Wall Street To Pay The Piper
Securities regulators took a step Monday toward trying to restore investor confidence in the wake of the corporate corruption and accounting scandals.
Ten of Wall Street's biggest brokerages are being fined $1.4 billion for ripping off untold numbers of investors by feeding them misleading stock research in an attempt to drum up business.
Citigroup will pay the largest penalty of $400 million, with Credit Suisse and Merrill Lynch paying $200 million apiece. Morgan Stanley and Goldman Sachs are ponying up $125 million and $110 million, respectively.
Lehman Bros., J.P. Morgan, Bear Stearns and UBS Warburg will pay $80 million to settle the charges. U.S. Bancorp Piper Jaffray will pay $32.5 million.
In addition, the firms will have to physically separate their research and investment banking arms.
One of the largest penalties ever levied by securities regulators, it follows a lengthy investigation by the Securities and Exchange Commission, New York Attorney General Eliot Spitzer and other state regulators, and market regulators.
"These cases are an important milestone in our ongoing effort both to address serious abuses that have taken place in our markets and to restore investor confidence and public trust by making sure these abuses don't happen again," SEC Chairman William Donaldson said at a news conference at SEC headquarters.
Donaldson, a former chairman of the New York Stock Exchange and co-founder of a major Wall Street investment firm, said he was "profoundly saddened and angry" about the conduct detailed in the regulators' complaints.
"There is absolutely no place for it in our markets and it cannot be tolerated," said Donaldson, who was flanked by the other regulators.
CBS News Correspondent Sharyl Attkisson reports the settlement is also a dose of payback for former Wall Street wizards Jack Grubman and Henry Blodget, trusted by small investors to sniff out good stocks. They got caught pumping up bad ones for personal gain. They were slapped with huge fines and barred for life from the industry that made them.
In documents released Monday, there's even evidence that Grubman, who worked as a telecom analyst for Salomon Smith Barney, upgraded AT&T stock purely to get his twins in preschool.
In a stunning e-mail, Grubman explains the deal: "I used (Citigroup Chairman) Sandy (Weill) to get my kids in pre-school which is harder than Harvard and Sandy needed (AT&T) (Michael) Armstrong's vote on our board."
Grubman upgraded AT&T; his boss, Weill, made a million-dollar contribution to the preschool; and Grubman's twins got admitted.
Once his kids got in, Grubman says, "I went back to my normal negative self on (AT&T). (AT&T Chairman) Armstrong never knew that we both played him like a fiddle."
Hundreds of Grubman's coworkers who relied on his bad stock advice to advise their own clients sounded the alarm on Grubman long before regulators. His colleagues called him a "poster child ... for conflicts of interest," "a crook." One wrote simply: "Shoot Jack Grubman."
Yet others saw him as a hero for the giant fees he generated. "Jack is clearly a rock star," said one Salomon banker. "Jack is viewed as a GOD," said another. He was paid like one, too – an $80 million salary over four years...and a $30 million dollar severance package when he left. Which makes the $15 million settlement he agreed to pay suddenly seem not so big.
The other analyst fined Monday, Merrill Lynch's Blodgett, also made millions in part touting stock he privately ridiculed as worthless. He'll pay $4 million. Both men will be banned permanently from the securities industry.
A fund of more than $387 million will be set up for customers of the 10 firms in the settlement. The rest of the fines will go to the states. The airing of the regulators' allegations could open the way for a flurry of private lawsuits by investors who believe they were defrauded.
Said Spitzer, the New York Attorney General: "It will take time, but because we put all this information in the public record, investors will be able in due course to recover the funds that they lost on false research."
The firms neither admitted nor denied allegations that they had misled investors, although Citigroup agreed to a statement of "contrition."