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The many extracts on these
pages are from copyright material. They are owned by the reference
given or its owner. They are reproduced here for educational purposes
and to stimulate public debate about the provision of health and aged
care. I consider this to be "fair use" in the common interest. They
should not be reproduced for commercial purposes. The material is
selective and I have not included denials and explanations. I am not
claiming that all of the allegations are true. The intention is to
show the general thrust of corporate practices as well as the nature
and extent of any allegations made.
The Settlement
and
The
Response
This page describes the investigators and
regulators, the negotiation process which resulted in a fraud
settlement, the nature of the fraud settlement and its inadequacies,
the inappropriate response of many of those involved, and finally
back to business.
CONTENTS
to
contents
The
Investigations
The investigations of the analyst and share
spinning frauds were triggered by the revelations when large
companies like Enron and WorldCom collapsed. They had been promoted
by analysts to the bitter end. Without these collapses no one would
have known. One can only speculate about the extent of the practices.
Most of the multinational financial institutions were involved. The
number of companies that resorted to fraud as a consequence of the
pressures generated by the analysts unrealistic reports is unknown.
The extent of the problem globally is unknown.
How
Similar to Health Care
The way these investigations were handled
gives an insight into the way systemic corporate misconduct is
managed when contrasted with misbehaviour by individuals and small
companies. We learn much more about the sort of processes which
allowed Tenet
(previously National Medical Enterprises) to survive the scandals of
the early 1990's only to offend again in the 21st century,
and Columbia/HCA
to resurrect itself as HCA. Vencor's
(now Kindred Healthcare) US $1.3 billion fraud was reduced to a US
$213 million fine to keep it in business. Smaller groups in contrast
are summarily punished and banned from Medicare. There is one law for
the rich and powerful and another for the rest.
It is possible to argue that the consequence
for the health system of crushing a company or even a whole health
care sector were so great that all parties fell over backwards to
minimise the impact. This justification obscures the fact that the
old boys network, lobbying and campaign donations all play a major
part in greasing the political wheels. The legislative response to
giant corporations' misdemeanours has seldom been much more than
tokenism.
Effective punishment and pressures to
addresses the underlying causes of the problem were effectively
blunted. Without real change to the competitive corporate health
marketplace the cycle of fraud and misuse of patients continues to
spiral upwards - to the extent of doing unnecessary and risky cardiac
surgery to boost profits.
to
contents
Similarities
on Wall Street
A very similar situation to that we saw in
health care existed on Wall Street. What mattered more than
retribution for the crimes committed or reform was the loss of
investor confidence, and the impact on the US economy. Market
ideology was seriously challenged and no one was ready to confront
this.
All parties were anxious to get the never
ending revelations off the front pages so that the market could "put
it behind them", investors could forget, and everyone could get back
to business. Banks angrily accused Mr Spitzer, the attorney general
of New York of allowing material to become public - the implication
being that all of the parties had agreed that the public be kept in
the dark.
This splat needs to be seen in the context of
the other 3 active participants in the fraud investigation. All were
dominated by corporate appointees who had to be driven to take
effective action. Making material public gave them no choice. It is
also obvious that the big corporations exploited this eagerness to
resolve the issues during the negotiations. Publicity made it more
difficult for them.
Sensible reflection on the past history of
the market shows that the frauds occurred because all this is exactly
what the market has done on many previous occasions. Without genuine
change it will do it again, perhaps in some other area. Wall Street
shows the same spiral into increasingly damaging and bizarre
practices that we saw in US health care.
to
contents
Political
Influence on the settlements
On other web pages I have documented the
political donations and intense lobbying undertaken by
Enron,
accountants
and financiers including Citigroup (donations
and
lobbying and more)
. Mr Levitt described the intense pressures
to which he was subjected by
congressmen and senators when as chairman of the SEC he proposed
tighter regulations and restrictions on unfettered market
activity.
Mr Spitzer, the US attorney general was
subjected to similar pressures and a personal attack when he targeted
the Wall Street financial giants. Efforts were even made to pass
legislation limiting state regulators right to prosecute securities
fraud. This would have killed off the only independent investigator
of the banks and left it to industry groups and their republican
allies.
Eliot L.
Spitzer, the New York attorney general, disclosed today that his
investigation of conflicts of interest among Wall Street research
analysts included a review of whether some analysts improperly or
fraudulently promoted shares of WorldCom.
Mr. Spitzer, who
has already secured a $100 million settlement from Merrill Lynch,
lashed back at Republican critics in Congress today, including
Representative Michael G. Oxley of Ohio, chairman of the Financial
Services Committee, and Representative Richard H. Baker of
Louisiana, chairman of the capital markets subcommittee, two of
the most powerful House members on Wall Street issues.
--------------------------------
He also condemned efforts by Wall Street lobbyists to persuade
lawmakers to adopt legislation that he said would "eviscerate the
ability of the states to prosecute securities fraud."
Later, Mr.
Spitzer added that Mr. Oxley "simply does not understand that
aggressive action is necessary" and that he "seems intent on
undercutting my efforts and those of other state regulators
seeking to enforce state laws to protect consumers."
---------------------------------
In statements issued this afternoon, both men attacked Mr. Spitzer
in personal terms. Mr. Baker called him a "failed investor" who
did not understand markets and was "making up his own rules about
how to protect all other investors." Mr. Oxley contended that Mr.
Spitzer's "actions also threaten to split our national markets in
a million pieces, so that every firm would have to reach
settlement with every attorney general."
------------------------------------
But one Republican, Senator John McCain of Arizona, strongly came
to Mr. Spitzer's defense.
"Anybody who
says you shouldn't have done what you did does not have the
interests of investors" at heart, Mr. McCain said at the Commerce
Committee hearing this morning.
-------------------------------------
Mr. McCain also told Mr. Spitzer he was confident a "majority of
U.S. senators" would oppose legislative efforts to curtail state
investigations into Wall Street.
TURMOIL AT WORLDCOM: WALL
STREET; Spitzer Says WorldCom Was Part of Investigation of
Analysts The New York Times June 27, 2002
A heavy handed disregard for the views and
interests of the public and even of their elected representatives is
not new. We have seen the unwillingness of government regulators to
crack down on giant health care corporations who stretch the limits.
Health and aged care chains play legal hard ball when regulators
accuse them of mistreating patients tying regulators up and wearing
them out.
This sort of behaviour was apparent with
Citibank as long ago as 1991. Big corporations capitalise on their
power and play hard ball to keep regulators at bay for as long as
possible. Citibank's response after the market scandals and
imprisonments of the 1980s is representative. It seems that Citibank
was in serious trouble at this time because of its international
lending policies and almost collapsed. The ruthless and deceptive
response to those the bank had once courted is reported on
another
page.
1991
Scarcely
three months ago, with Mr Milken finally in jail and the worst of
the S & L debacle apparently behind them, US prosecutors and
regulators were declaring an end to the crime wave that seemed to
grip America's financial markets in the late 1980s.
View From Manhattan:
More scandal is on the cards The Independent (London)
September 7, 1991
1991
Despite its
problems, regulators have not required Citibank to sign any formal
agreement on how it will run its business similar to
understandings regulators have reached at 518 other banks across
the country.
---------------------------
"Citicorp has at times taken advantage of its position as the
largest bank in the country to resist a lot of regulatory
pressure," said a former regulator - - - . Regulators, he said,
refrained from "taking public action that could cast an adverse
market perspective on Citicorp because they were afraid of causing
the very problems they wanted to avoid."
--------------------------
Today, the bank still has liquidity, but it has failed to
accumulate a strong capital base and is now the only one of the
nation's 25 largest banking companies not to meet the minimum
standard for shareholder capital to equal 4 percent of
risk-adjusted assets by the end of next year.
-----------------------------
"There is a double standard on the part of regulators, where they
refrain from open criticism of some of the biggest banks because
they worry about adverse consequences," said Michael Iovenko, a
partner at the New York law firm of Breed Abbott & Morgan and
a former bank regulator.
-------------------------------
In the case of Citicorp, regulators have not published any written
agreements, though it is known that they have prodded the company
for many years to increase its capital.
--------------------------------
After years of rejecting suggestions by regulators and banking
analysts that a stronger capital base is desirable, Citicorp's
chairman, John S. Reed, now says that "I know when I'm beat."
Citicorp: Too Big for
Public Dressing Down The New York Times November 4,
1991
To achieve
his goals, he (John Reed)- - - - - then sharply scaled
down, a once formidable corporate banking business that nearly
brought Citicorp to ruin in the early 1990's.
--------------------
He said his worst memories were of the real estate and
international lending fiascos that left the bank teetering on
collapse in the early 1990's. Reed
Announces Plans to Step Down as Co-Chief of Citigroup The New
York Times February 29, 2000
to
contents
Settling
the Allegations
Of interest is the manner in which the banks
behaved when they were accused and charged with exploiting the
vulnerability of those they claimed to serve.
The frauds exposed over the last 3 years are
really a continuum of the frauds and settlements of the last decade
of the 20th century extending into the 21st.
The web of fraud and antisocial practices was so wide that it is
sometimes difficult to know from the reports which settlement
addressed particular issues. There were a number of
settlements.
The Enron and WorldCom frauds were separate
entities for the bankruptcy courts, and for the prosecution of
company offenders. There were multiple other collapsed companies in
similar trouble but these two stand out because of their size, and
the number who were defrauded. Repeat offender, Arthur Andersen the
auditors for several of the companies were penalised separately and
went out of business.
The investment banks were integral to each of
these interlinked scandals. Their slimy fingers were busy greasing
all of these events in order to fill their own vaults with dollars.
Investors who believe that they have been defrauded now want those
dollars and are chasing after them.
There have been two mains areas of regulatory
action directly against the banks. The first action related to the
analysts and the share spinning. It ended as a cooperative endeavour
between the New York attorney general who led the charge, the US
Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD) and the New York Stock Exchange which
insisted on a rapid resolution. Only this settlement is examined on
this web page.
The second major fraud settlement involving
the banks was an investigation into the way the banks, but
particularly Citigroup and Morgan Chase, connived and assisted in the
Enron fraud using structured finance. This was also an example of a
wider problem where the banks had connived in corporate fraud with
large companies. This settlement is described on the Enron
page.
