[Congressional Record (Bound Edition), Volume 149 (2003), Part 8]
[House]
[Pages 10298-10300]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       WALL STREET ROBBER BARONS

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
  Ms. KAPTUR. Mr. Speaker, I have never met New York's Attorney General 
Eliot Spitzer, but on behalf of the citizens of Ohio, I want to thank 
him. The people of New York should be very proud of their Attorney 
General, Mr. Spitzer, for he is bringing to justice the robber barons 
of Wall Street who stole the money in our 401(k)s, who lied to our 
shareholders about the worth of various investments, who issued 
fraudulent reports about the value of stocks, and frankly destroyed a 
great deal of the confidence of our people in our so-called free 
markets. In fact, some might say they have been a free-for-all market. 
Some might say what these Wall Street fellows have done is a big heist, 
a big heist right out of people's pocketbooks and a big heist right out 
of people's dividends. Because of work that he did, and our Securities 
and Exchange Commission following behind, the regulators found fault 
with every single investment banking firm on Wall Street.
  I want to include in the Record much of what they said: ``Analysts 
wittingly duped investors to curry favor with certain corporate 
clients. Investment houses received secret payments from companies they 
gave strong recommendations to buy. And for top executives whose 
companies were clients, stock underwriters offered special access to 
hot initial public offerings.''
  It really is staggering, when we think about the recession that we 
are in, about the malfunctioning of our own stock markets which lie at 
the heart of this free enterprise system that has been hijacked time 
and again.

                              {time}  1630

  It started with Enron. Then we saw WorldCom. Then it was Tyco. Now it 
is every single money manager on Wall Street that has your money.
  So far, they have been fined as follows: $400 million is to be paid 
by Citigroup; $200 million each by Credit Suisse and Merrill Lynch, 
which included an earlier Merrill settlement of $100 million in fines; 
$100 million in fines by Goldman Sachs; $80 million in fines by Bear 
Stearns; $80 million by JP Morgan; and fines of the same amount to 
Lehman and to UBS Warburg; $32.5 million in fines by Piper Jaffray. 
These are names we see advertised in our newspapers. They have got 
enough money to buy ads all over the country, yet they take your hard-
earned money and they gamble it away.
  I have to ask myself as a Member of Congress, I am not going to trust 
those folks with the Social Security funds of this country. Do not tell 
me to put our people's hard-earned dollars in that stock market that 
you cannot trust from one day to the next, and do not ask this Member 
of Congress to vote for a Bush administration tax scheme that rewards 
some of the same fellows that just ran away with our money in our own 
equity market. Why was not anybody watching? Why did it take so long?
  Now, they tell you anything to get your money. That is what Mr. 
Spitzer found. And they did tell you anything to get your money. The 
news articles really say everything. What jumps off the page in the 
documents is the Wall Street firms' utter, utter disregard for the 
individual investor in pursuit of their own personal benefit. These are 
institutions that are supposed to be working for us, and they all, not 
one, not two, all, the major firms on Wall Street failed the American 
people.
  One investor told a colleague he was trying to make the company look 
good with his questions. A few moments later he said, ``We got paid for 
it, and I am going to Cancun tomorrow because of what I did.'' That is 
someone that took your money.
  Here is somebody, Sanford Weill, Citigroup's chairman. He persuaded 
an analyst to change a rating. This is not some guy in the back closet. 
This is the head of the largest investment banking firm in this 
country.
  What are they doing up there? What is the matter with them? You know 
how many people in my district have lost their retirement savings in 
the 401(k) plans alone? These are the highest paid people in our 
country that the Bush administration is about to open up the Treasury 
for. They do not deserve a dime. They ought to pay more of it back to 
us for what they have done.
  Mr. Speaker, I congratulate Attorney General Elliott Spitzer of New 
York. He is a hero in my book.
  Mr. Speaker, I include the three newspaper articles for the Record.

