Wall Street Analyst Settlement

The settlement involving 10 Wall Street firms has been a long awaited conclusion to the regulatory investigation uncovering a long suspected practice that stock analysts were misleading investors.  According to Eliot Spitzer, New York’s attorney general and man who’s efforts to investigate investment banks uncovered the vast underbelly of corporate fraud, the settlement with investment banks is all but final and waiting for approval from the SEC. 

The firms have denied any wrongdoing, but back in the December 2002 preliminary settlement the firms involved in the corporate fraud agreed to fines and other payments, in addition to changing the way business is done.  Under terms of the settlement, the firms that have been involved in the securities fraud will pay $900 million to federal and state regulators, $85 million for investor education, and $450 million to provide customers with independent research. 

The settlement has thus far been a bit controversial because commissioners have been wondering if the agreement is too harsh or too loose.  Citigroup’s Smith Barney unit will have to pay the largest single amount at $400 million.  Merrill Lynch agreed to pay $100 million toward investor education and independent research and a $100 million penalty that the company had agreed to earlier.  Included in the final settlement, regulators have said that three firms including, Citigroup’s Salomon Smith Barney unit, Merrill Lynch & Co., and Credit Suisse First Boston Corp. will be charged with committing fraud against investors.  According to regulators, fraud charges will be dropped in the final settlement in exchange for the firms agreeing to reforms. 

Expected to be included in the final settlement is explicit guidelines to how and when a Wall Street investment banker will be able to interact with analysts.  Already, there have been broad outlines that have been known for months.  Firms will be given information on how to buy and distribute third-party research.  Two independent monitors will be assigned to each firm to oversee compliance with the settlement and the firm can only pick their own monitor if regulators approve it. 

This was one source of the delay because some firms had their choice monitors denied.  Eliot Spitzer, New York’s attorney general and man who’s efforts to investigate investment banks deemed him Time magazine’s 2002 crusader of the year, wants to provide a road map for shareholder fraud lawsuits and arbitration claims.  What the final wording of the settlement will include will remain unknown until it has become final, as well as the amount of evidence from the fraud investigations will be released.  This information will affect how the corporate fraud involved firms will be pursued in securities fraud class actions.