT&T's rating, but said it had nothing to do with influencing the company.

Mr. Grubman also raised eyebrows by revealing in testimony this summer that he accompanied Salomon investment bankers when they made pitches for corporate underwriting business.

The settlement will bar research analysts in the future from attending such "pitches and roadshows" and requires that their compensation not be linked in any way to generating investment-banking business.

In addition to purchasing independent research reports on company stocks for investor clients, the brokerages are required under the agreement to disclose their rating and price forecasts so that investors can more easily compare the performance of analysts.

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