Ten of Wall Street's biggest investment firms have agreed to pay fines totalling $1.4 billion - the largest in Wall Street history - and adopt reforms to end insider trading scandals, writes Conor O'Clery, North America Editor, in New York.
The mammoth settlement was announced at a press conference in New York by Securities and Exchange chairman Mr William Donaldson after what he called a "complex and historic investigation" into the use of phoney research by analysts at top firms to lure merchant banking business.
Under the system everybody won except the small investor who suffered huge losses, said New York Attorney General Mr Eliot Spitzer, who led the investigation into Wall Street along with the SEC and other state and market regulators.
Huge fines were imposed on two of the star analysts of the tech bubble, Mr Jack Grubman of Salomon Smith Barney and Mr Henry Blodget of Merrill Lynch, both of whom were banned permanently from the securities industry.
Mr Grubman will pay $15 million in total and Mr Blodget $2 million in fines and penalties. The deal apparently removes the threat of imprisonment as they settled fraud charges without admitting any wrongdoing.
Citigroup's brokerage business, Salomon Smith Barney, was hit the hardest with a $300 million payout, but Citigroup CEO Mr Sanford Weill won a guarantee that he wouldn't be prosecuted. Like the other nine firms investigated, Citigroup neither admitted nor denied allegations that it had misled investors, but it alone agreed to a statement of "contrition."
Regulators found that Citigroup published fraudulent and misleading research that promoted banking clients and harmed investors while ignoring strong criticism from inside the company about the quality of research.
Mr Spitzer specifically criticised Citigroup senior management for not reacting when the head of global equities research at Salomon Smith Barney told them in an internal message that Citigroup research was "ridiculous on its face".
Morgan Stanley was fined $50 million and required to pay $75 million toward an independent-research fund for failing to manage conflicts of interests between its investment-banking and research divisions, or properly to supervise Ms Mary Meeker, the top telecommunications stock analyst.
Credit Suisse First Boston will pay $150 million in the settlement, Goldman Sachs, JP Morgan Chase, Bear Stearns, Lehman Brothers Holdings and UBS AG's Paine Webber will each pay $50 million, and US Bancorp's Piper Jaffrey unit $32.5 million. Deutsche Bank AG has agreed to settle and is expected to pay $50 million when it has provided all the evidence sought by regulators.
Separately Merrill Lynch, the largest Wall Street investment bank agreed to a settlement a year ago under which it paid a $100 million fine and agreed to keep analysts and investment banking apart.
The historic settlement is likely to be followed by more arbitration claims by investors who allege they lost money through analysts' advice which was deliberately falsified to bring in investment banking business.
The firms will pay $487.5 million in fines and give up $387.5 million in gains, and half of the $775 million payment by firms other than Merrill Lynch will be put into a fund for customers, with the remainder paid to the states.
They will pay $432.5 million into the independent research fund, and a new $80 million investor-education programme.
The Wall Street firms agreed to stop giving executives and board directors preferential access to initial public offering shares of firms they have courted as investment-banking clients. "These cases are an important milestone in our ongoing effort both to address serious abuses that have taken place in our markets and to restore investor confidence and public trust by making sure these abuses don't happen again," said Mr Donaldson.
Under new reforms certain analysts' reports must be made public within 90 days after each quarter to allow investors to compare their performance with analysts from different firms. An independent monitor will be assigned to each firm to make sure the terms of settlement are met.
The settlement began with an investigation into the research of Mr Blodget, who made his name predicting correctly that Amazon.com would reach $400 but who continued issuing high ratings for stock he privately rubbished after the bubble burst.
Mr Blodget was found to have hyped ratings on internet stocks to win lucrative investment-banking deals for his firm, while in emails he described the same stocks to colleagues as "crap".
Mr Spitzer, who obtained emails from other firms revealing the practice to be widespread, said Mr Grubman was right when he boasted he had turned conflict of interest into synergies. However, synergies were for the benefit of the investment brokers not investors for whom it meant destroyed lives, college tuition, and savings to pay off mortgages.
