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WASHINGTON — Federal and state regulators on Monday released the final terms of a landmark settlement in which nine of Wall Street biggest investment firms will pay at least $1.4 billion and adopt reforms to resolve allegations that they issued biased ratings on stocks to gain investment banking business.
It includes one of the largest penalties ever levied by securities regulators and will change the way major investment firms do business.
The settlement -- the result of a coordinated probe between the SEC ,New York Attorney general Eliot Spitzer's office, different state securities enforcement offices, the NASD and the New York Stock Exchange -- does not preclude future probes into practices by individual researchers or bankers, said Spitzer.
"We believe we have restored what is wonderful about our capitalist system -- which is truth, integrity and risk taking," said Spitzer during the press conference.
Three of the most profitable brokerages during the late 1990s market boom -- Citigroup Inc. Salomon Smith Barney unit, Credit Suisse Group's CSFB and Merrill Lynch & Co. -- settled charges of securities fraud, according to the Securities and Exchange Commission.
All 10 of the participating investment banks, including Goldman Sachs Group , settled lesser charges of violating market regulations. Regulators singled out Henry Blodget, a former Internet analyst at Merrill Lynch, and Jack Grubman, a former telecommunications analyst at Salomon Smith Barney, who agreed to pay almost $20 million in fines and be barred permanently from working in the financial services industry.
"When wrongdoing occurs, it must be confronted and punished," said SEC Chairman William Donaldson, flanked by Spitzer, New York Stock Exchange Chairman Richard Grasso and other regulators during a press conference. "Today we are doing just that."
In addition to the monetary payment, the settlement aims to make it more difficult to breach conflicts of interest between research and investment banking departments.
As part of the settlement, firms will have to physically separate their research and investment banking, analysts will be barred from pitch meetings with clients to win underwriting business, and interaction between analysts and investment bankers will have to be chaperoned by compliance officers.
The strictest requirements were reserved for Citigroup's investment banking arm, which agreed to pay $400 million, including $300 million in fines and restitution.
Sallie Krawcheck, head of Smith Barney, Citigroup's research division, will no longer report directly to Chairman Sandy Weill or other executives, but rather to three separate committees under its board of directors. Smith Barney must also report directly to the New York State attorney general on an annual basis.
While the fines and restitution have been known for months, today's settlement has been anticipated for the details of probes into individual banks.
Plaintiffs' lawyers say they expect to get access to e-mails, interviews and other documentation from regulators' investigations. That is expected to spur a new wave of civil litigation that could cost investment banks far more than the settlement itself, said plaintiffs lawyers.
"We are talking about tens of billions of dollars in future settlements here," said Thomas Ajamie, an arbitration attorney who won a $429 million award against a PaineWebber broker in 2001. "There are fraud charges involved, so investors deserve to be compensated as well."
The settlement underscores the demise of the star analyst system promoted by Wall Street during the market boom.
Blodget will be ordered to pay $4 million in penalties over claims he allegedly hyped stocks to win lucrative investment banking deals.
Former Salomon Smith Barney telecoms analyst Grubman will have to pay $15 million in connection with the settlement. Grubman and Blodget -- whose representatives could not immediately be reached for comment -- did not admit or deny wrongdoing.
"Analysts have taken the step that if they're going to have any credibility at all, they need to rely more on their own research and less on their needs for investment banking business," said Ralph Cole, who helps oversee $1.8 billion at Ferguson Wellman Capital Management in Portland, Oregon.
The settlement, first unveiled in December, includes a provision stating that brokerages will not be able to get reimbursed for the fines and restitution by insurance coverage. None of the brokerages will admit wrongdoing under their deal with the stock exchanges, state regulators and the SEC.
A firm-by-firm breakdown of the settlement, including penalties, investor education, independent research was listed as follows:
Salomon - $400 million,
Merrill - $200 million,
Credit Suisse Group's CSFB - $200 million,
Morgan Stanley - $125 million,
Goldman Sachs - $110 million,
Bear Stearns J.P. Morgan Chase - $80 million,
Lehman Brothers (LEH) - $80 million,
UBS AG's UBS Warburg unit - $80 million
US Bancorp's Piper Jaffray - $32.5 million
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