Wall Street’s bad boys were hit with the biggest fines in the history of the securities markets last week — but there are few signs that the industry will change its ways.
The 10 largest brokerage firms were hit with $1,4-billion in fines and restitution, and two high-flying analysts crashed to earth.
But the ”global settlement” gives details of a far greater range of conflicts of interest than previously disclosed.
In real terms, $1,4-billion represents about 7% of Wall Street’s earnings last year — a very bad year.
No one has been jailed, and none of the 10 firms, the crème de la crème of banking and investment in the United States, admitted to or denied any of the charges against them. Citigroup, Wall Street’s largest bank, did agree to a statement of ”contrition”.
New York Attorney General Eliot Spitzer, who led the investigation by state and federal authorities, has warned that the settlement was ”very much the beginning for those who acted improperly”.
”The question is not are things better today or even next week or next month, but whether they are better six months or a year from now,” said Spitzer. ”Frankly, I do not know the answer to that.”
The changes that the Securities and Exchange Commission (SEC) and Spitzer are initiating are structural and superficial at best, as the irregularities they are trying to combat are so vague. Proving fraud is nearly impossible.
Citigroup, Merrill Lynch and Credit Suisse First Boston were accused of outright fraud by prosecutors. But the thousands of pages of internal e-mail messages and other evidence regulators made public painted a grimy picture of Wall Street as an industry rife with conflicts of interest during the height of the Internet and telecommunications bubble that burst three years ago.
The investigations showed that the firms put aside the interests of the investing public as they pursued investment banking fees — the business of helping corporations raise money by selling securities, which had become highly lucrative in the soaring market of the late 1990s.
At firm after firm analysts duped investors to curry favour with these corporate clients, according to the prosecutors.
Investment houses reportedly received secret payments from companies they gave strong recommendations to buy. And for top executives whose companies were clients, stock underwriters offered special access to hot initial public offerings.
”These cases reflect a sad chapter in the history of American business — a chapter in which those who reaped enormous benefits based on the trust of investors profoundly betrayed that trust,” said William Donaldson, the new SEC chairperson. ”They also represent an important new chapter in our ongoing efforts to restore investors’ faith and confidence in the fairness and integrity of our markets.”
The heaviest penalties in the settlement were meted out to Citigroup, which will pay fines and other costs totalling $400-million. Citigroup’s chairperson and CEO Sanford Weill is also barred from talking with the firm’s stock analysts about the companies they cover, unless a lawyer is present.
Credit Suisse and Merrill Lynch will each pay $200-million; Morgan Stanley $125-million; Goldman Sachs $110-million; Bear Stearns, JP Morgan, Lehman and UBS Warburg $80-million each; and Piper Jaffray $32,5-million.
Two men considered superstars have been penalised individually for their behaviour, although neither admitted wrongdoing.
Jack Grubman, telecommunications specialist for Citigroup’s brokerage firm Salomon Smith Barney, who blatantly hyped up telecom stocks such as Worldcom, will pay a fine of $15-million on conflict-of-interest charges.
Merrill Lynch’s infamous Internet expert, Henry Blodget, will shell out $4-million in penalties. In his private e-mails, Blodget once described a stock he was publicly recommending as ”a piece of shit”.
Both have been barred from the industry for life, but have escaped prosecution. The revelations shocked unsuspecting investors who were lured into buying billions of dollars of shares in companies the analysts knew were troubled, and which ultimately either collapsed or sharply declined.
The sheer volume of damning evidence collected since the investigation started in 2001 has lawyers eager to get to work on class action lawsuits on behalf of investors. These may cost Wall Street even more heavily.
The main element in the reforms is the strict division — even physical separation — between equity research and investment banking.
But whether these ”Chinese walls” remove Wall Street’s inherent conflicts of interest remains to be seen. Separating the departments does not mean conflicts will disappear, or will not occur in the future.