Conflict Probes Resolved at Citigroup and Morgan Stanley
As part of a landmark "global resolution" of Wall Street investigations by state and federal regulators, Attorney General Eliot Spitzer today announced the resolution of his office's investigation of conflict of interest problems at two of the nation's largest investment banks.
"The global resolution implements far-reaching reforms that will help change behavior on Wall Street and protect investors," Spitzer said. "As part of the global resolution, regulators have addressed the specific circumstances at each firm with strong, but fair sanctions."
"In addition, evidence uncovered in these investigations is being placed in the public domain to empower individual investors to recover funds that may be owed to them."
Spitzer's office, after initiating conflict of interest investigations in 2001 and reaching a landmark settlement with Merrill Lynch in May 2002, sparked and then helped spearhead the joint investigation by state and federal regulators that began last summer. An agreement in principle was reached in December 2002 and a final settlement was announced today in Washington along with specific findings for each firm investigated. Spitzer's office was responsible for investigating Citigroup's Salomon Smith Barney, now called Citigroup Global Markets (SSB). Key findings of this investigation are as follows:
- SSB failed to manage conflicts of interest between its research and investment banking divisions;
- SSB published fraudulent and misleading research that promoted investment banking clients and harmed investors, in a manner which violated New York's Martin Act;
- SSB ignored internal warnings that its research product had become "basically worthless;"
- SSB's star telecom analyst, Jack Grubman, had undisclosed conflicts of interest; and
- SSB engaged in improper spinning and public offering stock distribution practices.
Pursuant to the settlement, SSB must adopt all of the terms and provisions of the global resolution and pay the most of any firm -- $400 million. In addition, the company will adopt a series of measures above and beyond the reforms contained in the global resolution. These measures include:
- CEO of Smith Barney (SSB's research division) will report periodically to three separate committees of the Citigroup Board of Directors on the objectivity, independence and quality of the company's research and on the company's progress in complying with terms and provisions of the global settlement. To aid the independence of the reporting process, no senior Citigroup executive will participate in these meetings;
- CEO of Smith Barney will also advise the Attorney General that these reports have been made;
- SSB will adopt procedures preventing senior executives of Citigroup, who function as an investment banker on a company, from directly communicating about that company with research analysts covering the company;
Citigroup Global will make a public statement of contrition for failing to address conflicts of interest. Separately, Grubman, formerly of SSB, has signed an Assurance of Discontinuance, the terms of which include:
- A life-time ban on functioning as a broker, dealer, investment advisor, employee of investment company or municipal securities dealer; and,
- A $15 million payment, which cannot be reimbursed or indemnified.
"Because of its record of violations, Citigroup faces additional requirements that go well beyond the global settlement. These provisions are necessary and appropriate, and my office will be vigilant in ensuring full compliance by the company," Spitzer said.
New York also investigated Morgan-Stanley Co., Inc. (MS). Key findings include:
- MS failed to manage conflicts of interest between research and investment banking divisions; and,
- MS failed to supervise senior research analysts, including the company's top telecom analyst, Mary Meeker.
MS will adopt all of the terms and provisions of the global resolution, pay a fine of $50 million, and contribute $75 million to an independent research fund.