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New York Attorney General Eliot Spitzer and the Securities and Exchange Commission Monday announced a settlement that will require 10 Wall Street firms to pay $1.4 billion and adopt reforms for issuing overly bullish stock research reports to win investment banking business. As part of the settlement, two former research analysts — telecommunications expert Jack Grubman of Citigroup’s Salomon Smith Barney and Internet expert Henry Blodget of Merrill Lynch & Co. — agreed to pay $15 million and $4 million, respectively, and be permanently barred from the securities industry. The $1.4 billion settlement amount is among the highest ever imposed by securities regulators, and Citigroup’s $400 million share of that settlement is the highest ever imposed on an individual firm. It follows a nearly two-year investigation started by Spitzer and later joined by the SEC and other state attorneys general. “The settlement finalized today implements far-reaching reforms that will radically change behavior on Wall Street,” Spitzer said at a news conference held Monday at SEC headquarters in Washington, D.C. “It is the fulfillment of a promise we made … to restore integrity to the marketplace, and just as important, to restore investor confidence in Wall Street.” SEC Chairman William H. Donaldson, who also spoke at the conference, said the action “brings to a close a period during which the once-respected research profession became nearly unrecognizable to earlier generations of investors and analysts.” Donaldson, a former chairman of the New York Stock Exchange and co-founder of the Wall Street investment bank Donaldson, Lufkin & Jenrette, said he was “profoundly saddened and angry about the conduct alleged in our complaints.” “When a firm publishes favorable research about a company without revealing to its customers that that research — far from being independent — was essentially bought and paid for by the issuer, we had no choice but to conclude that the research system was broken.” Adding to Citigroup’s $400 million, Merrill Lynch and Credit Suisse First Boston will each contribute $200 million toward the global settlement. The other firms — Bear, Stearns & Co. Inc.; Goldman, Sachs & Co.; Lehman Brothers Inc.; J.P. Morgan Securities Inc.; Morgan Stanley & Co. Inc.; UBS Warburg LLC; and U.S. Bancorp Piper Jaffray Inc. — will pay between $125 million and $32.5 million. About $387 million will go toward a fund to benefit customers of the firms. Another $387 million will be paid to the states. In addition, the firms will pay some $433 million to fund independent research and $80 million to promote investor education. The agreement finalizes a preliminary settlement announced in December. As is its practice, the SEC filed formal complaints Monday in Manhattan federal court against the firms and Blodget and Grubman, and outlined the terms of the settlement in court. In addition to the fines, the banks have agreed to create firewalls between their research and investment banking divisions, and no longer permit or require analysts to solicit banking business or base their compensation on banking revenues. Firms will also have to make public certain portions of their analyses within 90 days after each quarter ends to permit investors to compare the performance of analysts from different firms. An independent monitor will be assigned to each firm to ensure its compliance with the reforms. Firms will also be banned from “spinning,” or allocating portions of valuable shares of initial public offerings to executives of banking clients. Citigroup will adopt additional reforms that go beyond the global settlement. The chief executive of Smith Barney, Citigroup’s brokerage and research division, will report to separate committees of the parent board on the objectivity, independence and quality of its research. No Citigroup executive may be present at the meetings. The firm also has agreed to a public statement of contrition. However, Citigroup CEO Sanford Weill won an assurance that he will not be prosecuted. Weill came under scrutiny when an e-mail by Grubman was revealed stating that he had raised his rating of AT&T’s stock in exchange for Weill’s help in getting his children into an exclusive Manhattan nursery school. Grubman later recanted, saying he had lied to impress his colleague. Spitzer said the additional measures were warranted by Citigroup’s record of violations. “The provisions are necessary and appropriate and my office will be vigilant in ensuring full compliance by the company,” he said. NEW EVIDENCE At the news conference, Spitzer released a thick packet of new evidence, including internal company memos and e-mails, detailing the extent to which analysts devoted time and effort toward drumming up investment banking business. The evidence no doubt will be used by the scores of plaintiffs’ lawyers who have filed class action complaints alleging that conflicted analyst reports misled investors into buying overvalued stock. But Donald Langevoort, a professor at Georgetown University Law Center, said the new evidence may not help the plaintiffs’ cases that much. “Clearly, the settlement, no matter what words are used, is going to help plaintiffs make their case that there was a deliberate biasing of research,” he said. “But it probably won’t help on the issues of reliance and causation,” which he said was the hardest part of their case. “I don’t think this settlement should lead to any sense that the floodgates are now open,” he said.

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