Global Settlement in Place; Who’s Next?

Calls for $1.4 billion and ''dramatic reforms.'' Also: Commerce Bancorp inquiry may concern bond sales, political donations; SEC investigates possible insider trading at Black Box Corp.; two CFOs punished, one whistle-blower rewarded; and more.


It’s official. Wall Street’s relationship with Corporate America will never be the same.

U.S. District Judge William H. Pauley III approved the historic $1.4 billion global settlement against 10 Wall Street firms accused of conflicts between their investment banking and research departments. The enforcement actions and the proposed settlements were announced on April 28.

Under the terms of the pact, the 10 firms as well as two individual analysts will pay a total of $894 million, consisting of $397 million in disgorgement and $497 million in penalties. This includes one firm’s previous payment of $100 million in connection with its prior settlement with the states.

The firms will be required to make payments totaling $432.5 million to fund independent research for investors, and seven of the firms will make payments totaling $80 million to fund and promote investor education.

In addition, the firms are required to undertake “dramatic reforms” to their future practices, including separating their research and investment banking departments.

In a statement, Securities and Exchange Commission Chairman William H. Donaldson said, “We now begin the process of implementing the settlement, which we believe is an important part of our ongoing efforts to restore investors’ faith in the fairness and integrity of our markets.”

“This settlement represents a positive step toward restoring investor confidence and has the potential to change the way business is done on Wall Street,” said Ralph A. Lambiase, president of the North American Securities Administrators Association, in a statement. “While the global settlement is most important for its impact on Wall Street and investors, it also represents a model for state-federal cooperation that will serve the best interests of investors nationwide.”

The 10 firms are Citigroup Inc., Merrill Lynch & Co., Credit Suisse First Boston, Morgan Stanley, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Bear Stearns Cos., UBS AG, and U.S. Bancorp Piper Jaffray. (To find out more about how one firm plans to rebuild its reputation, read “Citi’s New Stance.”)

The two analysts are Jack Grubman at Citigroup’s Salomon Smith Barney division (now called Citigroup Global Markets), who had earlier agreed to a $15 million fine and a lifetime ban from the securities industry, and Merrill Lynch’s Henry Blodget, who had agreed to a $4 million penalty and a lifetime ban from the industry.

The settlement is the result of a sweeping investigation into conflicts of interest on Wall Street, led by New York Attorney General Eliot Spitzer (the subject of this month’s “Ten Questions” interview in CFO magazine).

Commerce Bancorp Inquiry May Concern Bond Sales, Political Donations

Commerce Bancorp Inc. announced that the Securities and Exchange Commission is looking into the municipal underwriting business of its subsidiary Commerce Capital Markets Inc.

The Cherry Hill, New Jersey, company said in a government filing that it is making this announcement “in light of published articles concerning the possible investigation” of the subsidiary. On Wednesday, the Associated Press reported that the SEC is investigating Commerce Bancorp’s dealings with Pennsylvania state treasurer Barbara Hafer, citing a source in the treasurer’s office.

The SEC is reportedly probing any relationship between bond sales involving Commerce Bancorp and political donations made by a Commerce Bancorp political action committee to Hafer, according to Reuters.

Commerce Bancorp said that it has received “an informal non-public confidential inquiry” from the SEC, but stressed it is “not aware of any formal investigation.” The company added that it is fully cooperating with the SEC, that it believes “it is in full compliance with all applicable laws and regulations,” but that it is unable to comment further.

SEC Investigates Possible Insider Trading at Black Box Corp.

Networking services company Black Box Corp. revealed in a regulatory filing that it has become aware of a formal order of investigation by the Securities and Exchange Commission related to possible insider trading violations.

The company announced that the SEC has requested additional information from the company and several officers, directors, and team members related to trading in the company’s stock prior to a March 11, 2003, press release.

After the dissemination of the release, which warned of lower fourth-quarter earnings, Black Box’s share price dropped $8, to $31.35 per share, in after-hours trading that day — a decline of about 20 percent from the closing price.

The company added that prior to this formal inquiry, it had voluntarily furnished information to the SEC, and that Black Box and the individuals named in SEC subpoenas “intend to cooperate fully with this inquiry.”

