Massive Investment Banking Settlement

“These cases reflect a sad chapter in the history of American business — a chapter in which those who reaped enormous benefits from the trust of investors profoundly betrayed that trust. These cases also represent an important new chapter in our ongoing efforts to restore investors’ faith in the fairness and integrity of our markets.” SEC Chairman William Donaldson

“If the Street follows both the spirit and the letter of this settlement, it will change the way business is done on Wall Street. Investors — not investment banking fees — will come first. And analysts will be beholden to the truth, not the IPO business.” NASAA President, Christine Bruenn.

Finally, an ugly chapter in Wall Street’s history comes to a close. With the largest settlement in history being announced, 10 of the largest brokerage firms in the country have agreed to pay a combined $1.4 billion dollars in fines and penalties, to settle allegations by a group of securities regulators.

Those regulators alleged that, from approximately mid-1999 through mid-2001 or later, all of the firms engaged in acts and practices that created or maintained inappropriate influence by investment banking over research analysts, thereby imposing conflicts of interest on research analysts that the firms failed to manage in an adequate or appropriate manner. In addition, the regulators found supervisory deficiencies at every firm.

The enforcement actions, the allegations of which were neither admitted nor denied by the firms, also included additional charges:

  • CSFB, Merrill Lynch and SSB issued fraudulent research reports in violation of Section 15(c) of the Securities Exchange Act of 1934 as well as various state statutes;
  • Bear Stearns, CSFB, Goldman, Lehman, Merrill Lynch, Piper Jaffray, SSB and UBS Warburg issued research reports that were not based on principles of fair dealing and good faith and did not provide a sound basis for evaluating facts, contained exaggerated or unwarranted claims about the covered companies, and/or contained opinions for which there were no reasonable bases in violation of NYSE Rules 401, 472 and 476(a)(6), and NASD Rules 2110 and 2210 as well as state ethics statutes;
  • UBS Warburg and Piper Jaffray received payments for research without disclosing such payments in violation of Section 17(b) of the Securities Act of 1933 as well as NYSE Rules 476(a)(6), 401 and 472 and NASD Rules 2210 and 2110.
  • Those two firms, as well as Bear Stearns, J.P. Morgan and Morgan Stanley, made undisclosed payments for research in violation of NYSE Rules 476(a)(6), 401 and 472 and NASD Rules 2210 and 2110 and state statutes; and CSFB and SSB engaged in inappropriate spinning of “hot” Initial Public Offering (IPO) allocations in violation of SRO rules requiring adherence to high business standards and just and equitable principles of trade, and the firms’ books and records relating to certain transactions violated the broker-dealer record-keeping provisions of Section 17(a) of the Securities Exchange Act of 1934 and SRO rules (NYSE Rule 440 and NASD Rule 3110).

The enforcement actions have also resulted in significant modifications of industry practices which may have far reaching effects.

Among other significant reforms included in these actions are the following:

  • To ensure that stock recommendations are not tainted by efforts to obtain investment banking fees, research analysts will be insulated from investment banking pressure. The firms will be required to sever the links between research and investment banking, including prohibiting analysts from receiving compensation for investment banking activities, and prohibiting analysts’ involvement in investment banking “pitches” and “roadshows.”
  • The firms will physically separate their research and investment banking departments to prevent the flow of information between the two groups.
  • The firms’ senior management will determine the research department’s budget without input from investment banking and without regard to specific revenues derived from investment banking.
  • Research analysts’ compensation may not be based, directly or indirectly, on investment banking revenues or input from investment banking personnel, and investment bankers will have no role in evaluating analysts’ job performance.
  • Research management will make all company-specific decisions to terminate coverage, and investment bankers will have no role in company-specific coverage decisions.
  • Research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. During the offering period for an investment banking transaction, research analysts may not participate in roadshows or other efforts to market the transaction.
  • The firms will create and enforce firewalls restricting interaction between investment banking and research except in specifically designated circumstances.
  • To ensure that individual investors get access to objective investment advice, the firms will be obligated to furnish independent research. For a five-year period, each of the firms will be required to contract with no fewer than three independent research firms that will make available independent research to the firm’s customers. An independent consultant for each firm will have final authority to procure independent research.
  • To enable investors to evaluate and compare the performance of analysts, research analysts’ historical ratings will be disclosed. Each firm will make its analysts’ historical ratings and price target forecasts publicly available

Under the settlement, two former star analysts–Internet expert Henry Blodget of Merrill Lynch and telecommunications analyst Jack Grubman of Citigroup’s brokerage business, Salomon Smith Barney–have agreed to pay $19 million in fines and penalties and be banned permanently from the securities industry to settle fraud charges. Blodget and Grubman are neither admitting nor denying any wrongdoing. Grubman will pay $15 million for undisclosed conflicts. He faces a lifetime ban from working for an investment firm or acting as an investment adviser, dealer or broker. Blodget will pay $4 million

Last May, Merrill Lynch, the nation’s largest brokerage, agreed to a separate settlement that included a $100 million fine and the separation of its analysts from investment banking. Under the settlement detailed Monday, Merrill will pay an additional $100 million toward the independent research fund and an investor education program.

Here is how the $1.4 billion breaksdown by firm:

Salomon Smith Barney, $400 million
Credit Suisse First Boston, $200 million
Merrill Lynch, $200 million
Morgan Stanley, $125 million
Goldman Sachs, $110 million
J.P. Morgan Chase, 80 million
Lehman Brothers, $80 million
Bear Stearns, $80 million
UBS Warburg $80 million
US Bancorp Piper Jaffray, $32.5 million
Total: $1.388 billion

Related Documents:

The SEC Press Release –


Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.