New York state Attorney General Eliot L. Spitzer, who has been Wall Street's toughest regulatory cop over the past year, plans to finish his investigations by mid-December with a settlement that will include millions of dollars in fines and some restrictions, but not the major structural changes he once sought, sources familiar with the negotiations said today.
Officials in Spitzer's office rejected the notion that reforms will not go far enough, as some investor groups have charged. Sources close to Spitzer said it was vital for Spitzer to take on Wall Street because of lax federal oversight, but now he believes that the investigation is rapidly approaching a point where continuing it -- with its slow drip of damaging revelations -- could further erode investor confidence.
The settlement talks, which will continue at the New York Stock Exchange on Monday, are intended to end inquiries into the practices of Wall Street firms by Spitzer, other state officials, the Securities and Exchange Commission, industry regulators and other states.
The settlement is expected to include large fines, including several hundred million dollars against the companies most targeted, such as Citigroup Inc. and Credit Suisse First Boston. No amounts have been agreed to, several regulators said.
The agreement is also likely to require each company to hire an "ombudsman" who would purchase independent research from firms that do no investment banking, sources said. The brokerage firm would be required to provide that research, along with any produced by their own analysts, to clients.
The settlement also is expected to strictly limit interaction between bankers and analysts on Wall Street, according to sources close to the negotiations. For instance, analysts would not be allowed to attend meetings where bankers pitch their services to potential corporate clients. Critics have said bankers used the promise of positive research coverage to attract banking clients.
Spitzer has said that full-service Wall Street firms should get rid of their research departments to eliminate conflicts of interest. He backed down after the companies argued that they need analysts to advise bankers on potential mergers and acquisitions and to suggest which companies are good candidates to go public.
In the weeks since the talks began, there have been more questionable and embarrassing revelations from Wall Street. Those include e-mails in which telecommunications analyst Jack B. Grubman suggested that he upgrade AT&T stock as a favor to his boss, Citigroup chief executive Sanford I. Weill, because Weill needed the support of AT&T chairman C. Michael Armstrong, a Citigroup director, in a boardroom struggle. Grubman also wrote that in return for the favor on AT&T, Weill helped get Grubman's twin daughters into an elite Manhattan nursery school.
The Wall Street Journal reported today that in addition to the e-mails, Grubman wrote a memo to Weill about his progress in talking to Armstrong and others at AT&T, and promising to keep Weill "posted." Grubman issued his upgrade just weeks after writing the memo.
Grubman dismissed the e-mails as a fantasy intended to impress a friend and colleague. Weill and Citigroup also dismissed the e-mails and said Weill never suggested that Grubman upgrade AT&T to win Armstrong's support. Sources close to the case said Armstrong is a longtime Weill supporter and that no special efforts would have been needed to secure the AT&T chairman's support.
But this week Weill for the first time acknowledged asking Grubman to take a "fresh look" at AT&T in light of major changes in the telecommunications industry. He also said he helped Grubman's daughters get into the nursery school. But Weill said he did so because Grubman was an "important employee."
Industry sources have called Weill's suggestion that Grubman take another look at AT&T highly unusual and said it would have been hard for the analyst to interpret it as anything less than a direct order.
Citigroup spokeswoman Leah Johnson declined to explain why Grubman felt the need to write a memo to his company's chief executive regarding a company he covered.
An official in Spitzer's office called the Grubman e-mail and the memo "very damaging," but said the revelations would not dissuade the attorney general from wrapping up his investigation. Sources said that although the e-mails and a memo have just become publicly known, they were reviewed earlier by regulators.