It has simply not been possible to track and
document all of the settlements surrounding bankruptcies in the USA
to see what the banks did in each - and much of the information may
not be publicly available. It is clear that WorldCom and Enron were
only representative parts of the wider problem.
to
contents
The
US $1.4 billion Fraud
Settlement
But the
regulators found fault with every major bank on Wall Street.
----------------------------
In settling the cases, the firms neither admitted nor denied the
allegations, following the standard practice in resolving such
disputes with the commission. WALL
STREET SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH
SETTLEMENT IN ANALYST INQUIRY The New York Times April 29,
2003
The US $1.4 billion settlement essentially
involved paying only about 7% of one years income and making some
changes designed to paper over the cracks that were exposed by the
system. Estimates of the total amount defrauded range as high as US
$7 trillion. Only two lesser individuals were penalised and no one
went to prison.
The agencies that negotiated this paltry
settlement made a show of being very critical of banking practices.
They boasted of the settlement and the new regulatory conditions
imposed. They claimed that the way that the companies operated would
be changed for ever. This duly made the headlines but more sober
reflection reveals a different picture. Particularly revealing are
the parties involved and the priorities that governed the
settlement.
to
contents
The
Regulators
Mr Spitzer, the New York attorney
general was a politician with ambitions and he was motivated to bring
these people to justice. He was publicly outspoken and very
active.
The SEC (US Securities and Exchange
Commissions) was a government appointed body responsible for
monitoring the market, investigating transgressions and taking
punitive action. Mr Harvey L. Pitt, chairman of the SEC had been an
aggressive critic of the previous chairman Mr Levitt.
Levitt
was a vocal opponent of corporate self regulation and a supporter of
transparency and oversight. Pitt acted for the accountants whose
activities Levitt wished to constrain.
President Bush's ideological orientation is
well illustrated by his appointment of Pitt to replace Levitt when he
became president. Pitt and Spitzer did not see eye to eye. Pitt's
position became untenable and he was replaced. President Bush
appointed William H. Donaldson a multimillionaire former investment
banker and former chairman of the New York Stock Exchange to replace
him and deal with the investment banking scandal. The SEC generally
brought up the rear and took some of the actions that resulted in
settlements.
With Harvey
L. Pitt, the current S.E.C. chairman, under heavy fire to resign
after a series of political gaffes, and his agency in disarray,
some investors are growing concerned that their desires for
additional overhaul are not being recognized in Washington.
Pipeline to a Point
Man The New York Times November 3,
2002
Levitt's
chief opponent in his battle against the accountants was a lawyer
named Harvey Pitt, who argued that the New Economy would benefit
from accountants doing more consulting. Pitt, appointed by George
W. Bush to be Levitt's successor, was recently forced to resign
his position at the S.E.C.
Buy Cheap, Sell Dear
The New York Times November 24, 2002
The NASD (National Association of
Securities Dealers ) was a regulatory industry body with wide powers
to investigate, fine and bar individuals from particular markets. It
kept records on individual analysts and registered them. It was the
one place where they could not plead the 5th Amendment and
refuse to testify.
The NASD had little choice but to act against
the individuals responsible by fining and banning a few analysts. The
fines were not large when compared with the annual earnings of these
analysts Unless those banned had been excessively extravagant they
would have enjoyed a luxurious retirement, particularly when compared
with many of the bankrupted retirees who suffered from their
actions.
It is a
violation of securities laws for an analyst to have two views on a
company, one for public consumption and one for private use. And
NASD rules forbid an analyst to maintain a rating or price target
on a company's shares that is not based on sound reasoning or that
overlooks evidence that could disprove the analyst's
argument.
Wall Street Star May
Face Suit By Regulators The New York Times January 4, 2003
Mr. Weiss
(lawyer) said he hoped the filing would bring attention to
what he called the inequities of the arbitration process at NASD,
which is run by securities firms and provides industry
oversight.
"The entire
arbitration scheme has not been addressing what has happened," Mr.
Weiss said about problems with the arbitration process, which he
says favors the investment firms over investors.
Salomon Arbitration
Cases The New York Times January 14, 2003
A hidden but powerful agent in the settlement
was the
New York Stock Exchange. Its
chairman Richard A. Grasso played a major part in arranging the
settlement.
Grasso was a rather controversial
figure himself. He seemed to have
little grasp of the social realities of what was happening.
Incredibly he proposed that Citigroup's Sandy Weill should join the
stock exchange's board. Weill's involvement with Grubman and with
Citigroup in the Enron scandal was front page news at the time. With
a friend like this it should be no surprise that Weill walked away
from the inquiry without penalty. Grasso too was deposed soon after
this.
A number of congressional committees
investigated, subpoenaed material, and interviewed those involved.
Large numbers of incriminating documents were obtained in this
way.
Also involved along the way were the
United States attorney's office, and the North American
Securities Administrators Association.
The bankruptcy court appointed a
special investigator who turned up more information. Standing in line
for time in court were the millions of investors who had been
defrauded. They were looking for many billions in
compensation.
In effect Spitzer was working and pushing
along three regulatory bodies which were largely staffed by the
market and responsible to it or to their political supporters. While
an aggressive public face was essential these groups would have a
natural tendency to be sympathetic to the bankers. After the
settlement Spitzer drove home the Levitt message.
Mr.
Spitzer attacked "an overarching effort to deregulate the
financial services industry over the last 20 years."
He said, "I
think we may now be paying the price for that deregulation," which
came amid reassurances from investment and commercial banks that
they could police themselves. Senators
Question Effectiveness of $1.4 Billion Settlement The New York
Times May 8, 2003
to
contents
The
Priorities
Behind all the rhetoric and putting pressure
on Spitzer was the desire to get this over with. Investors had
deserted the markets and the economy was suffering. The entire
marketplace and probably the government wanted to get this over as
soon as possible so that the marketplace, the heart of America could
get back to the business of wealth creation. The prospect of a
protracted process with ongoing headlines fuelling public distrust
was untenable. President Bush had an election in 2004 and these were
his supporters.
On the other hand if "investor confidence"
(read trust) was to be restored the settlement had to look credible
and it was essential that investors should see the system as changed.
The banks themselves realised this and had to give up any hope that
they could show that their practices were legal which they may have
been able to do. The issues were not so much legal as moral and
social.
But, in the
end, the urge to reach an agreement was overwhelming.
The $7
trillion in losses that investors have suffered since 2000
along with revelations that some research analysts had recommended
stocks while privately warning their big clients against them have
made small shareholders deeply suspicious that the markets are
rigged against them. That has not only made it difficult for
companies to raise the capital they need to expand but has also
become a huge drag on the American economy.
"Problems in the
stock market are having a very serious economic impact," said
David L. Roberts, senior international economist at Banc of
America Securities.
-----------------------------
In a worst-case possibility, regulators could have destroyed Wall
Street in order to save it -- insisting on trials that could have
ruined its credibility permanently.
-----------------------------
Although the firms were hardly anxious to agree to the terms,
which represented the biggest restructuring of their business
since at least 1975, when the New York Stock Exchange deregulated
commissions for stock trading, they understood that they needed to
make major changes to win investors' confidence.
--------------------------------
With the stock market remaining weak, securities industry
officials, regulators and -- finally -- Wall Street executives
realized that a settlement was needed to bolster investor
confidence. How Wall
Street Was Tamed The New York Times December 22, 2002,
In fairness
to the regulators, they had to take into account other
considerations in fashioning the settlement. Tougher action on the
nation's top investment firms could have dealt a terrible blow to
important institutions at a difficult time for the capital
markets.
Settling for Less
The New York Times December 27, 2002
The
agreement would help to bring an end to "one of the darkest
chapters in the history of modern finance," said Richard A.
Grasso, the chairman of the Big
Board.
Wall St. Deal Says Little
About Individuals The New York Times December 21, 2002
to
contents
The
Negotiations
These were negotiated settlements. How
appropriate is it that those who have raped society should be able to
negotiate their punishment? There is a very different law for the
high and mighty in the corporate world.
Spitzer a state attorney was taking on the
might of Wall Street, and those he had to work with to prosecute the
case were all from the competitive marketplace. Some were bankers and
colleagues of the accused.
The financial and banking conglomerates faced
a major challenge to their credibility and were threatened by very
costly actions for damages. The actual fine was less important than
the risks the wording of the settlement posed for costly litigation
from investors. Figures of US $10 to $30 billion in compensation have
been quoted, but it is not always clear whether the higher figures
include the Enron fraud.
There was intense haggling about the use of
the word fraud. Regulators insisted that the three largest culprits
accept this. Some banks claimed that they were not major participants
and should pay less. In addition some hoped that they could get their
insurers to pay some of the fine. This angered critics, insurers and
Mr Spitzer.
It is likely that there was a great deal of
denial in that the companies, initially at least did not believe that
they had done anything wrong - meaning illegal.
To begin with there were three regulatory
agencies and 10 banking corporations all acting independently and
trying to negotiate separate settlements with separate
agencies.
The changes which the banks would have to
make so that this would not happen again were negotiated. If these
seriously crippled the bank's commercial activities they would be
unacceptable, and would impact on the markets viability. The banks
argued this strongly.
One wonders if any other felons would have
regulators falling over backwards to accommodate them and their
individual agendas.
In
negotiations with Merrill Lynch's lawyers, Mr. Spitzer and his
staff demanded that Merrill split off its research department as a
separate unit. Officials at Merrill and other Wall Street firms
scoffed at the idea as naive, but Mr. Spitzer has not backed
down. Investor
Discontent The New York Times April 12, 2002
But the two
sides were having a hard time locking down the details of which
firm would pay how much and exactly which practices would be
banned and allowed.
---------------------------
After two months of intense negotiations, after hundreds of
meetings and conference calls between the regulators and the
firms, each side understood what the other wanted. "We had been
very fair in the process of looking at all of the concerns raised
by the firms," Ms. Schapiro said. "We were very much down in the
weeds, and it was time to bring it to the end."
---------------------------------
The negotiations were exhausting, said Barry R. Goldsmith,
executive vice president for enforcement at the NASD. Since
October, the firms held almost two dozen industry wide meetings
with regulators to discuss how to make research independent of
investment banking. Individual firms, meanwhile, held hundreds of
one-on-one meetings with regulators to negotiate the penalties
they would face for misleading reports they had released.