                [From the New York Times, Apr. 29, 2003]

 Ten Wall St. Firms Settle With U.S. in Analyst Inquiry: Agree to Pay 
                              $1.4 Billion

                          (By Stephen Labaton)

       Washington, Apr. 28.--Prosecutors announced a settlement 
     today with the nation's biggest investment firms that bars 
     the heads of the largest bank from talking to his analysts, 
     details a far greater range of conflicts of interest than 
     previously disclosed, and leaves the industry exposed both to 
     further regulation and costly litigation.
       The $1.4 billion settlement by 10 firms and 2 well-known 
     stock analysts reached tentatively last December but 
     completed in the last few days, resolved accusations that the 
     firms lured millions of investors to buy billions of dollars 
     worth of shares in companies they knew were troubled and 
     which ultimately either collapsed or sharply declined.
       The Securities and Exchange Commission, state prosecutors 
     and market regulators accused three firms in particular--
     Citigroup's Salomon Smith Barney, Merrill Lynch, and Credit 
     Suisse First Boston--of fraud. But the thousands of pages of 
     internal e-mail messages and other evidence that regulators 
     made public today painted a picture up and down Wall Street 
     of an industry rife with conflicts of interest during the 
     height of the Internet and telecommunications bubble that 
     burst three years ago.
       At firm after firm, according to prosecutors, analysts 
     wittingly duped investors to curry favor who corporate 
     clients. Investment houses received secret payments from 
     companies they gave strong recommendations to buy. And for 
     top executives whose companies were clients, stock 
     underwriters offered special access to hot initial public 
     offerings.
       ``These cases reflect a sad chapter in the history of 
     American business--a chapter in which those who reaped 
     enormous benefits based on the trust of investors profoundly 
     betrayed that trust,'' said William H. Donaldson, the new 
     chairman of the Securities and Exchange Commission. ``The 
     cases also represent an important new chapter in our ongoing 
     efforts to restore investors' faith and confidence in the 
     fairness and integrity of our markets.''
       In a reflection of regulators' concerns about the prospect 
     for conflicts of interest at Citigroup, Wall Street's biggest 
     bank, the settlement bars its chairman and chief executive, 
     Sanford I. Weill, from communicating with his firm's stock 
     analysts about the companies they cover, unless a lawyer is 
     present.
       But the regulators found fault with every major bank on 
     Wall Street.
       In addition to the three firms accused of fraud, five 
     others--Bear Stearns, Goldman, Sachs, Lehman Brothers, Piper 
     Jaffray and UBS Warburg--were accused of making unwarranted 
     or exaggerated claims about the companies they analyzed. UBS 
     Warburg and Piper Jaffray, were accused of receiving payments 
     for research without disclosing such payments.
       And Salomon Smith Barney and First Boston were accused of 
     currying favor with their corporate clients by selling hot 
     stock offerings to senior executives, who then could turn 
     around and sell the shares for virtually guaranteed profits.
       The two banks agreed to end that practice, known as 
     spinning.
       In settling the cases, the firms neither admitted nor 
     denied the allegations, following the standard practice in 
     resolving such disputes with the commission.
       In monetary terms, the $1.4 billion in fines, restitution 
     and other payments equals nearly 7 percent of the industry's 
     profits last year, which was Wall Street's worst year since 
     1995. Of that sum, $387.5 million will go to repaying 
     investors who file claims with the government. But armed with 
     the regulators' findings, lawyers are sure to seek many times 
     that total in private litigation.
       The firms also agreed to abide by what officials said were 
     significant new ethics rules and to build barriers between 
     investment bankers and stock analysts in hopes of relieving 
     analysts from the business pressures that many succumbed to 
     during the 1990's. For example, the compensation of analysts 
     is to be based on the quality of their research,

