“In a pact that could change the face of Wall Street, 10 of the nation’s largest securities firms agreed to pay a record $1.4 billion to settle government charges involving abuse of investors during the stock-market bubble of the late 1990s,” writes Randall Smith in today’s Wall Street Journal.

“The long-awaited settlement, which followed an intense investigation that brought together three national regulatory bodies and a dozen state securities authorities, centers on civil charges that the Wall Street firms routinely issued overly optimistic stock research to investors in order to curry favor with corporate clients and win their lucrative investment-banking business. The pact also settles charges that at least two big firms, Citigroup Inc.’s Citigroup Global Markets unit, formerly Salomon Smith Barney, and Credit Suisse Group’s Credit Suisse First Boston, improperly doled out coveted shares in initial public offerings to corporate executives in a bid to win banking business from their companies.”

“Regulators unveiled dozens of previously undisclosed examples of financial analysts tailoring their research reports and stock ratings to win investment-banking business. They added up to a scathing critique that scorched all the firms involved. The boss of one star analyst, Internet expert Mary Meeker of Morgan Stanley, praised her for being ‘highly involved’ in the firm’s investment-banking business. An analyst at the UBS Warburg unit of UBS AG explained she soft-pedaled concerns about a drug because its developer was ‘a very important client.’ “

” ‘I am profoundly saddened — and angry — about the conduct that’s alleged in our complaints,’ said William Donaldson, chairman of the Securities and Exchange Commission. ‘There is absolutely no place for it in our marketplace and it cannot be tolerated.’ ”
“The penalties included lifetime bans from the securities business for two former star analysts, Jack Grubman of Salomon and Henry Blodget of Merrill Lynch & Co., who were charged with issuing fraudulent research reports and agreed to pay penalties of $15 million and $4 million, respectively. Both the firms and the individuals consented to the charges without admitting or denying wrongdoing. But the regulators vowed to pursue cases against analysts and their supervisors as far up the chain of command as possible.”

“Bowing to political pressure from Congress, the regulators, which also included the National Association of Securities Dealers, the New York Stock Exchange and state regulators led by New York’s Eliot Spitzer, also won a promise by the firms not to seek insurance repayment or tax deductions for $487.5 million of the settlement payments.”

“The agreement sets new rules that will force brokerage companies to make structural changes in the way they handle research. Analysts, for instance, will no longer be allowed to accompany investment bankers during sales pitches to clients. The pact also requires securities firms to have separate reporting and supervisory structures for their research and banking operations, and to tie analysts’ compensation to the quality and accuracy of their research, rather than how much investment-banking fees they help generate.”

“Moreover, stock research will be required to carry the equivalent of a ‘buyer beware’ notice. Securities firms, regulators said, must include on the first page of research reports a note making clear that the reports are produced by firms that do investment-banking business with the companies they cover. This, the firms must acknowledge, may affect the objectivity of the firms’ research.”