------------------------------------
But in early November, tension surfaced between Mr. Spitzer, whom
the industry resented for instigating the investigation, and the
banks. - - - - Theodore A. Levine, the top lawyer for UBS, accused
the regulators of leaking details of the talks.
---------------------------------
Regulators also wanted new restrictions on "spinning," the
practice of allocating shares of hot public offerings to corporate
executives at companies from which the banks hoped to win
business. Regulators viewed spinning as little more than legalized
bribery.
-----------------------------
The fight over how much each firm should pay threatened to derail
the talks.
--------------------------
Before that (Mr Grasso's intervention), negotiations had
not been coordinated; each regulator had presented each bank with
individual settlement terms.
How Wall Street Was
Tamed The New York Times December 22, 2002,
Now that the
biggest firms on Wall Street have agreed to pay $1.4 billion to
end investigations into the behavior of their stock analysts, some
are trying to get their insurance companies to write the
checks.
-----------------------------
Citigroup, which agreed to a $300 million fine and another $100
million in payments, is among the firms hoping to recover at least
part of its share of the settlement, the people said.
--------------------------------
Mr. Spitzer has made his position clear. "As a matter of public
policy, fines and penalties should not be recoverable from any
insurance policy," he said - - - .
Wall St. Firms Want
Insurers To Cover Fines The New York Times January 18, 2003
Indeed, they
(bankers) have spent the past four months negotiating every last
sentence in the findings to do what they can to limit their
liability. Still, despite having increased their legal reserves,
experts estimate that the cost to firms for settling government
and civil litigation could exceed $10 billion in the coming
years.
Analysts to Pay Millions
in Fines New York Times April 28, 2003
to
contents
Grasso Steps
in
The stock exchange was more alarmed than
anyone. This was the heart of the capitalist system and it was
bleeding as a result of investor distrust. The longer it dragged on
the worse it became. The marketplace did not want this in court nor
did they want multiple separate settlements detailing each of the
disturbing findings over and over again.
Richard Grasso, the chairman of the stock
exchange stepped in and summoned the regulators to meetings where
they hammered out a unified approach. He also put his strong arm on
the bankers who were holding out for more concessions.
The object was to restore confidence in the
market and get back to trading. This became an exercise in managing
distrust of the market, not in addressing its core
problems.
The stock market desperately wanted to "
put this behind us". That the history of corporate fraud shows
you can't solve these problems by putting them behind you was not a
consideration.
Instead of putting this behind them this
fraud needed to be kept right up front by all parties, but
particularly the companies and the public. It needed to be kept there
for as long as it took society to progressively bring the marketplace
back under control.
Richard A.
Grasso, the chairman of the New York Stock Exchange, was
determined to prevent that (going to trial) from
happening.
On Oct. 1, Mr.
Grasso mediated. He invited top officials from the S.E.C., the
NASD, the Big Board (stock exchange) and the New York
attorney general's office to a dinner at his club, Tiro a
Segno.
-----------------------------
Over dinner, the regulators reached a broad understanding about
their responsibilities and the goals of the inquiry. Mr. Pitt
agreed that the S.E.C. would not try to take over Mr. Spitzer's
investigation. In turn, Mr. Spitzer acknowledged that the S.E.C.
had the ultimate duty to oversee the structure of the securities
industry and that he would not try to usurp that role.
And all the
regulators agreed that their goal should be reform of the
industry, not penalties so punitive that they would permanently
damage Wall Street.
Over the next
month, two more dinners followed, which the regulators joked were
"the meetings of the four families." But given the complexity of
the investigations and the negotiations, having regular top-level
contact was very important, said Ms. Schapiro of the NASD.
-----------------------------
The most crucial meeting came in mid-October at S.E.C.
headquarters in Washington, when officials from the S.E.C. and Mr.
Spitzer's office first presented the outlines of an overall
settlement to the banks. "It was clear that they would listen,"
one regulator who was present at the meeting said. "It was also
important that we had all of them at once."
---------------------------
But Mr. Grasso felt that because almost every firm had engaged in
at least some of the practices under investigation, an overall
settlement would be the only way to clean the stain attached to
Wall Street. Though the Big Board was one of the regulatory
agencies doing the investigating, Mr. Grasso had the respect and
confidence of both sides, and he helped broker the
deal.
"Grasso really
represented a catalyst, to keep on emphasizing how important it
was as an industry to put this behind us," one person close to
the negotiations said. How
Wall Street Was Tamed The New York Times December 22, 2002,
to
contents
Turning on the
Pressure
Spitzer knew that the banks must settle and
dared not go to court. He probably also realised that he needed to
quit while he was on top and had the support of the other regulators
and of Grasso. He turned the pressure on and gave the banks an
ultimatum. They settled.
"The
regulators started putting enormous pressure on," said Mary L.
Schapiro, vice chairwoman of the NASD, in an account echoed by
several other people involved in the negotiations. "We had really
been through these issues many, many times. We felt this wasn't
going to get better as it got older."
--------------------------
The lawyers sat down. Without preamble, Mr. Spitzer launched into
a lecture. According to people present, he said negotiators were
tired of the waffling, the nitpicking. "Today's the day," he said.
"Sign up or we're going into law-enforcement mode."
In less than 20
minutes, the meeting was over. Demonstrating his intent, Mr.
Spitzer stalked out of his own office before his guests.
------------------------------
But by Wednesday, Mr. Grasso and regulators had applied so much
pressure to the second-tier firms that they gave in.
Then Mr. Spitzer
gave his speech, and on Thursday a frantic round of faxes and
negotiations ended with an agreement in principle.
"Ultimatums were
delivered -- bottom-line numbers," Mr. Goldsmith said. "It got to
a point where time was running out here -- either you're on board
or off board." How Wall
Street Was Tamed The New York Times December 22, 2002,
to
contents
The
Settlement
The new SEC chairman Donaldson made the
announcement about the fines and the agreements entered into making
much of their effectiveness. It was in the interests of the
marketplace for the settlement to be accepted and of the bankers to
show contrition and demonstrate that they were complying.
They could not pretend that the fine was
really a deterrent or that the punishment fitted the crime. Instead
they claimed that the way that the companies operated would be
changed for ever. This duly made the headlines. A more sober
reflection reveals a different picture and as they reflected on this
the press became more sceptical.
The changes if they can be enforced which is
questionable, may help to contain the particular fraudulent conduct
but it does nothing about the real problem - the wider problem of the
upward trend in corporate misconduct. Patching one hole in a rusty
bucket does not put an end to the problem of leaks. It will soon
break through somewhere else. That issue is definitely not on the
agenda.
THE FINES
(FINAL
REPORT April 2003) FINDINGS
Merrill Lynch, the Salomon Smith Barney unit of Citigroup and
Credit Suisse First Boston issued fraudulent research
reports.
Bear, Stearns;
First Boston; Goldman, Sachs; Lehman Bros.; Merrill Lynch; Piper
Jaffray; Salomon Smith Barney; and UBS Warburg issued research
reports with "exaggerated or unwarranted
claims."
First Boston and
Salomon Smith Barney engaged in "inappropriate spinning" of
hot new stocks. They sold shares to top corporate executives in
return for banking business from the executives' companies. The
executives could then sell the stock at a profit.
PENALTIES
Without admitting or denying the charges, the firms agreed to
pay $875 million in restitution and fines. About $387.5 million
will be available to repay investors who were harmed; the rest
will go to New York and other states that investigated the suspect
practices.
Investors who
receive restitution will still be able to pursue claims against
the securities firms.
The firms agreed
not to deduct the fines from their taxable incomes or ask their
insurance companies for
reimbursement.
WALL STREET SETTLEMENT:
MARKET PLACE; In Wall Street Hierarchy, Short Shrift To Little
Guy The New York Times April 29, 2003
The fines,
restitution and other penalties were divided as follows: $400
million will be paid by Citigroup; $200 million each by Credit
Suisse and Merrill Lynch (which includes an earlier Merrill
settlement of $100 million); $125 million by Morgan Stanley; $110
million by Goldman Sachs; $80 million each by Bear Stearns, J. P.
Morgan, Lehman, and UBS Warburg; and $32.5 million by Piper
Jaffray. WALL STREET
SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH SETTLEMENT IN
ANALYST INQUIRY The New York Times April 29, 2003
THE UNFOLDING
STORY
Dec
2002
The agreement is not final, but regulators were rushing
yesterday to prepare an announcement to put an encouraging cap on
a year fraught with corporate scandal.
The agreement
is a result of roughly five months of fractious negotiations
between the firms and securities regulators. It is intended to
force Wall Street to produce honest stock research and to protect
analysts from pressure within the firm to issue upbeat forecasts
to attract investment banking fees. Under the terms of the deal,
brokerage firms will also be barred from dispensing hot stocks to
top executives or directors of public companies.
-------------------------
In agreeing to the fines, the firms would neither admit nor
deny charges that they had misled investors.
CORPORATE CONDUCT:
THE OVERVIEW; WALL STREET FIRMS ARE READY TO PAY $1 BILLION IN
FINES The New York Times December 20,
2002
When
securities regulators announced a $1.4 billion settlement with the
10 biggest firms on Wall Street yesterday, they described a litany
of misconduct that had harmed investors, but they did not name
many names.
------------------------
The other (exception) was Mr. Grubman's former boss,
Sanford I. Weill, the billionaire chairman and chief executive of
Citigroup, the parent of Salomon. Alone among Wall Street
executives, Mr. Weill was cleared by the agreement that regulators
announced yesterday.
-----------------------------
That assurance was critical to Mr. Weill -- and to reaching a
tentative accord with the 10 firms -- because his conduct was a
subject of investigations by Mr. Spitzer's office and the
regulatory arm of NASD.
-------------------------------
Although the $1.4 billion represents only a fraction of the firms'
assets and an even smaller portion of the aggregate losses
investors suffered when the stock bubble burst in 2000, regulators
said it was enough punishment. Wall
St. Deal Says Little About Individuals The New York Times
December 21, 2002
April
2003
Ten financial groups including world number one Citigroup were
snared in the scandal, blamed for shattering investor confidence
and sending shockwaves around world financial markets.
---------------------------
World number one Citigroup's brokerage arm, Salomon Smith Barney,
took the heaviest blow with a record fine of $US150
million.
In related
actions, two star stock analysts during the 1990s market boom -
Citibank's Jack Grubman and Merrill Lynch's Henry Blodget - were
fined and barred for good from the industry.