[[Page 10299]]

     not their contribution to the firm's investment banking 
     business.
       As part of the agreement, two analysts whose fortunes rose 
     with the markets, Jack B. Grubman of Salomon Smith Barney and 
     Henry Blodget of Merrill Lynch, agreed to lifetime bans from 
     the industry, along with significant fines.
       The singling out of Mr. Weill stemmed in part from his 
     efforts to try to influence Mr. Grubman to change his view of 
     AT&T--a Citigroup client that had Mr. Weill on its board--to 
     positive from negative. He and Citigroup's other senior 
     officers--whose contacts with the banks' research analysts 
     are also restricted under the settlement--were the only Wall 
     Street executives to agree specifically to such a 
     prohibition. Any top Wall Street executive directly involved 
     in investment banking, however, would be barred from 
     discussions with his company's analysts under the terms of 
     the agreements.
       For all the anticipation of today's announcement, the 
     voluminous record of complaints and damaging evidence left 
     many unresolved questions for both investors and the 
     securities industry.
       Foremost among those was what long-term impact the 
     settlement will have on the culture of Wall Street, the 
     integrity of stock analysis and the confidence of investors. 
     Concerned that the settlement might not be far reaching 
     enough--and might also have unintended consequences--
     officials at the S.E.C. are considering the adoption of a new 
     set of regulations governing stock analysts.
       ``It's critically important that we now step back and 
     thoroughly examine the issues,'' said Harvey Goldschmid, one 
     of the commissioners. Wondering whether the settlement might 
     discourage research for smaller markets, he added, ``No 
     research is certainly better than skewed research, but honest 
     research would be even better.''
       Critics who fear that the settlement falls short of 
     protecting investors said that they welcomed further efforts 
     by regulators.
       ``What they have imposed is a solution where they will try 
     to regulate behavior, ethics and business practices,'' said 
     Scott Cleland, the chief executive of Precursor Group and a 
     member of a coalition of small research firms without ties to 
     investment banks that have been seeking broader changes. 
     ``What they didn't do is address the conflict at its source--
     the commingling of trading, research and banking 
     commissions.''
       ``The analogy is that if this were an operating room, they 
     disinfected everything but the scalpel,'' Mr. Cleland said. 
     ``The scalpel is left dirty.''
       While providing $375.5 million in restitution that can be 
     sought by investors, the cases leave unresolved how much 
     investors might ultimately recoup after relying on the 
     analysts to make what turned out to have been calamitous 
     investments. Federal and state officials said today that one 
     aim of the settlement was to shake out enough strong evidence 
     to assist shareholders in private lawsuits and arbitration 
     efforts.
       ``This is very much the beginning,'' said New York Attorney 
     General Eliot Spitzer, whose early inquiry into conflicts on 
     Wall Street prompted federal and market regulators to begin 
     focusing on the issue--and who supporters say might try to 
     ride his success in the case to the governor's office in 
     Albany. ``One of our objectives was to put information into 
     the marketplace to permit investors on their own to seek 
     relief.''
       Wall Street executives acknowledged that the findings of 
     the regulators would probably draw more lawsuits against 
     their firms.
       ``It's sort of like throwing a party and inviting a lot of 
     people in, isn't it?'' E. Stanley O'Neal, Merrill's chief 
     executive, said at the firm's annual shareholders meeting in 
     Plainsboro, N.J.
       Government officials also emphasized today that the 
     settlements did not preclude them from further 
     investigation--pointedly noting, for example, that they were 
     examining whether any top executives at the investment firms 
     had failed to adequately supervise the analysts.
       ``Just wait,'' said Stephen M. Cutler, the head of 
     enforcement at the commission and a leading architect of the 
     agreement.
       In addition to the restitution, the firms also agreed to 
     pay $487.5 million in penalties, $432.5 million to fund 
     independent research, and $80 million for investor education. 
     Mr. Blodget agreed to pay $4 million and Mr. Grubman $15 
     million to settle the charges against them.
       The fines, restitution and other penalties were divided as 
     follows: $400 million will be paid by Citigroup; $200 million 
     each by Credit Suisse and Merrill Lynch (which includes an 
     earlier Merrill settlement of $100 million); $125 million by 
     Morgan Stanley; $110 million by Goldman Sachs; $80 million 
     each by Bear Stearns, J.P. Morgan, Lehman and UBS Warburg; 
     and $32.5 million by Piper Jaffray.
       One of the final issues that had been negotiated involved 
     which companies would bear the brunt of the penalties and how 
     much might be covered by insurance policies and deductible 
     from the firms' taxes.
       Under tax law, none of the $487.5 million in penalties is 
     deductible, and the firms agreed not to seek reimbursement 
     under their insurance policies.
       Prosecutors also inserted a clause in the settlement that 
     might make it harder for the firms to try to deduct any of 
     the $512.5 million in independent research and investor 
     education.
                                  ____