Two CFOs Punished, One Whistle-Blower Rewarded

The former chief financial officer of defunct Internet equipment company Interspeed Inc., which was based in North Andover, Mass., was sentenced to three years’ probation and a $10,000 fine for his role in what prosecutors called a scheme to inflate the company’s sales figures, according to Reuters.

William Burke will serve the first six months in community confinement, after pleading guilty in June to one count of falsifying books and records, according to the report, citing U.S. Attorney Michael Sullivan in Boston. Burke had faced up to 10 years in prison and a $1 million fine.

Meanwhile, U.S. Attorney Michael J. Sullivan and Kenneth R. Jones, postal inspector in charge of the Boston Division of the U.S. Postal Inspection Service, announced that the Brookline, Massachusetts-based Vantage Group, two of its subsidiaries, and Vantage’s CEO and CFO have agreed to pay $4.5 million to settle civil charges alleging they schemed to defraud the U.S. Postal Service.

Vantage is a for-profit company that conducts fund-raising programs on behalf of nonprofit organizations. The government’s civil complaint, filed in 1998, alleged that throughout the 1990s, chief executive Henry Lewis, finance chief Harry Melikian, and Vantage improperly and knowingly mailed approximately 78 million pieces of mail at the reduced, nonprofit mail rate, then made false statements to cover up the improper use.

Former Vantage salesman Lawrence Saklad blew the whistle on the company by filing suit under the provisions of the federal False Claims Act. Under the provisions of the act, whistle-blowers can share between 15 percent and 25 percent of the government’s recoveries. Saklad stands to collect about 22 percent or the settlement, or $900,000. (Not every whistle-blower fares so well, especially considering the personal and professional sacrifices required.)

Short Takes

  • Israeli-based Teva Pharmaceutical Industries Ltd. said it will buy Sicor Inc. for $3.4 billion in cash and stock to expand its business in injectable generic drugs.
  • Aflac Inc. said two line items within the shareholders’ equity section of its September 30 balance sheet needed to be reclassified. This reclassification increased unrealized gains on investment securities by $220 million and reduced unrealized foreign currency translation gains by $220 million. The reclassification had no effect on total shareholders’ equity, net earnings, or operating earnings, the company added.
  • Wackenhut Corrections Corp. said it adopted a shareholder rights plan, which helps to deter unsolicited takeovers. The rights can be exercised if a person or group announces a plan to buy or holds more than 15 percent of the company’s common stock.

The company also called a special shareholders meeting for November 18 to approve a change in the company’s name from Wackenhut Corrections Corp. to The Geo Group Inc. The name change is required by an agreement under which the company repurchased all 12 million shares of common stock held by Group 4 Falck A/S, its former majority shareholder, for $132 million in cash.

  • DaimlerChrysler North America Holding Corp., a unit of auto maker DaimlerChrysler AG, issued $2 billion in 10-year global notes, up from an originally planned $1.5 billion. The notes, rated A3 by Moody’s and BBB by Standard & Poor’s, were priced to yield 6.504 percent, 215 basis points higher than comparable Treasurys.
  • Altria raised $1.5 billion from the sale of two-part notes. It issued $500 million in five-year notes, priced to yield 5.743 percent, or 245 points over Treasurys, and $1 billion in 10-year notes, priced to yield 7.004 percent, or 265 points over the benchmark. The paper was rated Baa2 by Moody’s and BBB-plus by S&P.
  • American Honda Finance Corp., a wholly owned subsidiary of American Honda Motor Co., issued $750 million of five-year notes in the private placement market, up from an originally planned $500 million. They were priced to yield 3.868 percent, just 60 points over comparable Treasurys. The paper was rated A1/A-plus.
  • Anadarko Petroleum Corp. said it is increasing its quarterly common dividend by 40 percent to 14 cents a share, citing third-quarter results and “a good outlook for future cash flows.”
  • Junk bond mutual funds saw $1.1 million in outflows in the week ended October 29, according to AMG Data Services, following a $212.3 million inflow a week earlier. This was the first outflow since the week ended September 17.
  • Reliant Resources, Inc. said it will record a $1 billion impairment charge in the third quarter resulting from the company’s acquisition of Orion Power Holdings Inc. in February 2002.

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