----------------------------
If an analyst signed a research report supporting a stock while
privately admitting to doubts, "the only appropriate reaction is
outrage," Donaldson said.
-------------------------------
As part of the settlement, Credit Suisse First Boston (CSFB),
Merrill Lynch and Citigroup's brokerage unit were found to have
issued fraudulent stock research
reports.
'Biased' Wall St firms
fined $2.26bn Australian Financial Review April 29,
2003
Mr. Blodget
is expected to pay a $20 million fine and $2 million in
"disgorgement" - - - - - - Mr. Grubman will pay $15 million to
make his settlement with NASD without admitting or denying
wrongdoing.
The former
analysts (Blodget and Grubman) are the only individuals who
are expected to be part of the settlement into conflicts among
Wall Street stock research analysts. Analysts
to Pay Millions in Fines New York Times April 28, 2003
The
Securities and Exchange Commission, state prosecutors and market
regulators accused three firms in particular -- Citigroup's
Salomon Smith Barney, Merrill Lynch, and Credit Suisse First
Boston -- of fraud.
------------------------------
At firm after firm, according to prosecutors, analysts
wittingly duped investors to curry favor with corporate
clients.
---------------------------
"These cases reflect a sad chapter in the history of American
business -- a chapter in which those who reaped enormous benefits
based on the trust of investors profoundly betrayed that trust,"
said William H. Donaldson, the new chairman of the Securities
and Exchange Commission. "The cases also represent an important
new chapter in our ongoing efforts to restore investors' faith and
confidence in the fairness and integrity of our
markets."
WALL STREET
SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH SETTLEMENT IN
ANALYST INQUIRY The New York Times April 29, 2003
to
contents
The
Restrictions
In an attempt to promote the settlement
regulators trumpeted the restrictions placed on the companies.
Business would never be the same they claimed. In essence these
restrictions are artificial and tedious requiring people who work
together not to talk to each other.
The structures separating analysts and their
remuneration from bankers are contrived and their common interest in
making money for the company which employs them remain.
The changes rely heavily on compliance
officers and attempt to make them play a larger part in the firm. As
we have seen with analysts it is economic benefit which defines
status in the hierarchy. Compliance officers have limited direct
economic benefit.
While these changes, which require self
monitoring may have a short term impact the likelihood that they will
stand up to prolonged and intense competitive pressures is
questionable. With time, and regulatory tedium we can expect
employees to find ways around them, or to simply ignore them. The
restrictions address the problem of analysts' reports but not the
wider problem of corporate fraud. How for example do you stop large
banks from using their market power to buy the research they
want.
Instead of
discussing the paucity of punishment of people, the regulators
wanted to talk about the changes they are forcing on the firms and
their hopes that progress toward a settlement would help to bring
individual investors back into the financial markets. The firms,
including Merrill Lynch, Morgan Stanley and Goldman Sachs, have
agreed to limit interaction between their analysts and their
bankers and to buy stock research from independent companies and
distribute it to investors.
Wall St. Deal Says Little
About Individuals The New York Times December 21, 2002
In addition
to the settlement, new regulations to be announced today will
forever change how business is done on Wall Street, although many
firms have already instituted some of the new rules. Within firms,
for example, investment bankers and analysts must be physically
separated from one another and bankers will no longer be allowed
to have any influence over how research analysts are compensated.
Analysts to Pay Millions
in Fines New York Times April 28,
2003
As part of
sweeping overhaul of the rules:
- Wall Street
firms must separate research and banking
operations.
- Analysts'
compensation must be unrelated to investment banking
business.
- Analysts are
barred from soliciting investment banking business.
- Firms must
put a warning on all research reports indicating whether firms
do investment banking business with the companies they
cover.
- Brokerage
firms agree not to divert shares in lucrative initial public
offerings (IPOs) to clients in a position to give them
investment banking business.
- Firms must
disclose quarterly the price targets, ratings, and earnings per
share forecast in its research reports.
- The firms
agree to purchase independent, third-party research for their
customers over the next five years.
'Biased' Wall St firms fined
$2.26bn Australian Financial Review April 29,
2003
Moving
decisively to prevent bias in future research reports, the
regulatory settlement announced yesterday bars Sanford I. Weill,
chairman of Citigroup, and other senior officers from talking to
Citigroup's research analysts on investment banking matters
without a company lawyer present.
Citigroup's Chairman Is
Barred From Direct Talks With Analysts The New York Times
April 29, 2003
Brokerage
firms must also provide clients with competing independent
research and end the infamous practice, called "spinning," of
allotting hot initial public offering shares to favored clients.
Firms are already adopting many of these reforms to regain
investors' trust. Even experienced investors were shocked to
discover how widespread these practices were. The settlement
should be closely monitored to prevent their
reappearance.
Finding Fraud on Wall
Street The New York Times April 29, 2003
REFORMS
- Analysts'
pay will be based on research quality and accuracy. Firms must
post data on analysts' performance on their Web sites each
quarter.
- Securities
firms must disclose whether they do business with companies
they are analyzing.
- Citigroup
agrees to limits on contact between senior executives and
analysts.
WALL STREET SETTLEMENT:
MARKET PLACE; In Wall Street Hierarchy, Short Shrift To Little
Guy The New York Times April 29
"What they have imposed is a solution where they will try to
regulate behavior, ethics and business practices," said Scott
Cleland, the chief executive of Precursor Group and a member of a
coalition of small research firms without ties to investment banks
that have been seeking broader changes. "What they didn't do is
address the conflict at its source -- the commingling of trading,
research and banking commissions.
"The analogy
is that if this were an operating room, they disinfected
everything but the scalpel," Mr. Cleland said. "The scalpel is
left dirty." WALL
STREET SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH
SETTLEMENT IN ANALYST INQUIRY The New York Times April 29,
2003
The proposed
rule, to be issued by NASD, the nation's largest securities
regulator, is intended to force brokerage executives to make
compliance with securities laws and regulations as important a
business consideration as increasing market share.
---------------------------------
"There was clearly a breakdown in compliance at a number of firms,
and this is a way to refocus the attention of senior management on
compliance issues," said Mary L. Schapiro, president of NASD's
regulatory unit. "Signing on the dotted line and all the process
that is necessary to do that -- conversations with their
compliance officer, an in-depth review of what's happening in the
compliance office -- really focuses the attention on something
that is really important to the success of a firm."
If the rule goes
into effect, the chief executive and chief compliance officer of a
brokerage house would have to certify each year that the firm had
adequate compliance and supervisory policies in place. In that
way, the rule is similar to the requirement in the Sarbanes-Oxley
Act that chief executives of public companies certify each quarter
that financial statements are accurate.
------------------------------------
The proposed rule would also bring into the spotlight officials
who have typically operated behind the scenes at brokerage firms.
Compliance matters at many firms are typically handled by their
legal counsels. THE
MARKETS: Market Place; Accountability Is Focus of Rule Aimed at
Chiefs Of Wall Street The New York Times June 4, 2003
to
contents
Criticism of the
Settlement
The initial reports were guarded but some
more penetrating analyses followed. One article drew a telling
comparison between analyst fraud and internet fraud. The article
compared the settlement with fining fraudulent internet sellers 7% of
their annual income and then requiring them to voluntarily monitor
and certify that their research was sound.
There are criticisms about the failures to
address individual responsibility and character, and/or change
management.
Shortly after the final settlement senate
committees interviewed and attacked the regulators for their failure
to adequately penalise the banks. They did not do anything about the
flawed laws.
There is a
pervasive conflict, he said, that comes from focusing on the needs
of institutional clients while treating brokerage customers as
"the end point in a distribution chain of investment
products."
Mr. Pottruck
(David Pottruck, co-chief executive of Charles Schwab)
said, "Individual investors ought to have certain rights and a
system that serves their interests, that's invented around them,
that protects them, where they're at the center."
Investor Discontent
The New York Times April 12, 2002
"To an
extent, it's always individuals who are responsible for
wrongdoing," Mr. Bromberg (professor of securities law at
Southern Methodist University) said. "This sort of settlement
smooths that over so there's only corporate or institutional
responsibility, not individual responsibility."
CORPORATE CONDUCT: THE
OVERVIEW; WALL STREET FIRMS ARE READY TO PAY $1 BILLION IN
FINES The New York Times December 20, 2002
Article
by Lucian Bebchuk; Lucian Bebchuk is a professor at Harvard
Law School and a research associate of the National Bureau of
Economic Research.
------------------------------------------
One week ago regulators and the nation's top investment firms
announced what they described as a historic settlement. To
settle government claims that they misled investors, the country's
10 largest securities firms will pay $1.4 billion and will make
certain changes in how they operate. Industry regulators said the
settlement represents "the dawn of a new day on Wall Street"
and is a "vital step in restoring investor
confidence."
It might be more
accurate to regard the settlement, announced by federal, state and
industry regulators, as a slap on the wrist. By any standard
measure -- its punitive value, its deterrence effect or the extent
to which it will bring about structural change on Wall Street --
the settlement is rather modest.
------------------------
While more than $1.4 billion in fines and future payments is
hardly trivial, it is not large given what is at stake and the
potential gains to the firms from this type of misconduct.
---------------------------
The total cost of the settlement to Citigroup will be $400
million. Is this price steep enough to discourage thoughts of
similar misdeeds in the future? Hardly.
----------------------------------
Citigroup's investment banking unit, the unit has underwritten
$190 billion in the telecom sector alone since 1996, pocketing
hundreds of millions in underwriting fees. Moreover, according to
its 2001 annual report Citigroup made $4 billion from underwriting
fees in 2000 and 2001 -- 10 times the cost of its part of the
settlement.
---------------------------------
Perhaps the value of the settlement lies in neither its punitive
effect nor its deterrence value but in the structural changes it
will bring to Wall Street.
--------------------------------
The settlement does not permit the fate of analysts to be directly
determined by the investment banking unit. But the success and
compensation of analysts will continue to depend on the management
and decisions of the firm's top executives, for whom investment
banking fees remain an important source of profits.
There is strong
empirical evidence that analysts tend to issue more favorable
reports about companies with which their firms have an
underwriting relationship. There is little reason to expect that
the settlement will eliminate this pattern.
-----------------------------------
And perhaps there are no realistic structural reforms that would
work better than the moderate ones adopted.
