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Wall Street's Research Bazaar

Some of the Street's leading investment banks were paying each other to write research on banking clients.

Some of the leading Wall Street investment banks were paying other banks to do research on their banking clients, and they should have told investors about it, the

Securities and Exchange Commission

said Monday.

The SEC alleged that the payments were related to public offerings and other transactions in which the investment banks acted as underwriters. That raises the question of whether the banks were contracting with each other for research that stimulated investor interest in their clients' offerings.

Investment banks including

Morgan Stanley

(MWD)

,

J.P. Morgan Chase

(JPM) - Get Report

,

Bear Stearns

(BSC)

,

UBS Warburg

(UBS) - Get Report

and

U.S. Bancorp Piper Jaffray

(USB) - Get Report

made or received payments running into the millions of dollars for research, the SEC alleged.

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Under federal securities laws, companies that issue research and have received compensation for it are required to disclose the fact that they were compensated and the amount of the compensation, said Antonia Chion, associate director at the SEC's enforcement division. And the

National Association of Securities Dealers

and other nongovernmental regulatory bodies require brokerages that pay others for their research to disclose that fact, she said.

As part of the settlement agreement, the companies charged with making or receiving payments for research related to underwriting transactions agreed to disclose such payments in the future.

The revelations about the paid research came as part of the

settlement agreement announced on Monday between the SEC and 10 investment banking houses. The investment banks agreed to pay $1.4 billion to settle allegations that they issued tainted and biased research to prop up stock prices in the late 1990s and early 2000s.

The practice of paying rivals for research and not disclosing those payments was a part of that flawed system, the SEC alleged.

Among the specific allegations were that between 1999 and 2001:

Morgan Stanley paid $2.7 million to 25 investment banks for "research guarantees" related to at least 12 stock offerings that it led. Included in that amount was $816,000 paid to seven banks in relation to the December 1999 public offering of Agile Software and $670,000 paid to three investment banks in connection with the public offering of Veritas Software that same month.

J.P. Morgan paid $1.3 million in seven different payments related to five banking transactions on which it was the lead or co-lead underwriter.

U.S. Bancorp Piper Jaffray received $1.8 million in part for issuing research reports. Among the payments Piper Jaffray received was $400,000 in relation to a debt offering by Just for Feet in June 1999, and $150,000 related to a stock offering by JDS Uniphase . Piper Jaffray also paid other rivals more than $400,000 to issue or continue research on its clients in relation to banking transactions it led.

UBS Warburg received more than $360,000 in payments for issuing research reports. The company also paid other companies more than $430,000 for research on its clients in relation to banking transactions it led.

Bear Stearns paid a rival $102,750 in relation to research coverage the rival issued on Andrx Corp. . Bear Stearns was the lead underwriter on an Andrx banking transaction in in May 2000.

The SEC did not give full details on the payments, such as whom the banks paid or whom they received money from.

Paying for research was not in itself illegal. But the practice did involve an inherent conflict of interest, said Ron Geffner, a former SEC enforcement official and an attorney with Sadis & Goldberg in New York.

On one side, the question is whether the investment banks who were issuing the research did so simply because they were paid by rivals for their research, Geffner said. On the other side, the question is whether the banks that paid for the research were doing so merely to drum up interest in their clients, he said.

Such conflicts of interest are not themselves illegal, Geffner said. But investment banks do have an obligation to disclose such conflicts, he said.

"This seems on its face to be a conflict that as an investor I would have liked to know," he said.

But Seth Taube, another former SEC enforcement official, said he disagreed with the government's interpretation of the law that investment banks needed to disclose the payments. Investment banks buy research from each other all the time, and there's nothing nefarious about it, he said.

The issue is not a matter of disclosure, said Taube, who serves as chairman of the securities litigation department at law firm McCarter & English. The issue is the nature of the payments themselves. If the payments were made simply to buy research -- a common practice -- investment banks wouldn't have any obligation to disclose them, he said.

The question is "whether brokerage firms were paying other investment banks money for inaccurate research reports, whether there was a scheme to defraud," Taube said. "I don't think that was the reality."