                [From the New York Times, Apr. 29, 2003]

           In a Wall St. Hierarchy, Short Shift to Little Guy

                        (By Gretchen Morgenson)

       Documents disclosed as part of yesterday's settlement show 
     how Wall Street firms, in pursuit of investment banking fees, 
     put the interests of their individual clients dead last.
       As an analyst at Lehman Brothers told an institutional 
     investor in an e-mail message, ``well, ratings and price 
     targets are fairly meaningless anyway,'' later adding, ``but, 
     yes, the `little guy' who isn't smart about the nuances may 
     get misled, such is the nature of my business.''
       In a newly disclosed tactic, Morgan Stanley and four other 
     brokerage firms paid rivals that had agreed to publish 
     positive reports on companies whose shares Morgan and others 
     issued to the public. This practice made it appear that a 
     throng of believers were recommending these companies' 
     shares.
       From 1999 through 2001, for example, Morgan Stanley paid 
     about $2.7 million to approximately 25 other investment banks 
     for these so-called research guarantees, regulators said. 
     Nevertheless, the firm boasted in its annual report to 
     shareholders that it had come through investigations of 
     analyst conflicts of interest with its ``reputation for 
     integrity'' maintained.
       Among the firms receiving payments for their bullish 
     research on companies whose offerings they did not manage 
     were UBS Warburg and U.S. Bancorp Piper Jaffray. UBS received 
     $213,000 and Piper Jaffray, more than $1.8 million.
       What jumps off the page in these documents is the Wall 
     Street firms' disregard for the individual investor in 
     pursuit of personal benefit.
       One comment made by a Bear, Stearns analyst is telling. 
     While participating in a conference call by SonicWall, an 
     Internet company whose shares Bear, Stearns had sold to the 
     public, the analyst told a colleague that he was trying to 
     make the company look good with his questions. A few moments 
     later, he said, ``we got paid for this,'' adding, ``and I am 
     going to Cancun tomorrow b/c of them.''
       But because greed is a part of human nature and human 
     nature seldom seems to change, Alan Bromberg, professor of 
     securities law at Southern Methodist University, remains 
     skeptical that the terms of the settlement will bring 
     substantive change to Wall Street.
       ``I don't see this as a great reformation,'' Mr. Bromberg 
     said. ``I don't see this as a new world we are moving into. 
     The pressures are still going to be there. Brokerage firms 
     don't make money other than by selling securities so they're 
     going to inevitably be encouraging people to buy and will 
     always have pressures to hype what they think is good or what 
     they're otherwise involved in.''
       The heaviest penalties in the settlement went to Salomon 
     Smith Barney, Credit Suisse First Boston and Merrill Lynch. 
     Regulators contended that analysts at these firms committed 
     securities fraud by recommending stocks to the public they 
     had expressed misgivings about privately.
       But securities regulators also found that all the firms 
     failed to supervise adequately the research analysts and 
     investment banking professionals they employed. They failed, 
     therefore, to protect clients who were basing investment 
     decisions on research that had been written to attract or 
     maintain investment banking clients.
       While the symbiotic relationship between Wall Street 
     research analysts and investment bankers harmed investors, it 
     was beneficial to the firms. Lehman Brothers and Goldman, 
     Sachs, according to regulators, encouraged analysts to work 
     closely with investment bankers to generate deals.
       Goldman, Sachs aligned its research, equities and 
     investment banking divisions to work collaboratively and 
     fully leverage its limited research resources. In 2000, 
     Goldman noted happily that ``research analysts, on 429 
     different occasions, solicited 328 transactions in the first 
     5 months'' and that ``research was involved in 82 percent of 
     all won business solicitations.''
       Crucial to the firms' failure to supervise themselves was 
     the tendency by their analysts to publish research that was 
     not based on sound analysis or principles of fair dealing or 
     good faith, the regulators said. Eight of the 10 firms that 
     settled--Bear, Stearns; Credit Suisse First Boston; Goldman, 
     Sachs; Lehman Brothers; Merrill Lynch; Piper Jaffray; Salomon 
     Smith Barney; and UBS Warburg--issued such reports. The 
     firms' research also contained exaggerated or unwarranted 
     assertions about companies, or opinions for which there were 
     no reasonable bases.
       For example, at Credit Suisse, regulators contend that its 
     analyst covering Winstar, a small telecommunications concern 
     that never turned a profit and that filed for bankruptcy two 
     years ago, failed to disclose the risks inherent in the 
     company. The firm had initiated equity research coverage of 
     Winstar in May 2000, with a ``strong buy'' rating and a 12-
     month target price of $79.

