Wall Street finally reaches $1bn settlement

Billion-dollar boondoggle

20 December 2002 By Rob Cox, Rob Cox, Rob Cox, Rob Cox Follow @rob1cox

With this, the research business model changes dramatically. The full burden of cost will fall firmly on equity departments. And this will likely herald a sweeping reduction in the size of research departments and the amount produced.

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The securities industry is expected to announce on Friday that it has reached a $1bn settlement with regulators to put to rest investigations they hoodwinked investors by publishing misleading research on equities. As part of the settlement, the firms will pay fines that will be divvied up among the regulators and US states to be paid as restitution to investors who lost money as a result of tainted research.

Citigroup will pay the largest fine, of about $325m, followed by Credit Suisse First Boston, with $150m. Merrill Lynch paid $100m in an earlier agreement. Goldman Sachs, Morgan Stanley, Lehman Brothers, JP Morgan, UBS, Deutsche Bank and Bear Stearns are expected to pay $50m each. US Bancorp and Thomas Weisel partners are also expected to pay up to $50m.

As part of the settlement, the firms will also agree to reforms including barring analysts from participating in underwriting deals and preventing bankers from pressuring analysts to change their recommendations. Internal compliance monitors will be established to ensure the reforms are enacted. Regulators involved in the pact include the Securities and Exchange Commission, New York Attorney General Eliot Spitzer, NASD and a handful of other state regulators.

Additionally, the firms will be required to buy about $500m worth of research from independent firms for their clients over the next five years.

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