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Salomon Smith Barney Inc. bankers know “who,” “what” and “when,” and the answers are “no one,” “nothing” and “never.” Responding to criticism about the investment bank’s advisory role in Citigroup Inc.’s $1.9 billion acquisition of European American Bank, bankers familiar with the deal emphasized that no information was shared between the investment bank and its parent, Citigroup. Salomon advised Melville, N.Y.-based North Fork Bancorp Inc. in a rival bid for EAB. Salomon bankers, sources involved in the deal said, claim they followed all internal policies regarding conflicts of interest and had no knowledge that the investment bank’s sister subsidiary, Citibank, was set to swoop in on EAB. Nevertheless, the flap over Salomon’s role has magnified the inherent conflicts that exist between M&A advisory practices and the sometimes competing interests of the institutions that control them. Dealmakers and legal experts agree that while internal barriers may be in place to avoid conflicts, full-service financial services firms may lose the battle of appearances unless they provide some sort of disclosure to their clients. “When it happens like it did in EAB, you have to wonder,” said M. Patricia Oliver, a banking M&A attorney at Squire Sanders & Dempsey in Cleveland. “With the consolidation in the industry, this is an issue we have been seeing and will be seeing more of.” Indeed, the potential for apparent conflicts is not limited to commercial banks and investment banks joined by a merger. Goldman Sachs Group Inc., for instance, has no retail banking franchise, but it does have a huge private equity business — its latest fund has more than $5 billion invested — that could easily come into conflict with its M&A practice. David Head, co-head of the financial institutions M&A practice at Salomon, declined to comment specifically on the EAB transaction, but he did emphasize Salomon’s policy on potential conflicts. Those policies “ensure that confidentiality is maintained and our interests are completely aligned with those of our clients.” “On certain transactions, there may be many companies involved with whom we have a strong relationship,” he said. “But we are solely focused on the interests of the clients for whom we are working.” Still, such assurances don’t always protect bankers in conflict of interest cases. In one recent example, Germany’s Mannesmann AG sued the U.K.’s Vodafone Airtouch PLC in November 1999. The reason: Vodafone had hired Mannesmann’s former adviser, Goldman, to advise it on a hostile bid for Mannesmann. Though a judge threw the case out, a more recent example, involving Salomon’s work for North Fork Bank last year, shows there is more clarity developing in the law. In that case, a New York court barred Salomon from advising North Fork because it violated a confidentiality agreement in place between Salomon and North Fork’s target, Dime Bancorp Inc. In yet another example, last year analysts at Chase Manhattan Corp.-owned Chase H&Q issued a “buy” rating on Infospace Inc. Chase’s venture capital arm, meanwhile, was dumping the stock. Though the details of those examples differ, the underlying issue of appearance is common to all and the case of Citi-North Fork, which also was advised by Lehman Brothers Inc. “It’s an issue because of consolidation,” said Raymond Soifer, principal of Soifer Consulting, a Ridgewood, N.J.-based bank consulting firm. When M&A bankers pitch their services “it comes up if for no other reason than competitors will bring it up … that could be the difference in a close contest.” Soifer added that when he worked for Brown Brothers Harriman, he was careful to tell clients that he was independent of the bank at large. “My experience is that an institution will wall off bankers working on a transaction, and generally they succeed,” he said. Oliver agreed. Most bankers, he said, will “knock themselves out” to explain to clients that Chinese walls and confidentiality will be enforced. But Oliver, who works for KeyCorp, among other banks, said that sometimes disclosure isn’t enough. “Several of our community bank clients have gone so far as to refuse to deal with an investment bank owned by a bank because of their view that they are giving fees to a competitor,” Oliver said. In the EAB case, however, there seems to be agreement that there was little or no disclosure by Salomon to members of the North Fork team. And Salomon bankers are trying to make it clear: There was no disclosure because they had no knowledge Citibank was in the race, sources said. Furthermore, Salomon bankers say that despite allegations to the contrary, they never dropped out of the North Fork camp. Instead, they were told by North Fork CEO John A. Kanas that he was dropping the bid on the day the Citibank-EAB deal was announced, Feb. 13. Kanas did not return calls seeking comment. Citibank was advised by Mike Neborak, Citigroup’s deputy head of strategy and business development and represented by Andy Felner, Citigroup’s in-house counsel. Mark Davis, who manages $32 million in funds for the Banc Stock Group in Columbus, Ohio, said that he’s not surprised that Citi ended up on both sides of the deal. “People will do anything for fees,” he said. “What was probably so unforeseen is that Citi hasn’t been a bidder in years. Why would you tell a client that Citi might be interested? It would sound like a tip that they were.” Davis added that it probably would have made no difference had Salomon advised North Fork of Citi’s intentions. “There was no way North Fork would have outbid Citibank in that situation,” he said. “Even if they had been advised by God.” Related chart: Sibling rivalry Copyright (c)2001 TDD, LLC. All rights reserved.

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