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Brokerages to Pay Heavy Fines in Unethical Practices Settlement


In an effort to restore investor confidence, federal and state regulators announced Friday that the largest investment firms in the United States have agreed to pay $1.5 billion in fines to settle allegations of conflict of interest and unfair business practices on Wall Street.

The agreement is being called an "historic" settlement.

Ten of the nation's investment firms, including JP Morgan, Bear Sterns, Goldman Sachs, Lehman Brothers and Morgan Stanley, will pay fines ranging from $50 million to $300 million. The heaviest penalty will be paid by Citigroup's Salomon Smith Barney.

New York Attorney General Eliot Spitzer, who reached a similar deal with Merrill Lynch in May, announced the settlement. He worked closely with the U.S. Security and Exchange Commission to uncover the misleading of investors with biased stock recommendations.

"This has been only about one thing. It has been about ensuring that retail investors get a fair shake," he said. "Retail investors know that there is no guaranteed return in the market. They know there is risk. But the one thing they deserve is honest advice and fair dealing."

The agreement intends to overhaul the way business is conducted on Wall Street by isolating research analysts from the pressure of investment banking.

Links between researchers and investment banks will be severed and, Mr. Spitzer says, for a five-year period, the brokerage houses must fund independent research for investors. The agreement also bans lucrative initial public offerings of stock to corporate executive and directors, who are in the position to influence investment banking decisions.

The agreement has yet to be finalized. However, the chairman of the New York Stock Exchange, Dick Grasso, says that the settlement has been released to the public in an effort to quickly rebuild faith in the market. In the past year, many of the nation's 85 million investors have turned away from the stock market as a growing number of cases involving corporate fraud and unethical behavior were revealed.

"In 2003 we want to begin with a fresh slate a clean business model and a very unambiguous, very powerful message to investors and to those in markets," said Mr. Grasso. "The practices that have been uncovered will not be tolerated. People who would believe that they can continue or in some way game the system will be out of the system and the American public I think will be best served by doing what we are doing today."

Regulators say a portion of the fines will be directed towards investor restitution, although it is unclear exactly how that plan will be carried out. An investor education fund will also be established.

The agreement did not include small brokerage houses, however, the regulators say they expect the settlement to serve as a guideline for business practices that can be applied to firms of all sizes throughout the United States.

None of the investment firms have commented publicly on the settlement.

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