Posted 7:27 PM by Blah blah

Sad Day for the Financial World (Business)

S.E.C. Chastises Morgan Stanley's Chief for Comments (NY Times):

"Morgan Stanley's efforts to play down its role in the Wall Street research scandal appeared to backfire yesterday, as the chairman of the Securities and Exchange Commission released a blistering letter addressed to the firm's chief executive.

William H. Donaldson, the commission chairman, said in a letter dated Wednesday that he was 'deeply troubled' by comments from Philip J. Purcell, the Morgan Stanley official, which he said 'evidence a troubling lack of contrition.'

He warned that Morgan Stanley could face further legal action if it continued to deny having acted badly in the research scandal, which was the subject of a $1.4 billion industry settlement."

Regulators Reach Final Settlement Against Wall St. Firms (NY Times).

"The $1.4 billion settlement by 10 firms and 2 well-known stock analysts reached tentatively last December but completed in the last few days, resolved accusations that the firms lured millions of investors to buy billions of dollars worth of shares in companies they knew were troubled and which ultimately either collapsed or sharply declined.

The Securities and Exchange Commission, state prosecutors and market regulators accused three firms in particular - Citigroup's Salomon Smith Barney, Merrill Lynch, and Credit Suisse First Boston - of fraud. But the thousands of pages of internal e-mail messages and other evidence that regulators made public today painted a picture up and down Wall Street of an industry rife with conflicts of interest during the height of the Internet and telecommunications bubble that burst three years ago.

At firm after firm, according to prosecutors, analysts wittingly duped investors to curry favor with corporate clients. Investment houses received secret payments from companies they gave strong recommendations to buy. And for top executives whose companies were clients, stock underwriters offered special access to hot initial public offerings....

In a reflection of regulators' concerns about the prospect for conflicts of interest at Citigroup, Wall Street's biggest bank, the settlement bars its chairman and chief executive, Sanford I. Weill, from communicating with his firm's stock analysts about the companies they cover, unless a lawyer is present.

But the regulators found fault with every major bank on Wall Street.

In addition to the three firms accused of fraud, five others - Bear Stearns, Goldman Sachs, Lehman Brothers, Piper Jaffray and UBS Warburg - were accused of making unwarranted or exaggerated claims about the companies they analyzed. UBS Warburg and Piper Jaffray were accused of receiving payments for research without disclosing such payments.

And Salomon Smith Barney and First Boston were accused of currying favor with their corporate clients by selling hot stock offerings to senior executives, who then could turn around and sell the shares for virtually guaranteed profits.

The two banks agreed to end that practice, known as spinning....

The firms also agreed to abide by what officials said were significant new ethics rules and to build barriers between investment bankers and stock analysts in hopes of relieving analysts from the business pressures that many succumbed to during the 1990's. For example, the compensation of analysts is to be based on the quality of their research, not their contribution to the firm's investment banking business....

Any top Wall Street executive directly involved in investment banking, however, would be barred from discussions with his company's analysts under the terms of the agreements....

In addition to the restitution, the firms also agreed to pay $487.5 million in penalties, $432.5 million to fund independent research, and $80 million for investor education. Mr. Blodget agreed to pay $4 million and Mr. Grubman $15 million to settle the charges against them.

The fines, restitution and other penalties were divided as follows: $400 million will be paid by Citigroup; $200 million each by Credit Suisse and Merrill Lynch (which includes an earlier Merrill settlement of $100 million); $125 million by Morgan Stanley; $110 million by Goldman Sachs; $80 million each by Bear Stearns, J.P. Morgan, Lehman, and UBS Warburg; and $32.5 million by Piper Jaffray."

Analysts to Pay Millions in Fines (NY Times):

"Henry Blodget, the former Internet analyst at Merrill Lynch, and Jack B. Grubman, the former telecommunications analyst at Salomon Smith Barney, are expected to pay almost $20 million in fines and penalties and agree to be barred permanently from the securities industry today, according to a person briefed on the investigation. The sanctions are to be disclosed when regulators announce the final agreement in the $1.4 billion investment banking research settlement....

[E]very time an investment banker wants to speak with an analyst a lawyer or compliance officer must be either present in the room or patched in via telephone. For bankers and analysts used to spending weeks together on the road pitching new deals, it will be a new and somewhat colder world."