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. Last Updated: 07/27/2016

Brokerages Agree to Pay $1.4Bln Fine

NEW YORK -- It won't be business as usual on Wall Street, officials at the biggest U.S. brokerage firms vow.

Hoping to restore investors' shattered trust, 10 firms -- including Citigroup, Goldman Sachs and Credit Suisse First Boston -- said Friday they would change business practices and pay $1.44 billion to settle allegations they misled investors by hyping certain stocks.

But it is unclear how much the settlement -- one of the largest ever won by regulators -- will do to compensate investors for losses, punish individual executives and analysts, and bring closure to a year of market scandals.

"Every investor knows that the market involves risk," New York Attorney General Eliot Spitzer told a news conference Friday at the New York Stock Exchange. "Nobody expects a guaranteed profit. But what every investor expects and deserves is honest investment advice -- advice and analysis that is untainted by conflicts of interest."

The firms allegedly misled investors by inflating stock ratings to help their firms win investment banking business. The case drew widespread attention when authorities uncovered e-mails in which analysts privately derided stocks they were touting to the public and helped lead to the current crisis of confidence on Wall Street.

The settlement negotiated by Spitzer's office, the Securities and Exchange Commission and other regulators calls for 10 firms to pay millions in fines, sever the links between research and investment banking and fund independent stock research for investors.

In agreeing to the fines, the firms would neither admit nor deny charges they had misled investors.

Citigroup's Salomon Smith Barney brokerage unit will pay the heaviest fine: $300 million. But Citigroup CEO Sanford Weill won a guarantee he would not be prosecuted.

Credit Suisse will pay $150 million. Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Morgan Stanley, Lehman Brothers, Deutsche Bank and UBS Warburg will each pay $50 million, according to a joint statement by regulators.

In May, Merrill Lynch, the nation's largest brokerage firm, agreed to a settlement that included a $100 million fine and the separation of its analysts from investment banking.

In addition to the $900 million in fines, the firms also will pay $450 million over five years for independent research and $85 million for a nationwide investor education program.

Richard Grasso, the chairman of the NYSE, said the settlement would help bring a close "to one of the darkest chapters in the history of modern finance."

But experts on the industry were divided in their assessments.

"I don't think it's going to restore trust," said Paul Lapides, director of the Corporate Governance Center at Kennesaw State University in suburban Atlanta. "The settlement is like telling a bank robber if he gives the money back, he doesn't have to do jail time."

Without stiff individual punishments there will be limited incentives for the brokerages to change their behavior, he said.

Sam Hayes, professor of finance at the Harvard University Business School, said "It's an important day for investors, and I think from this point forward they ought to be able to follow the recommendations of the professionals on Wall Street with a lot more confidence."

Spokesman for many of the firms did not immediately respond to requests for comment. But some portrayed the settlement as a move forward for the industry.

"We share with our regulators the goal of restoring investor confidence," Citigroup said in a written release. "We have faced the difficult issues of the past several months head-on, and we have implemented new practices and standards that are leading the industry."

In a similar statement, UBS Warburg said: "This has been a difficult process, but our focus has been, and will continue to be, ensuring the integrity of our business."

The settlement, which Spitzer said will not be finalized for as long as two months, excludes two smaller firms, US Bancorp Piper Jaffray and Thomas Weisel Associates, that had raised objections to the settlement last week. Negotiations are continuing and those firms are expected to pay $20 million each, Spitzer spokesman Darren Dopp said.

"They got away lucky," said fund manager Mario Gabelli, whose firm Gabelli Asset Management manages roughly $22 billion, when asked how the settlement will affect the bank stocks.

"The fines of $1.4 billion are a little above the range we expected, but that isn't the big deal because the fines aren't the key issue," said James Schmidt, who manages the $2.4 billion John Hancock Regional Bank Fund and the $1.5 billion John Hancock Financial Industries Fund.

"The more important aspect of the agreement is what sort of statements of fact might be released that could be used by plaintiffs in class-action lawsuits," he said.

Such suits, they reason, could become extremely costly for the brokerages. (Reuters, AP)