SEC Settles $1.4 Billion Suit With Wall Street Firms

Ten of Wall Streets biggest firms will pay a total of $1.4 billion to settle civil conflict of interest claims, the Securities and Exchange Commission announced this week. SEC Chairman William H. Donaldson and New York State Attorney General Eliot L. Spitzer announced the settlement to several ongoing investigations in federal court.

The settlement restructures the brokerage business by putting barriers between analysts and investment bankers who work for the same firm. The 10 firms involved in the settlement are now required to provide three independent sources of research before making recommendations. The research must come from companies that do no banking business. The settlement further calls on the firms to fund an investor education program and to assign autonomous monitors to ensure adherence to the settlement’s terms. The firms accepted the settlement without admitting or denying culpability.

The largest penalty — $400 million — was levied against Citibank, the parent company of Salomon Smith Barney, which employs Jack B. Grubman, one of the two analysts barred for life from the securities profession as part of the settlement. Credit Suisse First Boston and Merrill Lynch will each pay $200 million; Morgan Stanley will pay $125 million; Goldman Sachs Group will pay $110 million; and Lehman Brothers Holdings, J.P. Morgan Chase, Bear Stearns and UBS Warburg will pay $80 million each. U.S. Bancorp Piper Jaffray will pay $32.5 million. The fines are a fraction of what Wall Street firms earned during the bull market. Critics of the settlement complained that no criminal charges were filed against top executives. SEC Chairman Donaldson said investigations are ongoing into the actions of all the top executives during the bull market.

The government used internal e-mails and other communications to show how analysts promoted companies that they were privately saying were losers for investors so that their firms would continue to receive the more lucrative investment banking business from the companies in question.

In a 2001 e-mail, Grubman, once a major telecommunications analyst, referred to one company he was recommending as a "pig." Another e-mail showed that a colleague of Grubman’s called him a "poster child for conspicuous conflicts of interest." The settlement calls for Grubman to pay $15 million of the $48 million he earned between 1999 and 2001. Henry Blodget, a Merrill Lynch analyst, was ordered to pay $4 million and was also banned from the profession for life. Spitzer’s investigation into Blodget and Merrill Lynch led to the more sweeping probe. Frank Quattrone, a former technology banker with Credit Suisse First Boston, is facing charges of criminal obstruction of justice. Other individuals and analysts are facing criminal investigations.

Despite the steep fines, few believe that the money will find its way to individual investors who suffered losses as a result of the firms’ actions. Spitzer said individuals sign away their rights to sue brokerage firms when they open their accounts. However, he said they can participate in the class-actions suits that are now working their way through the courts. He said that the documents related to the settlement, made public on Monday, would certainly provide fodder for the pending civil actions.


Already a member? log in here.

Editor's Choice

Upcoming CPE Webinars

Dec 3The materials discuss the concepts and principles in the AICPA’s new special purpose framework.
Dec 8Kristen Rampe will cover how to diffuse the tension in challenging situations in this one-hour webinar.
Dec 9A key component to improving your firm’s workflow efficiency while enhancing your profitability at the same time is how you leverage emerging technologies.
Dec 16Kristen Rampe will give tips on how to bring confidence into the room and build a valuable network.