Wall Street's chapter of shame and humiliation

  • Business
  • Wednesday, 30 Apr 2003


THE news that ten of Wall Street's biggest investment firms had agreed to pay US$1.4bil in penalties and restitution to settle charges by US regulators that their analysts regularly skewed their research to benefit a few privileged clients at the expense of smaller investors must be cold comfort to millions of individual investors who lost fortunes in relying on such tainted research. 

Of the money to be forked out, only US$387mil goes to restitution for investors who have been harmed, while US$432.5mil will be used to finance independent research and US$80mil to pay for investor education. 

It is also worth noting that none of the ten firms, which literally comprise a list of Who's Who in banking and investment in the US, had admitted to or denied any of the charges against them, although Citigroup did agree to a statement of “contrition.” 

The investigations showed that these Wall Street firms put the interests of individual investors right down the bottom of the list in their pursuit of investment banking fees. At firm after firm, analysts duped investors in order to curry favour with corporate clients, according to the prosecutors.  

The heaviest penalties in the settlement were meted out to Citigroup, which will pay fines and other costs totalling US$400mil, Credit Suisse First Boston (US$200mil) and Merrill Lynch (US$100mil). But many are probably justified in feeling that the payments are mere drops in the ocean for these mighty names and only slaps on the wrist for those who had perpetuated or condoned these acts of shame. 

SEC (Securities and Exchange Commission) Chairman William Donaldson (L), NASD (National Association of Securities Dealers) Chairman and CEO Robert Glauber (C) and New York Stock Exchange Chairman Richard Grasso listen to a question by a reporter during an SEC briefing to announce a $1.4 billion settlement against Wall Street investment banks, April 28, 2003 in Washington. Citigroup, Morgan Stanley and others had been charged with conflict of interest by the company's financial research analysts. REUTERS/Mike Theiler

Wall Street of course hopes that the settlement will finally close a chapter of abuses and downright fraud that has plagued the industry. Securities and Exchange Commission (SEC) chairman William Donaldson called the cases “an important milestone” in efforts to address “serious abuses that have taken place in our markets and to restore investor confidence and public trust by making sure these abuses don't happen again.” 

But New York Attorney General Eliot Spitzer has already warned this is not the end of the matter. “It is very much the beginning for those who acted improperly,” he said. 

Outraged investors who have lost the bulk of their life savings are entitled to claim their pound of flesh, and indeed the overwhelming amount of damning evidence collected over months of investigation may spur a barrage of civil suits by investors who feel they have been cheated of their money. 

Two men who were the poster boys for this period of greed and unethical conduct (how well I remember that famous line that the Michael Douglas character utters in the Oscar-winning film Wall Street: “Greed is good,” he proclaims proudly) have been penalised individually for this kind of indefensible behaviour, but again there is no admission of any wrongdoing on their part. 

Former high-flying analyst Jack Grubman, the telecommunications specialist for Citigroup's brokerage firm Salomon Smith Barney – the man who was once so powerful that his help was even sought in his chairman Sanford Weill's boardroom aspirations, and who blatantly hyped up telecom stocks such as Worldcom – will pay a fine of US$15mil on conflict-of-interest charges. 

The other is Merrill Lynch's infamous Internet expert Henry Blodget, who will pay US$4mil in penalty. Remember, this is the analyst who once described in his private e-mails that a stock he was publicly recommending was “a piece of shit.”  

The revelation is, frankly, shocking; this sort of conduct is more than professional dishonesty. It amounts to perpetuating a con game upon poor, unsuspecting investors.  

Both men have been spared the prospect of any criminal prosecution. To small investors who had been badly burnt in following their advice, their only consolation lies in the fact that these two have been barred from ever working in the securities industry again, whether as analyst, dealer or broker. 

One result of the settlement is that firewalls will now be erected between the investment banking and research divisions of the firms to prevent the conflict of interest so endemic in the past.  

Brokerages will also be banned from allocating to directors and executives preferred access to IPO shares of companies that they had courted as investment bankers. 

Jack Grubman

Not all US investors are convinced that the terms of the settlement will bring substantive change to Wall Street. Southern Methodist University professor of securities law Alan Bloomberg is quoted as saying: “I don't see this as a great reformation. I don't see this as a new world we are moving into. The pressures (to hype and encouraging people to buy) are still going to be there.” 

Some of these brokerages have been quick to decry Asia's lack of transparency and other shortcomings as a factor for getting out of our equity markets in recent years. We trust the finger wagging will cease now that the shoe is on the other foot. 

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