Aiming to close one of the darkest chapters in the history of Wall Street, federal and state regulators announced a $1.4 billion settlement agreement Friday with the largest brokerage firms to penalize them for bogus ratings and separate future research from investment banking opportunities.
The agreement has not been finalized and requires the approval of the Securities and Exchange Commission.
The terms of the agreement call for the removal of analyst pay based on banking fees, bans the allocation of hot initial public offerings (IPOs) to corporate executives and directors and requires brokerage firms to provide independent research for five years. Each firm also must make its ratings and price target forecasts available to the public so retail investors can discern the performance of analysts.
New York Attorney General Eliot Spitzer said regulators launched an investigation into the practices of Wall Street more than a year ago out of concerns for the retail investor such as “Joe Smith in Utica New York.”
“This has been only about one thing. It has been about ensuring retail investors get a fair shake,” he said at a press conference Friday afternoon held at the New York Stock Exchange. “We needed to eliminate the conflicts of interest that have become unduly pervasive.”
Ten brokerage firms have agreed to pay $450 million for independent research, $85 million for investor education and $900 million for retrospective relief, some of which could be funneled to investors who can prove they lost money on bad advise.
Regulators underscored the settlement agreement should not be construed as a cap on what investors could get back from brokerage firms that issued bad advise. That amount of money will be determined through future litigation and arbitration proceedings.
Firms involved in the settlement include Bear Stearns & Co. LLC, Credit Suisse First Boston Corp., Deutsche Bank, Goldman Sachs, J.P. Morgan Chase & Co., Lehman Brothers Inc., Merrill Lynch & Co. Inc., Morgan Stanley, Salomon Smith Barney and UBS Warburg LLC.
Citigroup’s Salomon Smith Barney, whose former star telecom analyst Jack Grubman has been lambasted for allegedly issuing bogus ratings on WorldCom Inc. and other foundering carriers, agreed to pay $400 million for independent research, relief and investor education. Grubman left the firm in August.
In May Merrill Lynch reached a $100 million settlement agreement with the New York State Attorney General to resolve perceived conflicts of interest. The probe focused on Merrill’s Internet sector securities research from 1999 to 2001.