Front Page: Wall Street to Reform Analyst Conflicts

Securities regulators aim to give Joe Public the tools to discern good advice on a stock from a bad recommendation. That could restore public confidence in the financial markets, where biased analyst recommendations have infuriated investors who lost billions of dollars in the high-tech market.

Aiming to close one of the ugliest chapters in the history of Wall Street, federal and state regulators in late December announced a $1.4 billion settlement with the largest brokerage firms to penalize them for bogus ratings and to separate future research from investment banking opportunities.

The agreement calls for the removal of analyst pay based on banking fees, bans the allocation of hot initial public offerings to corporate executives and directors and requires brokerage firms to provide independent research for five years. Each firm also must make its ratings and price target forecasts available to the public so retail investors can discern the performance of analysts.

Ten brokerage firms have agreed to pay $450 million for independent research, $85 million for investor education and $900 million for retrospective relief, a portion of which could be funneled to investors who can prove they lost money on bad advice.

Regulators underscored the settlement agreement should not be construed as a cap on what investors could get back from brokerage firms that issued bad advice. That amount of money will be determined through future litigation and arbitration proceedings.

Firms involved in the settlement include Bear Stearns & Co. LLC, Credit Suisse First Boston Corp., Deutsche Bank AG, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Lehman Brothers Inc., Merrill Lynch & Co. Inc., Morgan Stanley, Salomon Smith Barney Inc. and UBS Warburg LLC.

Citigroup's Salomon Smith Barney, whose former star telecom analyst Jack Grubman has been lambasted for allegedly issuing bogus ratings on WorldCom Inc. and other foundering carriers, agreed to pay $400 million for independent research, relief and investor education. Grubman has reached a preliminary agreement with regulators to pay a $15 million fine and be banned for life from the securities industry, according to Reuters, quoting a spokesman from the New York State Attorney General's office. An SEC spokesman declined comment.

In May Merrill Lynch reached a $100 million settlement agreement with the New York State Attorney General to resolve alleged conflicts of interest. The probe focused on Merrill's Internet sector securities research from 1999 to 2001.

"I think [Wall Street analysts] have lost a lot of credibility and it's a shame because there are good analysts out there in the Wall Street firms who have been tainted with the same brush," says Tim Alward, president of Ford Equity Research. The firm joined with other investors to create a consortium, Best Independent Research LLC, which aims to sell independent research to Wall Street.

New York Attorney General Eliot Spitzer says regulators launched an investigation into Wall Street practices more than a year ago out of concerns for the retail investor such as "Joe Smith in Utica, N.Y."

"This has been about only one thing. It has been about ensuring retail investors get a fair shake," he says. "We needed to eliminate the conflicts of interest that have become unduly pervasive."

Alward says the ability to track analyst performance should help investors. "It seems like performance measurements is the one component...that the sell-side firms are trying the hardest to resist," he says.

Investars.com is one company that provides analyst performance data to institutional investors such as managers of mutual funds. The company will provide its data to Best Independent Research for ultimate distribution to retail investors.

"We believe that past performance should be the measure of credibility," says Kei Kianpoor, CEO of Inve-stars.com. "Institutions know very well what to listen to and what not to listen to. Individual investors should have some sort of guidance provided to them."

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