Updated from 2:01 p.m. EDT
At long last, the deal is done.
Regulators unveiled final terms today of a $1.4 billion settlement with 10 Wall Street firms stemming from last year's sweeping investigation into the securities industry and its use of tainted and biased research to pump up stock prices during the bull market.
One of the highlights of the deal includes a finding that
Credit Suisse First Boston
issued fraudulent research reports -- a legal conclusion that's tantamount to saying the Wall Street firms committed securities fraud. The three firms also paid the stiffest penalties in the deal for their alleged deception.
The other seven firms that signed on to the settlement were charged with a lesser sin: issuing stock research reports that "contained exaggerated or unwarranted claims."
(See a sidebar on incriminating internal emails.)
Of all the firms, Citigroup, which was investigated by New York Attorney General Eliot Spitzer, was singled out for the
harshest treatment .
The $400 million in fines and penalties Citigroup is paying is the most of any of firm. The settlement with Citigroup also goes further than the other agreements in requiring the nation's largest financial-services firm to issue "a public statement of contrition.'' It also imposes specific restrictions on contacts between top executives of the firm and its investment bankers and research analysts.
A copy of Citigroup's public apology was included with copies of the settlement agreement release by Spitzer's office. In that statement, the bank said: "We deeply regret that our past research, IPO and distribution practices raised concerns about the integrity of our company and we want to take this opportunity to publicly apologize to our clients, shareholders and employees.''
While not charged in the investigation, the documents filed by Spitzer paint a somewhat unsavory picture of Citigroup Chairman and Chief Executive Sanford Weill, particularly when it comes to Weill's attempts in 1999 to get Jack Grubman, the firm's former telecom analyst, to take a "fresh look'' at his then negative rating on shares of
Many of settlement details, however, have been known for quite some time, since regulators unveiled a tentative settlement back in December.
What's likely to pique the most interest is the flood of internal emails and confidential reports that regulators are releasing as part of the final agreements. Regulators are including private communications among dozens of investment bankers and analysts at other Wall Street firms as lengthy exhibits to support their allegations.
The emails, while not enough to justify the filing of fraud charges against all but two high-profile analysts, may be enough to help investors justify claims they were misled by Wall Street firms into buying stocks of companies that essentially were smoke and mirrors.
One example is an email from a Morgan Stanley executive to a top executive at Loudcloud, know called
, in which the investment firm seeks to be part of the company's upcoming initial public offering. In the email, the Morgan Stanley executive tells Marc Andreessen, chairman of the Iternet support services company, that he can "commit putting the entire franchise behind Loudcloud to achieve the best valuation and aftermarket performance, as well as unmatched strategic advice post-IPO.''
It's these and other emails, regulators contend, that show how Wall Street's drive for investment banking business caused it to tailor and slant its stock research and issue bullish reports -- even when such reports weren't warranted.
The deal also will include the imposition of big fines against two of the biggest stock touters of the bull market: former Citigroup telecom analyst Jack Grubman and former
Internet guru Henry Blodget. Grubman will pay a fine of $15 million, and Blodget will pay up to $4 million in fines and penalties. Both men neither admit nor deny any charges against them, and they will be banned from the securities industry.
Internet analyst Mary Meeker, on the other hand, won't face any charges. Still, the settlement reached with Morgan Stanley is expected to include some documents that may cast Meeker in an unfavorable light, sources say.
In fact, none of the 10 firms signing onto the deal will admit to any of the charges against them. That's customary in securities industry settlements.
Two firms that were part of the tentative agreement, Deutsche Bank and Thomas Weisel Partners, are not expected to be included in the final agreement. The investigations against them will be settled at a later date.
The deal also will include a number of structural changes that would put more walls between investment bankers and stock researchers and prohibit firms from doling shares in hot initial public offerings to corporate executives. It will also include a five-year plan that will require the participating Wall Street firms to make alternative research reports available to their customers.
The broad parameters of the deal, including the fines and penalties each firm will pay, were announced at a press conference in December. And subsequent details have emerged during the four months of final negotiations between regulators and lawyers for the securities industry.
Wall Street hopes that the settlement will finally put last year's investigations behind it, and that investors will start focusing again on the future. But that may be wishful thinking, because private litigation arising from the tainted research settlement could go on for years.
Indeed, the next problem for Wall Street won't be dealing with securities regulators but fighting off a wave of arbitration and class-action lawsuits brought by disgruntled customers.
Some say the final cost to Wall Street of resolving all the private litigation may make the $1.4 billion settlement look like chump change.