Still, the
settlement is better characterized as "business as usual" than as
"the dawn of a new day." We should not exaggerate the extent
to which the settlement will restore investor confidence.
Settling for Less The
New York Times December 27, 2002
But
because greed is a part of human nature and human nature seldom
seems to change, Alan Bromberg, professor of securities law at
Southern Methodist University, remains skeptical that the terms of
the settlement will bring substantive change to Wall
Street.
"I don't see
this as a great reformation," Mr. Bromberg said. "I don't see this
as a new world we are moving into. The pressures are still going
to be there. Brokerage firms don't make money other than by
selling securities, so they're going to inevitably be encouraging
people to buy and will always have pressures to hype what they
think is good or what they're otherwise involved in."
WALL STREET SETTLEMENT:
MARKET PLACE; In Wall Street Hierarchy, Short Shrift To Little
Guy The New York Times April 29,
2003
For all the
anticipation of today's announcement, the voluminous record of
complaints and damaging evidence left many unresolved questions
for both investors and the securities industry.
Foremost among
those was what long-term impact the settlement will have on the
culture of Wall Street, the integrity of stock analysis
WALL STREET SETTLEMENT:
THE OVERVIEW; 10 WALL ST. FIRMS REACH SETTLEMENT IN ANALYST
INQUIRY The New York Times April 29, 2003
BYLINE:
By Richard Dooling; Richard Dooling's most recent novel, "Bet Your
Life," is about insurance fraud.
---------------------------
They won't talk to each other. Really.
Right. Imagine
the same remedies being imposed on the other purveyors of fraud in
the news last week: outfits that use the Internet to sell things
like penis enlargers.
-------------------------
What if, instead of threatening to send them to jail, the
authorities said: "O.K., hand over 7 percent of last year's
profits on that herbal Viagra. Then follow up with some structural
reforms. Make sure the people testing this stuff don't talk to the
people selling it." How would they react? How would we?
What is the real
difference between Henry Blodget, Merrill Lynch's Internet analyst
during the tech boom, and the guy who tries to entice me into the
latest e-mail scam?
-----------------------------
The central engine of fraud never changes: tell lies to gullible
people until they hand over their money.
------------------------------------
Investors like to believe not only that they're smart, but that
financial scandals are isolated blights confined to a single firm
or sector. Alas, the trove of evidence produced during this latest
inquiry points to systemic conflicts of interest in investment
trading, research and banking. The odor coming off these papers
suggests a system that is rotten to the core.
----------------------------
Restore investor confidence in Wall Street? Not likely for baby
boomers, who've already been publicly fleeced in broad daylight.
Wall Street will have to wait for another generation of innocents
to prey upon. A Fraud by
Any Other Name The New York Times May 4,
2003
Senior
United States senators questioned today whether the $1.4 billion
Wall Street settlement would change attitudes at the top of the
biggest brokerage firms, while regulators defended the agreement
as a historic move toward reform.
"Firms are
not contrite and simply consider the fines and penalties as a
means to make a problem go away," said Richard C. Shelby,
Republican of Alabama, at a Senate Banking Committee hearing on
the settlement that was made final last week with 10
firms.
"I am not
convinced that the global settlement has done enough to change
attitudes at the top of these banks," said Mr. Shelby, chairman of
the committee. Senators
Question Effectiveness of $1.4 Billion Settlement The New York
Times May 8, 2003
to
contents
De ja
vu
Going through another round of regulatory
change to patch the many holes that allowed the roaring tide of
rising marketisation to sweep through will not prevent it breaking
through somewhere else.
It happened
in the 1880s, again in 1929 and even more famously in 1987. After
every stock market party, the police arrive to pick through the
morning-after rubbish and find something ugly.
The great Mom and Pop
rip-off: The Guardian (London) June 1, 2001
The response by all responsible parties to
the repeated scandals over the years has been token fines, and then
to patch the hole which caused the immediate problem, before putting
it behind them and pretending it really did not happen or that we are
different now. The response this time is no different and once again
the senior managers of the companies with whom the buck should stop
go unscathed.
Alan
Bromberg, professor of securities law at Southern Methodist
University, said - - - - "I think it's poor business practice not
to have an even playing field," he said. "But I don't see any way
to effectively legislate an even playing field and that is the
problem."
Ebbers Got Million Shares
In Hot Deals The New York Times August 28, 2002
to
contents
Promising
More Prosecutions
Challenged by critics and heavily criiticised
in the senate regulators changed their tune and promised that this
settlement was only the first step in their efforts to weed out and
punish those responsible. Donaldson promised "This is just the
beginning." Spitzer said that executives were "fair game" for
regulators and in July it was announced that the head of Citigroup's
research department might be charged.
Nearly 8 months since the settlement those
who have not lapsed into an amnesic torpor are still waiting for any
further sign of regulatory activity. President Bush has supplied a
convenient distracter in Iraq.
Spitzer may have been willing. In fact a new
round of subpoenas looking for emails was sent to 12 of the Wall
Street institutions.
Ex-financier Donaldson and those at NASD
would have been reluctant about going after prominent colleagues and
friends like Weill and Carpenter from Citigroup. The stock exchange
would have strongly opposed this. They would insist on "putting it
behind them" in the overall interest of the market.
So far,
regulatory proceedings against analysts have not led to actions
against their superiors, the executives who ran Wall Street
research departments. But such cases may be forthcoming, according
to some regulators. Mr. Blodget and Mr. Grubman were not rogues;
their actions were subject to scrutiny by their superiors who had
a duty to ensure that they were abiding by securities
laws.
Wall Street Star May Face
Suit By Regulators The New York Times January 4,
2003
"This is
very much the beginning," said the New York attorney general,
Eliot Spitzer, whose early inquiry into conflicts on Wall Street
prompted federal and market regulators to begin focusing on the
issue -- and who supporters say might try to ride his success in
the case to the governor's office in Albany. "One of our
objectives was to put information into the marketplace to permit
investors on their own to seek relief."
--------------------------
Government officials also emphasized today that the settlements
did not preclude them from further investigation --
---------------------------
"Just wait," said Stephen M. Cutler, the head of enforcement at
the commission and a leading architect of the
agreement.
WALL STREET SETTLEMENT:
THE OVERVIEW; 10 WALL ST. FIRMS REACH SETTLEMENT IN ANALYST
INQUIRY The New York Times April 29,
2003
Mr. Shelby
compared huge investor losses with the relatively modest payout
and asked William H. Donaldson, - - - - whether the settlement
punished Wall Street enough.
Mr. Donaldson, -
- - -, pledged further inquiries of brokerage executives. He said,
"You cannot dismiss the fact that these are the largest fines that
have ever been given.
"This is not
the end," he said. "This is just the beginning."
----------------------------------
But no other individuals have been singled out despite
thousands of memos and e-mail messages released by investigators
showing managers deeply involved in an intertwining of research
and investment banking that compromised analysts'
work.
Senators Question
Effectiveness of $1.4 Billion Settlement The New York Times
May 8, 2003
Federal
securities regulators have demanded copies of e-mail messages and
other documents from 12 large Wall Street firms and dozens of
their managers, including current and former chief executives, as
they open a new phase of their investigation into stock
research.
--------------------------------
The demands come as regulators turn their attention to the
executives who were responsible for supervising the analysts who
rated the stocks. Having built cases against some firms by
compiling embarrassing e-mail messages written by analysts, the
regulators now want to see what those who were in charge of the
research and investment banking departments, and even the entire
companies, have to say about investment recommendations.
-----------------------------
Mr. Weill was among the Citigroup executives named in the
subpoena sent to that company, people who have been briefed on the
matter said yesterday. S.E.C.
Seeks Information On Analysts' Supervision The New York Times
June 3, 2003
The area of
supervisory failures is a subject of considerable concern among
regulators - - - - - -- none of the executives who oversaw the
analysts' work have been pursued.
It is highly
unusual for top executives of brokerage firms to be the subject of
regulatory actions. THE
MARKETS: Market Place; Accountability Is Focus of Rule Aimed at
Chiefs Of Wall Street The New York Times June 4, 2003
to
contents
Implications for
Investors
The major penalty for these financial
conglomerates may prove to be retribution by shareholders. This is
however not a forgone conclusion. While the morality and even
criminality of what was done is not in doubt, the legality is far
from clear. It remains to be seen how the judiciary responds if these
cases come to court which seems unlikely.
The financiers will want to stay out of court
because of the publicity. The quantum of damages will depend on their
eagerness to keep it out of court as well as legal opinion about the
likelihood of success. Estimates of banker's possible payouts in
settlement of the fraud range up to US $30 billion. A figure of US
$10 billion is suggested for Citigroup alone. No one asks how much of
this will be claimable from insurance. Citigroup has set aside US
$1.3 billion to meet these costs but litigation is likely to drag on
for years. One of the reasons given for the early out of court
settlement of regulators actions was so that litigants would be able
to secure compensation in their life times.
Some
analysts have predicted it could cost Citigroup $10 billion to
settle lawsuits arising from its work for Enron, WorldCom and
several other troubled telecommunications companies.
Salomon Talks To the
S.E.C. About Settling Conflict Cases The New York Times
September 28, 2002
Citigroup
set up a $1.3 billion legal reserve last quarter and Credit Suisse
First Boston, a unit of Credit Suisse, said on Tuesday that it had
set aside $450 million to cover the costs of litigation over its
stock research practices.
Merrill Shows Profit, But
Gloom Prevails The New York Times January 23,
2003
The claims
go beyond previous disclosures of the frenzied atmosphere at
Global Crossing before its financial collapse early last year, and
they set the stage for a legal battle expected to take years. The
suit also names as defendants several investment banks --
including Salomon Smith Barney, part of Citigroup -- that raised
money for Global Crossing and recommended its securities to their
clients. Adding to Claims
Against Global Crossing The New York
Times January 30, 2003
"The
arbitration cases between the banks and small investors will be a
war of attrition over the next five years," said Jacob H.
Zamansky, an arbitration lawyer based in New York who gained
notice by winning a $400,000 claim against Merrill Lynch in 2001.
He said that he was getting up to 20 e-mail messages a day from
individual investors eager to press suit now that new evidence on
analyst conflicts will be made
available.
