- The Washington Times - Tuesday, April 29, 2003

Wall Street’s top investment houses yesterday agreed to pay $1.4 billion in fines and end the routine betrayal of small investors who were used as bargaining chips during the stock-market boom to gin up business with corporate clients.
   
   Bilked investors will be able to win as much as $3 billion in compensation from the 10 firms through lawsuits using thousands of internal e-mails and documents released by state and federal regulators who announced the settlement yesterday. Major class-action suits already are pending to recoup some of the billions lost since the stock bubble burst three years ago.
   
   The internal documents show that investment heavyweights from Citigroup’s Salomon Smith Barney to Merrill Lynch & Co. misled investors about the prospects for high-flying telecommunications and Internet stocks to win lucrative stock-underwriting deals.
   
   The lies and deceptions were so extreme and well-known internally that even the firms’ own stockbrokers, who work with small clients, pleaded with executives to stop recommending losing stocks and fire the analysts touting them.
   
   “His ridiculously bullish calls on [WorldCom and Global Crossing stock] cost our clients a lot of money,” said one Citigroup broker of star analyst Jack Grubman, who earned tens of millions of dollars for pushing WorldCom, Global Crossing and AT&T; even after their stocks had plummeted.
   
   Another broker lamented small clients’ “tremendous ill will” against Mr. Grubman.
   
   “Fire this idiot. Fire Grubman. He’s dead wrong and cocky,” said others in internal evaluations decrying the loss of integrity and investor trust bred by Mr. Grubman’s unwavering support of tech companies even as they lurched toward bankruptcy.
   
   Citigroup is paying the biggest fine, $400 million, and will issue a statement of “contrition” under the settlement. Mr. Grubman and Henry Blodget, a Merrill Lynch analyst whose hyped recommendations also helped fuel the tech-stock bubble, will pay $19 million in fines and are barred from working on Wall Street.
   
   Citigroup Chief Executive Sanford Weill, who at one point ordered Mr. Grubman to raise his rating of AT&T; stock to clinch a banking deal, is barred from talking to analysts without lawyers present. But he won a guarantee that he will not face criminal prosecution.
   
   The civil settlement, filed in the U.S. District Court in New York yesterday, does not preclude future criminal prosecution of other executives and analysts.
   
   The investment banks and executives did not admit wrongdoing in agreeing to settle, but they know it will spawn massive class-action lawsuits and have set aside $3 billion to settle those suits. Incriminating evidence abounds in the released documents.
   
   “Grubman made a fortune for himself personally and for the investment banking division,” said one broker in an internal Citigroup document. “However, his investment decisions have impoverished the portfolio of my clients, and I have had to spend endless hours with my clients discussing the losses Grubman has caused them.”
   
   Even firms such as Goldman Sachs & Co., which is paying a comparatively small fine of $110 million because its clients are mostly large and sophisticated institutional investors, regularly betrayed clients’ trust, the documents show.
   
   One Goldman research analyst, whose job was to provide investment advice, said in a memo that his top priority in 2000 was to “get more investment-banking revenue” as were his second and third priorities.
   
   “With the benefit of hindsight, it’s clear that we all everybody in the industry could have done better,” said Goldman spokesman Lucas Van Praag. “We think the settlement is another important step in restoring investor confidence.”
   
   E. Stanley O’Neal, Merrill Lynch’s chief executive, told the firm’s annual meeting today, “Clearly, we are not perfect and we haven’t always lived up to our ideals.”
   
   Eliot Spitzer, the Democratic New York attorney general whose investigation of Merrill Lynch two years ago sparked the industrywide probe and settlement, said he expects it to spawn “a substantial body of civil litigation.”
   
   Securities and Exchange Commission Chairman William Donaldson, himself the founder of a prominent Wall Street firm and former New York Stock Exchange chairman, said he was “profoundly saddened and angry about the conduct that’s alleged in our complaints. There is absolutely no place for it in our markets and it cannot be tolerated.”
   
   A last-minute concession negotiated by the SEC and state litigators precludes the investment banks and analysts from attempting to write off the enormous cost of the fines on their taxes or receive compensation from insurance companies.
   
   The concession was sought by Senate Finance Committee Chairman Charles E. Grassley, Iowa Republican, who wanted to ensure that taxpayers don’t help foot the bill for the record payments.
   
   The $1.4 billion total includes $875 million in fines, which must be paid immediately; $80 million for investor education, and $450 million in seed money for an independent research fund, both of which must be paid over five years. About $390 million of the fines will be returned as restitution to investors.
   
   The investment houses must provide their clients with access to independent as well as in-house research, and allow investors to compare analysts’ performances by publishing the results of their analyses within 90 days.
   
   Analysts are barred from attending investment roadshows and other events staged to win stock-offering business, and their pay cannot be linked to the bank’s underwriting business.
   
   Brokerages also are barred from providing sought-after clients, such as former WorldCom Chairman Bernie Ebbers, with preferential access to startup stock offerings a practice known as “spinning” that enabled executives to rake in billions in profits during the stock market boom.

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