[[Page 10300]]

     Credit Suisse retained the $79 target from Jan. 5 to April 3, 
     2001, even as the stock plummeted to 31 cents a share from 
     approximately $17 and the company's market capitalization 
     fell to $30 million from $1.6 billion.
       Some of the most entertaining reading in the masses of 
     evidence that regulators have made public for use by 
     aggrieved investors in their own lawsuits is the commentary 
     by Salomon Smith Barney brokers about Jack B. Grubman's 
     performance as the firm's top telecommunications analyst.
       As far back as 2000, brokers were expressing outrage and 
     betrayal over Mr. Grubman's woeful stock picking, which many 
     noted was related to his dual roles as investment banker and 
     analyst. Yet even as the brokers howled about Mr. Grubman's 
     tendency to keep recommending stocks as they collapsed in 
     price, the analyst retained his job at Salomon until last 
     August.
       Here are some outtakes from Salomon brokers late in 2000. 
     Mr. Grubman ``should be publicly flogged,'' one said. ``Under 
     the category, Bonus for Creating Tax Loss Carry Forwards for 
     Retail Clients, Grubman should be recognized accordingly as 
     our best analyst.''
       Many said the analyst should be fired, while another broker 
     said, ``If Jack Grubman is a top `research analyst' then I 
     have a bridge to sell.''
       Another remarked: ``Boo Hiss. Banking showed its ugly 
     head.''
       During the year these comments were made, Mr. Grubman was 
     paid $14.2 million in salary and bonus.
       As a result, Salmon's brokers emerge as yet another group 
     victimized by Mr. Grubman's conflicted status. As one broker, 
     or financial consultant, put it: ``Grubman has zero 
     credibility with me or my clients. He is collecting from two 
     masters'' at financial consultant expense.
       Then referring to investment banking functions, he 
     continued: ``He brings IB business to the firm and loses his 
     objectivity. I am sure that nothing will come of my comments. 
     The spin-masters will say that everyone else does it. Is 
     there an honest person left?''
                                  ____


         Finding Fraud on Wall St. May Be a Step to Higher Post

                         (By Raymond Hernandez)