Analysts to Pay
Millions in Fines New York Times April 28, 2003
This
unambiguous language (ie fraudulent), not the fines' dollar
amounts, may be the most significant outcome of the inquiry
undertaken by the New York attorney general, Eliot Spitzer, and
other regulators. Finding
Fraud on Wall Street The New York Times April 29, 2003
Federal and
state officials said today that one aim of the settlement was to
shake out enough strong evidence to assist shareholders in private
lawsuits and arbitration efforts.
WALL STREET
SETTLEMENT: THE OVERVIEW; 10 WALL ST. FIRMS REACH SETTLEMENT IN
ANALYST INQUIRY The New York Times April 29, 2003
Analysts
estimate that arbitration and other civil litigation cases will
eventually cost the big investment banks billions of dollars.
------------------------------
Still, by agreeing to settle with regulators this April, the banks
with a big network of individual customers, like Merrill and
Citigroup, have tacitly agreed to the claims made by regulators
that some of the research they issued during the boom was
fraudulent, even though they neither admitted to nor denied such
accusations. Legal
Reprieve For Wall Street Is Not Likely To Last Long The New
York Times July 4, 2003
to
contents
Corporate
Responses
Corporate Response to
The Enron Scandal
As we have seen elsewhere
the initial response to the allegations about the complicity of the
banks in the Enron fraud was indignation. The structured finance
practices were well established and had been carefully checked for
legality. It was not their legality but their amorality which was so
disturbing. These allegations were resolved separately and I have
addressed that on
another page. Only one quote is
included here.
Sanford I.
Weill, the chairman and chief executive of Citigroup, told
employees yesterday - - - - - in a letter that Citigroup's work
for Enron was legal and complied with accounting standards and
industry practices on Wall Street.
----------------------------------
Mr. Weill has not gone as far as senior executives of a rival, J.
P. Morgan Chase, who told investors and reporters on Wednesday
that their employees had done nothing wrong in helping Enron set
up complicated financing vehicles that kept large amounts of debt
off the company's balance sheet.
-------------------------------
"I feel badly and I truly regret the pain that has been caused,"
he (Weill) said in the letter. "From everything we know,
our activities with Enron were legal, met accounting standards,
and reflected industry practices -- and our people, relying on the
advice of independent legal and accounting experts, believed they
were doing the right thing."
Still, Citigroup
may conduct itself differently in the future because, Mr. Weill
said, "the industry's standards are changing rapidly."
"By today's new
standards," he added, "and with the benefit of hindsight, we will
evaluate client transactions in an entirely different light than
in the past."
Citigroup's Chief Defends
Enron Work To Employees The New York Times July 26, 2002
to
contents
World
Business Responds to Enron
The wider business community also preferred
not to confront the issue of Enron. At international business
meetings like the World Economic Forum of which Enron was a prominent
member, the matter was largely kept off the program and hardly
discussed in private. Even more worrying was the way in which the
issue was played down and the myopic level of denial about its
significance.
More than a
thousand corporate chief executives are gathered in New York for
the World Economic Forum, their voices ringing out in almost all
the panel discussions.
But in four
days of nonstop talking, the Enron scandal has hardly been
mentioned; when it has been, the emphasis has been on lax business
practices and how every recession brings down some big company,
rather than on the apparent fraud at the heart of Enron's
collapse.
Only one hastily
organized panel specifically dealt with the scandal, and its
principal speaker, Richard H. Murray, director of legal and
regulatory affairs at Deloitte & Touche, quickly set the tone.
Enron, he told a less-than-packed audience in one of the smallest
conference rooms, should not be viewed as a morality play -- there
are too many nuanced issues and no clear answers.
Gail D.
Fosler, chief economist at the Conference Board, argued that
"Enron happened as part of the change in corporate value systems
between 1989 and today."
----------------------------
"Enron is not important to us," Mr. McLean (the forum's chief
spokesman) said. "They are bankrupt."
-------------------------------
Many cited Enron as a symptom of the times, a point of view
offered by Stanley Fischer, the former second in command at the
International Monetary Fund who is now a vice chairman at
Citigroup. "Enron is something that happens at the end of a boom,"
he said in a panel on the economic outlook, "so I think we are in
for a period of slow growth."
--------------------------------
And in interviews, half a dozen chief executives, made less rather
than more of the scandal.
-------------------------------
"But I don't think they are drawing the conclusion that because
Enron failed, the system is flawed."
--------------------------------
"Someone raised the issue of corporate corruption," Mr. Sweeney
said, "and the consensus on the panel was that this was not an
issue of globalization."
ENRON'S MANY STRANDS:
THE BUZZ; World Economic Forum Plays Down the Scandal The New
York Times February 4, 2002
to
contents
Share
Spinning
Share spinning was something which had gone
on for years but had never been used to secure influence and support
quite so blatantly. Although it was included in the settlement
agreement companies did little more than promise to behave better
next time. It was not stopped.
Fraudulent
Market Reports
The fraud involving analysts was a rather
different issue. The analysts' professional values, and the
corporations' responsibilities were clear. The failure was one of
deliberately looking the other way. They simply did not want to know.
People like Grubman, and probably Weill rationalised their behaviour.
Others adopted strategies to ensure that they did not look, and that
those who did were ignored. Private emails show that many were
unhappy but wisely did not complain openly. Those who did soon found
themselves expendable.
to
contents
Denial and
Attacking the
Messenger
The first response to the allegations was one
of denial, claiming that this did not happen and that analyst and
corporate ethics were above reproach. Market supporters turned on
Spitzer, the messenger and attacked him alleging ulterior
motives.
Yesterday,
as Merrill was being granted another week to make court-ordered
changes to its stock reports, the industry's main trade group was
arguing against proposed reforms.
Stuart Kaswell,
general counsel of the Securities Industry Association, said the
group was preparing to weigh in against a proposed requirement
from securities regulators that analysts disclose details of any
banking relationships their employers had with the companies they
were rating. He said the requirement would be too costly and would
not help investors evaluate the research.
----------------------------------
Despite what Mr. Spitzer called "dramatic evidence" to the
contrary, Mr. Kaswell insisted that most analysts were unbiased
and that securities firms knew better than to risk compromising
the integrity of research to make more money.
Their research
is "the crown jewel of the brands of those firms," Mr. Kaswell
said. "It's just not credible to think that senior management
would tolerate an institutional pressuring of one of their major
franchises to get the next transaction."
Mr. Kaswell said
many people, including analysts, became too exuberant about stocks
in the late 90's. "That doesn't mean they were corrupt," he said.
"It means they were wrong. Being wrong isn't criminal."
Investor Discontent
The New York Times April 12, 2002
Reeling from
a contracting economy and a loss of faith in the stock markets,
many of the people who work on and around Wall Street see Mr.
Spitzer at the root of their troubles.
Many say his
investigations into Wall Street practices continue to harm an
industry that is already down and out, and accuse him of pursuing
the issue for his own political gains. And they are
angry.
Some said their
feelings were evident this week, for example, when Mayor Michael
R. Bloomberg, Gov. George E. Pataki and Rudolph W. Giuliani, the
former mayor, were among the political notables invited to the
gala 70th birthday party for Sanford I. Weill, the chairman of
Citigroup -- and Mr. Spitzer was not.
----------------------------
"Look I've seen this movie before," said Michael Holland, a former
Salomon Brothers partner and a fund manager at Holland &
Company. "Spitzer has obviously overreached. - - - - - - -- he saw
his opportunity and he took advantage of it."
----------------------------
In the Wall Street community, the animosity toward Mr. Spitzer is
hardly a secret. He made a name for himself by taking out of
mothballs the Martin Act, a 1921 state law giving the attorney
general jurisdiction over securities trading. With that, he took
on Merrill Lynch & Company, the nation's biggest brokerage
firm and a pillar of New York's financial community.
Spitzer Unpopular on
Street He Made His Beat The New York Times March 20, 2003
The unfolding evidence was quite clear and
there was soon much less room for public denial. Some preferred to
remain silent and keep their heads in the sand.
That those involved in the settlement did not
see it as altering the way business was going to be done in the
future is reflected in the large salary UBS Warburg paid to a new
Health Care analysts during the negotiations.
But even if
she is not giving all favorable reviews to companies under her
purview, her rich contract has caused a number of bankers to
suggest that the only way UBS Warburg could justify paying her
over $3 million a year is if she brings in a substantial amount of
investment banking business.
Conflict Issue Over
Analyst's Deal New York Times April 8, 2003
to
contents
Mea
Culpas
In other companies, senior staff like Weill
were more directly involved and threatened. Their interests were
better served by doing a mea culpa and promising changes. They rushed
to show willingness by putting the recommendations made by the
regulators into place before they were finally forced to do
so.
This is what Citigroup did and one wonders if
this enabled Weill to escape prosecution. In spite of his mea culpa
Weill still skirted around Citigroup's culpability by talking of the
"appearance of what we do". He subsequently replaced senior staff and
then resigned himself. None of this stopped each of the companies
from negotiating aggressively to minimise restrictions on their
business activities and reduce their liability to further civil
actions for damages.
Most Wall
Street firms and their executives, embarrassed by details in the
industrywide settlement on how they duped investors to keep their
corporate clients happy, have either kept quiet or issued
statements of contrition for the lapses that occurred during the
stock boom of the 1990's. THE
MARKETS: Market Place; Grabbing for a Patch of Moral High
Ground The New York Times April 30,
2003
While Wall
Street firms brace for more embarrassing details to come out, they
are already scrambling to put into force the stricter new
regulations, which will abruptly change the way investment bankers
and research analysts interact.
Research
officials at Wall Street firms say they are already changing their
pitch books ÷ the formal presentations that bankers show to
companies when they are bidding for a deal or a public offering.
While in the past these books would prominently mention the firm's
analyst, that will no longer be the case.
--------------------------------
For bankers and analysts used to spending weeks together on the
road pitching new deals, it will be a new and somewhat colder
world. Analysts to Pay
Millions in Fines New York Times April 28,
2003
In a
statement released yesterday, Mr. Weill apologized for past
business practices and announced that Sallie Krawcheck, the chief
executive of Smith Barney, which is now Citigroup's research and
brokerage arm, would meet privately with the Citigroup board's
compensation, audit and governance committees to review
compensation and budget issues for her research
division.
"Certain of our
activities did not reflect the way we believe business should be
done," Mr. Weill said. "That should never have been the case, and
I am sorry for that. I have been reminded myself of how the
appearance of what we do may be questioned and of how we must take
care to ensure that our conduct does not raise such questions."
