Investors Await Effects of Analyst Deal
As a long-anticipated settlement of stock-analyst conflicts was rolled out Friday, the agreement was met with questions about whether it actually would change the way Wall Street works to make it a fairer place for small investors.
The settlement was unveiled at a news conference at the New York Stock Exchange, where regulators cast it as a dramatic reform that would close “perhaps one of the darkest chapters in the history of modern finance,” in the words of NYSE Chairman Richard Grasso.
The settlement with such Wall Street giants as Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley “will result in significant reforms that will serve investors for many years to come,” said Stephen Cutler, chief of the Securities and Exchange Commission’s enforcement division. It “is intended to bring new integrity to Wall Street research.”
The tentative agreement would end a series of government probes into whether stock analysts intentionally deceived investors with bullish stock picks designed to draw lucrative investment banking work to their firms.
The deal calls for 10 major investment banks to shell out more than $1.4 billion in fines and other payments and to take steps to insulate their stock analysts from the pressure of drumming up business.
The deal also would ban the brokerages from handing out lucrative new-stock offerings to corporate executives and would force them to buy research from independent firms and give it to their own customers.
A final deal is expected to be signed next month.
All told, experts said, the settlement sweeps away the most flagrant abuses of the late-1990s market bubble and sets in motion several innovative, if untested, reforms.
“On balance, the [individual] investor is better served,” said professor Samuel Hayes of Harvard University. “This is about as good as we could have hoped for.”
However, the settlement’s true effect will not be known for some time, in part because key questions went unanswered Friday.
Though regulators said they wanted to create a restitution fund to reimburse small investors who lost money in the market, its structure has not been determined. New York Atty. Gen. Eliot Spitzer said he wanted to reimburse investors but that a restitution fund may be tough logistically.
Another key question is how much evidence of wrongdoing will be released to the public.
The best chance investors have to recover money is to prevail in class-action lawsuits and arbitration hearings, and voluminous proof of misconduct would help their cases. Yet it is unclear how much data regulators will make public or whether it would bolster legal actions, said John Coffee, a Columbia University law professor.
“The only way to get meaningful restitution is if the SEC and Spitzer turn over the smoking-gun documents they’ve been uncovering for the last year,” Coffee said.
The biggest unknown is whether the pact would succeed in restoring investor confidence, which has been badly eroded by this year’s procession of Wall Street and corporate scandals.
Some people doubted that the sanctions and reforms would have much effect on Wall Street’s behavior.
“It’s business as usual -- just a slap on the wrist,” said T. Sheridan O’Keefe, president of the National Assn. of Investment Professionals. “Eventually, when this uproar dies down, things will just go back to the cozy way they were.”
Regulators sharply disagreed. “A banker is a banker. A research analyst is a research analyst,” said the NYSE’s Grasso. “Cross the line and you’re in violation” of the new rules.
Regulators also dismissed the notion that the firms, which earned billions in investment banking fees in the 1990s, got off with comparatively light fines.
“I don’t think you can call $1.4 billion a slap on the wrist,” Cutler said.
The penalty is the largest ever imposed for securities law violations, according to the SEC, eclipsing earlier settlements with Prudential Securities Inc. and Nasdaq market dealers.
The fines will be divided evenly among federal regulators and the states. California, the most populous state, will receive the most money -- though the exact amount wasn’t immediately disclosed. Each state will decide how to spend its share.
As is standard in any settlement, the firms will neither admit nor deny guilt. But Citigroup and some other firms could be forced by Spitzer to issue statements of contrition.
Citigroup, parent of Salomon Smith Barney, said that it has “implemented new practices and standards” that make it “a stronger company.”
Some of the firms involved in the settlement said they were glad the deal was done and are committed to providing quality research. Others declined to comment or could not be reached.
In a surprise deal struck Friday, Spitzer announced that Jack Grubman, a former Salomon analyst at the center of the credibility furor, has tentatively agreed to pay a $15-million fine and be barred from the securities industry for life.
Spitzer has said that executives at the brokerage firms would not be prosecuted, but it is unclear whether some individuals eventually will face civil charges.
What is certain in the wake of Friday’s accord is that some things won’t change.
No settlement could resolve all of Wall Street’s inherent conflicts. Though analysts would be walled off from investment banking, the split is not complete. For example, analyst bonuses still could be set by overall firm revenue -- a major portion of which comes from banking profits.
Nor is there a guarantee that stock research, even that provided by independent firms, would be an improvement. Boutique research firms are expecting the huge payday that would come from contracts with investment banks, and they could fear contradicting the analysts of their new employers, experts said.
Perhaps the most important outcome of the lengthy probes, some add, is that the accompanying notoriety has put investors on notice to be wary of analysts.
Equally significant, the controversy may alter the makeup of the analyst ranks. As analysts became celebrities in the 1990s, their salaries skyrocketed. Paychecks are certain to decline sharply in coming years, weeding out those simply looking to make a quick buck.
The most immediate effect of Friday’s announcement was a boost for brokerage stocks. With the cloud above them partially lifted, all 10 brokerages in the deal saw their share prices rise.
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Bloomberg News was used in compiling this report.
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Settlement bills, by brokerage
Here are the amounts major brokerages will pay to settle charges of widespread misconduct in the late 1990s, in millions of dollars:
Independent Investor Firm Fine research education Total Salomon Smith Barney $300 $75 $25 $400 CSFB 150 50 0 200 Merrill Lynch 100** 75 25 200 Morgan Stanley 50 75 0 125 Goldman Sachs 50 50 10 110 Bear Stearns 50 25 5 80 Deutsche Bank 50 25 5 80 J.P. Morgan Chase 50 25 5 80 Lehman Bros. 50 25 5 80 UBS Warburg 50 25 5 80 Total $900 $450 $85 $1,435
Source: Securities and Exchange Commission
** Payment made in prior settlement
