Wall Street banks pay $1.5bn to settle with Spitzer

The conflict-of-interest cloud that has lingered over Wall Street all this year was finally about to lift last night with the announcement of a landmark $1.5bn (£936m) settlement between a dozen of the leading brokerage firms and American securities regulators.

Fines of $1bn – one of the largest such punishments in Wall Street history – will be distributed between all of the firms. The heaviest burden falls on the Salomon Smith Barney unit of Citigroup, which must pay $325m. All the banks involved have also agreed to undertake internal reforms to curb conflict of interest difficulties in the future. They will also pay $535m over five years for independent research for investors, and an investor education programme.

The deal comes at the end of five, often fractious, months of negotiations between the firms and US regulators, including the New York Attorney General Eliot Spitzer. Mr Spitzer last night hailed the settlement as a landmark, "which will permanently change the way Wall Street operates." "This has been about one thing only," he said, "to restore public confidence in Wall Street, and to ensure that retail investors get a fair shake. They must have honest advice and fair dealing." It is more than a year since Mr Spitzer first began a high-profile quest to expose serious securities law violations inside the big banks. At issue has been the blurring of lines between the investment banking activities of the banks and the work of research analysts.

Mr Spitzer accused the banks of allowing researchers to massage their assessments of companies to encourage them to give investment banking business to the banks. In some cases, analysts were found to be over-promoting shares in companies they privately considered lame.

The banks involved in the settlement include Citigroup, CFSB, Goldman Sachs, Morgan Stanley, US Bancorp, Deutsche Bank, Bear Stearns, Lehman Brothers, JP Morgan Chase and UBS Paine Webber. As well as undertaking to separate research and investment operations, the banks have agreed to end the practice of so-called IPO "spinning", whereby they would curry favour with important investment banking clients by issuing them with shares of hot public offerings.

In reaching yesterday's deal, the banks avoided having formally to plead guilty to any charges. Moreover, regulators have foregone the opportunity to press charges against any of the chief executives involved, including Sanford Weill the head of Citicorp, who has found himself at the eye of the storm.

Sources indicated, however, that charges may yet be filed separately against Jack Grubman, the former star telecoms analyst at Citigroup. Regulators already plan to fine him $15m for a career of cozying up to important corporate clients of the bank and to bar him from the securities industry for life.

Mr Weill came under close scrutiny after admitting earlier this year that in 1999 he asked Mr Grubman to reconsider a negative rating he had issued for AT&T, a hugely important client for the bank.

Following Salomon Smith Barney, the second largest fine, of $150m, falls on Credit Suisse First Boston. The other firms are paying $50m apiece. In addition to the banks punished yesterday, the country's largest brokerage firm Merrill Lynch agreed last May to a $100m fine, and the separation of its research and investment banking arms.