Citigroup's Chairman Is
Barred From Direct Talks With Analysts The New York Times
April 29, 2003
to
contents
Blaming
the Investors
The response after the settlement was
predictable. Those senior staff who had kept their heads in the sand
attempted to deny their culpability, something they had undertaken
not to do. This brought a sharp reprimand from regulators. Some
companies took the "we were not as bad as the others" approach
claiming their infringements were minor. Others wisely remained
silent. Citigroup did make changes.
Instead of coming to terms with their
unsavoury conduct the blame was shifted to the poor defrauded
investors who should have known that investing on the stock market
carried risk. They should not expect compensation when their gamble
did not come off. Spitzers actions threatened the very nature of
capitalism.
Then there
is Philip J. Purcell, the chief executive of Morgan Stanley.
According to Mr. Purcell, Morgan Stanley and its clients should
not be disturbed by the firm's activities during the bubble.
----------------------------------
His remarks to a packed ballroom at the Pierre Hotel lasted about
15 minutes. Taking questions, Mr. Purcell appeared to
contradict directly the regulators' findings that Morgan Stanley
had failed to disclose to investors that it had paid $2.7 million
to other Wall Street firms to publish research on companies whose
shares Morgan Stanley had underwritten.
-----------------------------
Mr. Purcell's comments came as a surprise to Eliot Spitzer, the
New York attorney general, whose office investigated Morgan
Stanley. "We believe," he said, "that the allegations set forth in
the Morgan Stanley document establish a record that should deeply
trouble retail investors - - - - .
----------------------------------
"If a firm engages in denying the settlement terms, it's risky
business," said Christine Bruenn, president of the North American
Securities Administrators Association and one of the regulators
that investigated the Wall Street firms. "A firm who does deny the
settlement terms once they have settled risks the ire of the 50
states, the two self-regulatory organizations and a contempt order
from a federal judge." THE
MARKETS: Market Place; Grabbing for a Patch of Moral High
Ground The New York Times April 30,
2003
William H.
Donaldson, the commission (SEC) chairman, said in a letter
dated Wednesday that he was "deeply troubled" by comments from
Philip J. Purcell, the Morgan Stanley official, which he said
"evidence a troubling lack of contrition."
He warned that
Morgan Stanley could face further legal action if it continued to
deny having acted badly in the research scandal, which was the
subject of a $1.4 billion industry settlement.
----------------------------------
Before and after the settlement's details were announced, Morgan
Stanley sought to establish a public perception that it had
behaved better than other major investment banking firms, even
though it was required to pay $125 million in the settlement. At
the conference on Tuesday, Mr. Purcell argued that Morgan shares
were a good investment because "we have maintained our standards,
in market share as well as our reputation, in my view."
--------------------------------
But Mr. Purcell's statement, coming a day after his firm accepted
the settlement without admitting or denying the allegations, "was
deeply troubling." He added that the commission chairman's letter
"is an interesting example of backbone on the part of
Donaldson."
------------------------------
"First, your statements reflect a disturbing and misguided
perspective on Morgan Stanley's alleged misconduct," Mr. Donaldson
wrote. "The allegations in the commission's complaint against
Morgan Stanley are extremely serious".
---------------------------------
"In light of these charges," Mr. Donaldson continued, "your
reported comments evidence a troubling lack of contrition and lead
me to wonder about Morgan Stanley's commitment" to complying with
the law.
Mr. Donaldson
noted that the settlement required Morgan Stanley not to deny the
allegations, and added that that requirement applied to Mr.
Purcell.
MORGAN STANLEY DRAWS
S.E.C.'S IRE The New York Times May 2,
2003
Having won
the war -- or at least a major battle -- against Wall Street's
shoddy behavior, Mr. Spitzer, New York's attorney general, already
fears losing the peace.
One big reason
is a cynical revisionism taking hold in some Wall Street quarters.
The thesis is that investors have only themselves to blame for
their losses during the stock market, not duplicitous research.
The thesis further holds that little will change as a result of
the settlement's reforms.
Instead of just
taking a bow on Monday, as he deserved to do, Mr. Spitzer
counterattacked, singling out for special scorn an op-ed piece
written the previous week for The Wall Street Journal by Stanley
O'Neal, the chief executive of Merrill Lynch, one of three firms
that were charged with fraud. Mr. O'Neal argued that regulatory
attempts to remove risk from the marketplace threatened the very
nature of capitalism.
-----------------------------
Mr. O'Neal wrote that it was a disservice to the economy and to
investors to teach them that "if they lose money in the market
they're automatically entitled to be compensated." But, of course,
that is not the lesson Mr. Spitzer and the other regulators are
trying to teach. Their mission is to end conflicts of
interest.
Mr. O'Neal's
essay is only one of several signs that Wall Street remains in
deep denial about the degree to which it betrayed investors'
trust. On Tuesday, Philip Purcell, chief executive of Morgan
Stanley, insisted there was nothing improper about revelations
that his firm and others had paid one another to issue bullish
research reports on their investment-banking clients.
No less
cavalier was the New York Stock Exchange's recent nomination of
Sanford Weill, Citigroup's chairman, to join its board. - - - - --
but one is still left wondering where Richard Grasso, head of the
exchange, has been in the past year.
Investors should
keep a wary eye on this self-denial and lack of contrition. It may
suggest that the revisionists are on to something when they say
that nothing will change on Wall Street.
Wall Street
Revisionism The New York Times May 1, 2003
to
contents
Spitzer won the Battle
but lost the War
The next step was to portray those who had
imposed the restrictions in a negative light and claim that they were
a threat to marketplace democracy, which was seen as a higher
goal.
As far as the stock exchange and the
companies went they wanted as little interference with business
activities as possible. They wanted to get back to business. The
words used were to "put this behind us" which really meant to get it
out of sight so that everyone would forget about it. Some reports
considered that Spitzer had won the battle but lost the
war.
A Citigroup
statement said, "We are pleased that today's announcement of a
settlement-in-principle will put these regulatory matters behind
us." Wall St.
Deal Says Little About Individuals The New York Times December
21, 2002
Just as
efforts to close tax loopholes spur financial wizards to devise
strategies to test the law's limits, so the experts in structured
finance are driven to devise new strategies to find legal ways to
buff, if not distort, the performance of underachieving
corporations.
"They are just
redefining the equation," Michael H. Sutton, a former chief
accountant with the Securities and Exchange Commission, said of
recent reform efforts. "That's not going to stop the pressure to
structure transactions that meet the requirements of the new
rules." A Higher Standard
for Corporate Advice The New York Times December 23, 2002
"Firms
are not contrite and simply consider the fines and penalties as a
means to make a problem go away," said Richard C. Shelby,
Republican of Alabama, at a Senate Banking Committee hearing on
the settlement that was made final last week with 10 firms.
Senators Question
Effectiveness of $1.4 Billion Settlement The New York Times
May 8, 2003
There is,
alas, only one Eliot Spitzer. And while you want to stand up and
cheer when Mr. Spitzer, New York's attorney general, wins another
round against malefactors of great wealth, his side -- our
side, unless you happen to be a corporate insider -- is losing the
war.
-----------------------
This (US $1.4 billion) was, however, a mere slap on the
wrist. And it's increasingly obvious that neither the investment
bankers nor corporate evildoers in general are feeling
chastened.
Indeed, last
week Stanley O'Neal, the chief executive of Merrill Lynch, wrote
an op-ed article caricaturing the likes of Mr. Spitzer -- though
without naming him -- as enemies of capitalism who teach investors
that "if they lose money in the market they're automatically
entitled to be compensated."
-------------------------
But it's
revealing that Mr. O'Neal felt empowered to write that piece in
the first place. Like the New York Stock Exchange, which tried to
appoint Citigroup's Sanford Weill to its board -- Mr. Weill is now
forbidden to talk to his own company's analysts unless a lawyer is
present -- Mr. O'Neal overreached. But he clearly knows which
way the wind is blowing.
--------------------------
Last summer it seemed, briefly, as if the torrent of scandals --
and the revelations about how closely some of our politicians were
tied to scandal-ridden companies -- would bring about a public
backlash against corporate malfeasance. But then the topic largely
vanished from the news, driven out by reports about Iraq's nuclear
weapons program and all that. And after the midterm elections,
which put apologists for corporate insiders back in control of all
the relevant Congressional committees, we might as well have had
the sirens sound the all-clear. Only Mr. Spitzer still has both
the inclination and the power to make trouble.
-----------------------------
In the end the corruption of our corporate system will bring
retribution; - - - - - . But right now the bad guys, though
they lose an occasional battle, are winning the war.
The Acid Test The New
York Times May 2, 2003
The reason that Spitzer lost the war was that
while he was fighting and winning some victories in the battles in
the courts the financiers were quietly winning their own important
battles and these were hidden from view.
But Mr.
Lewis of the Center for Public Integrity said: "Millions of
Americans have lost their nest eggs or seen their retirement
savings diminished, and we're getting political rhetoric from
Washington that it's a few bad apples. The idea that after all
this Washington did a collective yawn is nothing short of
offensive. The only people they seem to be talking to are the
people who funnel the money to their campaigns or who don't want
to be regulated."
Few groups
funnel more money to Washington than the financial services
industry. From July 2001 to July 2002, the most recent period for
which figures are available, 10 large brokerage firms and two
securities industry lobbying organizations spent $31 million
pleading their cases before Congress, the White House and many
Washington agencies.
-----------------------------------
J. P. Morgan Chase spent $6.4 million on lobbying during the
period, and Citigroup and its brokerage unit, Salomon Smith
Barney, spent $6 million. Corporate governance issues like
executive compensation, stock options and auditor independence
were on Citigroup's agenda, according to its
filings. Pipeline to a
Point Man The New York Times November 3, 2002
to
contents
Failures
in Comprehension
In the midst of the exposure of its practices
and an outcry about Blodget's dishonest reports Merrill Lynch brought
Blodget's retired boss out of retirement to run the company's
flagging research department.
Since the
firm plucked Andrew J. Melnick out of retirement early last year
to help run its research department, Goldman Sachs's rankings in
research polls have declined.
----------------------------------
Regulators are now examining whether Mr. Melnick -- who ran
Merrill's research department from 1997 through 2001 -- and other
top Wall Street executives failed to supervise their analysts.
