Wall St. fines 10 firms

Regulators said they hoped the disclosure would help some duped investors collect money for their losses. Less than a third of the settlement money will be set aside to repay investors who can show they lost money relying on such research, with the rest going to state coffers and to fund a new form of stock research.

By making public some previously undisclosed e-mails and other documents, regulators said harmed investors might be better armed to recover losses in private lawsuits or arbitration cases.

``The documents that have been uncovered are crass to the extreme, and should make it clear to the small investors that they were being used as bargaining chips to bring in corporate clients on the investment-banking side,'' said New York Attorney General Eliot Spitzer, who brought the charges along with the North American Securities Administrators Association, the Securities and Exchange Commission, NASD and New York Stock Exchange.

As part of the final settlement, reached in principle late last year, two of Wall Street's best-known and highest-paid stock researchers -- Jack Grubman, the telecommunications analyst at Citigroup's Salomon Smith Barney unit, and Merrill Lynch Internet analyst Henry Blodget -- were barred from the industry for life and forced to repay $20 million to regulators.

Regulators charged that investment banks allowed their stock research to become biased in favor of companies wanted as investment-banking clients.

The two firms that paid the highest fines in the settlement -- Citigroup and Credit Suisse First Boston -- also were accused by regulators of inappropriate ``spinning,'' or allocating shares of certain new hot stocks to executives of companies they were pursuing for investment-banking business.

None of the firms admitted wrongdoing, although Citigroup issued a statement of ``contrition.''

Business changes

The settlements call for a litany of changes to the way Wall Street does business. They include:

* Severely limiting the contact between investment bankers and research analysts.

* Requiring research analysts to be paid on the basis of their research accuracy -- not investment-banking activities.

Some said that in Silicon Valley, the changes are likely to mean that smaller companies will get far less research coverage of their company than in the past. Instead, research analysts will focus on larger companies whose shares can generate trading commissions for the firm's trading division, some say.

That in turn could mean fewer young start-ups will get the attention they need to be funded early through initial public stock offerings, or IPOs.

''That's going to change life for Silicon Valley a lot, for everybody including venture capitalists and others,'' said Chris Danne, an investor-relations specialist at BlueShirt Group. Without investment-banking fees to motivate firms to provide research coverage, ''there is less incentive for them to cover these smaller names,'' he added.

The most common charge levied against all 10 firms was that they used the promise of research coverage -- which companies would reasonably interpret as favorable coverage -- to entice companies to use them for investment banking. Most firms also paid researchers steep bonuses that were based not on their job of providing objective research to investors, but rather on whether their research could draw in investment-banking clients.

At three firms -- Credit Suisse First Boston, Salomon Smith Barney and Merrill Lynch -- regulators found that the conflicts amounted to fraud.

For instance, industry regulator NASD charged that a Credit Suisse analyst tried in May 2001 to stop providing research on Digital Impact, which he privately complained to his bosses was going to have ``a difficult time thriving.'' After being prodded by investment bankers, the analyst kept the company -- an investment-banking client of the firm -- at a ``buy'' rating for an additional five months.

E-mail objections

In some cases, the conflicts angered salespeople within the firms who had the most contact with large investors. As Grubman stayed stubbornly bullish on money-losing telecommunications stocks, for instance, institutional salespeople sent ``hundreds'' of scathing e-mails to his bosses decrying his lack of objectivity.

One called Grubman ``the poster child for conspicuous conflicts of interest,'' while another complained, ``I have had to spend countless hours with my clients discussing the losses Grubman has caused them.''

``How can an analyst be so wrong and still keep his job?'' another asked.

Regulators left open the possibility that more individual bankers, researchers or investment-bank supervisors could face civil or criminal charges.

So far, Credit Suisse's former star banker, Frank Quattrone, stands alone in facing criminal prosecution, in his case for allegedly obstructing justice by encouraging colleagues to purge documents he knew regulators were seeking from his firm. Quattrone denies knowingly urging obstruction, and said he will fight the charges in court.

Regulators did not spell out precisely how investors who feel they were defrauded can collect some of the $387.5 million in funds being set aside for restitution. The SEC will choose an administrator who will decide on an ``equitable'' method of disbursement.

© 2003 San Jose Mercury News.