       Washington, Apr. 28.--The question was about tax loopholes 
     and whether the 10 securities firms that agreed to pay $1.4 
     billion to resolve charges of wrongdoing by their research 
     analysts would be able to squirm out of their plight by 
     writing off their fines. It put the men behind the lectern at 
     the Securities and Exchange Commission's headquarters on the 
     spot.
       But not Eliot Spitzer. ``Maybe I can be a little less 
     discreet,'' Mr. Spitzer, the attorney general from New York, 
     chimed in. ``I always try to be.''
       With that, he shifted the focus to Congress, urging 
     lawmakers to act to close the loopholes, and insisting his 
     office and the S.E.C. had done their jobs.
       ``Spoken like a man whose Hill is in Albany and not in 
     Washington,'' said William H. Donaldson, the chairman of the 
     S.E.C., to laughter.
       Mr. Spitzer's hill, some say, is just about anywhere he 
     wants it to be these days, having been indiscreet enough to 
     take on the biggest names on Wall Street during a relentless 
     investigation of securities fraud. For more than a year, he 
     has plunged forward, making cases and headlines along the 
     way, and some say paving his future with stepping stones 
     bearing the names of Henry Blodget, Jack B. Grubman and the 
     like.
       At the news conference here today announcing the settlement 
     of the case against the 10 firms, Mr. Spitzer was just one 
     player of many. Nonetheless, it was a defining moment for Mr. 
     Spitzer, who just five years ago took a gamble and used his 
     family's vast wealth to oust Dennis C. Vacco, the Republican 
     attorney general at the time.
       As attorney general, Mr. Spitzer revived the long-dormant 
     Martin Act, a 1921 state law giving the attorney general of 
     New York, jurisdiction over securities trading.
       Mr. Spitzer uncovered, among other things, damaging e-mail 
     messages among stock analysts at Merrill Lynch & Company, the 
     nation's biggest brokerage firm and a main-stay of New York's 
     financial community. He accused the analysts of urging 
     customers to buy stocks that the analysts believed where 
     losing bets just so that Merrill could curry favor with 
     companies it wanted as clients.
       In doing the job, Mr. Spitzer, 43, has followed in the 
     tradition of activist and consumer-oriented attorneys 
     general, like Louis J. Lefkowitz, who set the standard, and 
     Robert Abrams.
       But in his prepared remarks, he likened the pursuit of Wall 
     Street evildoers to another crusader, Theodore Roosevelt, the 
     populist Republican president who dubbed himself a Trust 
     Buster and crusaded against unchecked corporate wealth and 
     power.
       ``We are at a rare moment,'' he said. ``It is akin to the 
     moment we were at 100 years ago.''
       Before he was president, Mr. Roosevelt was New York's 
     governor, and many say that is the real goal of Mr. Spitzer.
       Indeed, many of those who make their living from Wall 
     Street are seething over Mr. Spitzer, blaming him for 
     pursuing scandal at the expense of their livelihoods and New 
     York's economy. Many complain, quietly, of course, that Mr. 
     Spitzer has relentlessly undermined the public's trust in the 
     stock market while boosting his own political fortunes.
       Many of Mr. Spitzer's fellow Democrats, however, feel 
     otherwise.
       ``New York Democrats need someone who can galvanize them,'' 
     said Hank Sheinkopf, a Democratic consultant in New York who 
     was one of Mr. Spitzer's campaign advisers in 1988. ``Eliot 
     Spitzer appears to be that person right now.''
       ``This is not without its perils,'' Mr. Sheinkopf added. 
     ``The danger is that he has angered a large portion of New 
     York's traditional fund-raising base, Wall Street.''
       Mr. Spitzer, in an interview after the news conference, 
     acknowledged the potential difficulties. ``This case has left 
     me without some friends I had before,'' he said.
       But, he said, it might have made him friends elsewhere. 
     ``I've got a job to do and I'm going to do it,'' he said. ``I 
     hate to sound overly moralistic, but it's the only way to do 
     this job.''
       Mr. Spitzer also said it was premature for him to talk 
     about a possible campaign for governor, though people in both 
     parties say he is the man to beat should be choose to run for 
     governor in 2006. ``All I can tell you is that I have made no 
     decision about that,'' he said.

                          ____________________