They have issued subpoenas to Merrill, Goldman and other firms,
seeking e-mail messages and documents from 1999 through 2001. The
deadline for filing these documents was yesterday.
During the
period in question, Mr. Melnick hired, supervised and helped to
determine the compensation of Mr. Blodget and Phua K. Young, who
was accused by NASD, the securities industry regulator, last month
of issuing misleading research reports on Tyco International and
exchanging gifts with L. Dennis Kozlowski, the company's chief
executive at the time.
------------------------------------
"What were they thinking?" asked Michael Holland, an investment
manager and a former Salomon Brothers partner. "At the most
optimistic, one can describe the hiring of Mr. Melnick as a pretty
aggressive move given the highly charged political atmosphere that
existed both then and now."
---------------------------------
Mr. Melnick did not come cheap: several people with an
understanding of his compensation package say that Goldman agreed
to pay Mr. Melnick more than $5 million a year.
Leader of Goldman's Stock
Research Has Rough First Year The New York Times June 21, 2003
to
contents
Citigroup
Makes Changes
Weill was given a nasty shock. Citigroup had
the most stringent conditions applied and in fairness to Weill he
responded. Very early on he accepted that Citigroup's conduct had
been unacceptable and while he did not admit liability he promised to
change. He probably had little choice. Salomon Smith Barney's
tarnished name was changed to Citigroup Global Markets. Its
interesting that he started recording stock options differently in
accounts. Weill and Reed had earlier been on a business
round table committee which scuppered
government plans for reforming options in this way.
Weill fired seniors staff and many analysts
and then retired himself. The problem is that he appointed his own
supporters to replace him people from the firm whom he had groomed.
They were likely to continue the same stressful management practices
which fueled the fraud.
Under the agreements firms had undertaken to
buy independent research. Analysts in the firm had become an
expensive liability rather than an asset and a downgrade was
inevitable. The culling of analysts should be seen as a business
decision as much as a response to the regulations. Their private
emails were a threat to the company. Teams were employed to screen
all personal email and transgressions were an excuse for firing more
staff.
Weill resigned from the other boards he was
on including AT&T where his conflicts of interest had created
problems as revealed in the Grubman affair. This may simply have been
good public relations because Weill, nearly 70 was going to retire
anyway. He knew that Spitzer had him in his sights and was doing
everything he could to show he was making changes.
It is my thesis that it is the context to
which people respond which is the problem rather than the people
themselves. If this is true then simply changing faces and
regulations will not work. If these new people don't find ways around
the system in order to be meet competitive objectives then they will
be replaced by someone who will.
It is interesting that Mr Weill's successor,
CHARLES O. PRINCE III is also an expert acquirer, a lawyer whose
life's work has been arranging Weill's deals and putting out the
fires resulting from his focus on outcomes and neglect of what was
happening in the company. It will be interesting to see whether he
can run a company which does not do these unsavoury things but still
remains competitive over the long term. My assessment of this
marketplace is that like health care where there are similar
conflicts it simply can't be done. He will be pushed when profits
fall.
In health care we are familiar with
protestations and commitments to reform. Tenet Healthcare and its
management was
particularly profuse in its public commitment
to ethics and reform, yet 5 years later it responded to market
pressures and reverted to type - even carrying out unnecessary
surgery. Like Salomon Smith Barnety (now renamed Citigroup Global
Markets to escape its past ) National Medical Enterprises changed its
name to Tenet Healthcare and replaced senior management with like
minded successors. One wonders whether Citigroup will be any
different.
The chief
executive of Citigroup, taking the offensive after weeks of
negative publicity regarding the company's role in financing Enron
and WorldCom, outlined to employees yesterday several changes in
the way it does business.
In a memorandum
circulated within Citigroup, Sanford I. Weill said the bank would
no longer provide financing for companies that plan to conceal
debts by keeping them off their balance sheets. - - - - - Mr.
Weill also said that Citigroup planned to join a growing list of
corporations that would begin recording stock options granted to
employees as expenses. The accounting change will take effect next
year.
In addition,
Citigroup's board will set up a committee that will focus on
corporate governance issues. All the members of the committee will
be independent directors, Mr. Weill
said.
--------------------------
"Starting
immediately, we will only do these transactions for clients that
agree to make prompt disclosure," Mr. Weill said.
Citigroup has previously maintained that it was not responsible
for Enron's attempts to hide its debts because Enron did not tell
its bankers that it planned to hide the obligations.
---------------------------
"Investors have made it clear that they want options accounted for
in this manner, and we at Citigroup continue to place a high
priority on our responsibilities to shareholders," Mr. Weill said
in the memo. Citigroup
Chief Makes Changes In How BankDoes Business The New York
Times August 8, 2002
"Our board's unanimous decision to create a distinct committee to
address corporate governance issues reflects our wholehearted
dedication to maintaining best-practice standards," said
Citigroup's chief executive, Sanford I. Weill.
Citigroup Turns to a
Panel The New York Times September 19,
2002
Mr. Prince
said he felt up to running Salomon. "Sandy is the premier deal
maker, and I was one of a handful of people who worked with him on
every deal Citigroup has done," he said. "I know what doing a deal
means."
Mr. Fix-It for the
House of Salomon The New York Times September 29, 2002
By resigning
from the two boards, Mr. Weill ends a practice at Citigroup known
as interlocking directorships, where corporate executives serve on
each others' boards. The practice is frowned upon by specialists
in corporate governance issues, because it creates the potential
for conflicts of interest.
-------------------------------
Corporate
governance specialists said Mr. Weill's resignation from the
boards was a positive step. "This is designed to increase his
credibility with investors at a time when he needs that support,"
said Charles M. Elson, the director of the Center for Corporate
Governance at the University of Delaware. "Regardless of the
motivation, this is welcome news." 2
Outside Ties Cut by Chief Of Citigroup The New York Times
October 2, 2002
Citigroup
said yesterday that it had hired Sallie L. Krawcheck, the chief
executive of Sanford C. Bernstein, to lead a separate division for
its stock research and brokerage businesses, even before it has
reached a agreement with regulators on how its analysts will
operate.
The announcement
is the latest in a series of appointments and other steps taken by
the chief executive of Citigroup, Sanford I. Weill, over the last
few weeks that demonstrate his determination to quickly resolve
the multiple investigations into its investment bank, Salomon
Smith Barney. Citigroup
Picks A Former Star Of ResearchFor a New Unit The New York
Times October 31, 2002
In a
statement, Weill said, "Certain of our activities did not reflect
the way we believe business should be done. That should never have
been the case, and I am sorry for
that."
Citigroup CEO Barred From
Talking To Bloomberg News (http://www.yourlawyer.com)
May 5, 2003
Two of
Citigroup's most senior investment bankers, Robert K. DiFazio and
Arthur D. Hyde III, have been removed from their positions, the
company said yesterday, hinting at what might be a fresh round of
high-level management changes amid a barren deal-making
environment and increased levels of regulatory scrutiny.
-----------------------------
" - - - - this change in leadership reflects a new strategic
direction for this business," Charles O. Prince (Weill's
man), the head of Citigroup's investment bank, said in an
internal memorandum sent to employees.
-------------------------------------
The fact that Mr. Rubin, formerly a co-chairman at Goldman Sachs,
has been examining the inner workings of Citigroup's
investment-banking operations suggests that Mr. Weill is serious
about making changes at the equities division.
The departures
of Mr. Hyde and Mr. DiFazio follow other senior executive moves
that started last fall. Michael A. Carpenter, the head of
corporate investment banking, was removed from his position and
was succeeded by Mr. Prince, a trusted confidant of Mr. Weill.
John Hoffman and Kevin J. McCaffrey, the two research officials
who supervised Jack B. Grubman, the bank's former star
telecommunications analyst who has been barred from the securities
business for life, have also left the firm.
Citigroup Ousts 2 Top
Investment Bankers The New York Times May 9, 2003
Citigroup
dismissed eight research analysts yesterday and temporarily
withdrew coverage of 117 companies, signaling a fresh initiative
by Sallie L. Krawcheck and her research team to reduce
costs.
The cutbacks are
the first to affect Citigroup's research operations in the United
States since Ms. Krawcheck became chief executive of its Smith
Barney unit last October. Other firms, including Goldman Sachs and
Merrill Lynch, have made significant cuts in their research staffs
this year, as weakness in trading persists and new regulations
make research a more costly proposition.
---------------------------------
Under this new regulatory regime, senior analysts with
compensation packages set during the 1990's boom have become
expendable, bankers and research officials say.
------------------------------
For Ms. Krawcheck, as for other executives on the Street, the
challenge is to shrink a research bureaucracy that was largely
designed to support Citigroup's investment banking and recast it
to serve institutional and retail clients. Trading commissions
from these sources are on the wane, though, making her charge all
the more difficult.
8 Analysts Are Dismissed
By Citigroup The New York Times May 24,
2003
The
departing analysts assessed businesses ranging from oil to
software to securities to airlines. In all, Smith Barney has at
least temporarily discontinued coverage of close to 250 companies
-- leaving a big gap with regard to a number of important
industries.
---------------------------------
She has also been given a mandate by Mr. Weill to create a new
type of research, independent of investment banking concerns, and
to banish the ghost of Jack B. Grubman, the former
telecommunications analyst for Smith Barney who has been barred
from the securities industry.
-----------------------
Smith Barney analysts have another pressing concern, though: They
are afraid of losing their jobs. This fear only increased after
the cutbacks in May.
Changed Smith Barney Is
Thin on Analysts The New York Times June 13,
2003
But
according to Smith Barney analysts familiar with the
circumstances, Mr. Santangelo had sent an advance copy of a
research report to a client.
----------------------------
The e-mail message that cost Mr. Santangelo his job was sent late
one night in April, the Smith Barney analysts said, while he was
alone in his office.
-------------------------
Smith Barney has set up a team of former analysts to monitor the
department's outgoing e-mail, in addition to performing other
supervisory duties.
------------------------------------
And so it goes for research analysts in the post-bubble world.
Once lionized on CNBC, celebrated on the covers of glossy
magazines and in many ways considered the public face of their
firms during the market boom, analysts are increasingly seen by
their employers as liabilities. Wall
Street's Harsh New Reality The New York Times August 17, 2003
to
contents
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