Wall Street's Fine Mess

How much should brokerages and banks pay in penalties for their tainted research? Here's a look at what past settlements cost

What else would hold up an industrywide agreement on how to clean up Wall Street's research practices than, well, money? Banks, regulators, and law enforcers are still arguing over how much 12 major firms should have to pay in a "global settlement" for issuing misleading research reports. The goal had been to have the matter resolved by yearend.

Merrill Lynch (MER ) paid $100 million in May to settle with New York Attorney General Eliot Spitzer. Some regulators -- anxious to see that figure topped -- are throwing out numbers ranging from $75 million to $500 million for what they say are some of the worst offenders, such as Citigroup. The banks complain that the fines under discussion are way too steep. (Let us know what you think about this issue in our Reader Survey.)


  for Wall Street misdemeanors indicate otherwise. To historian Charles Geisst, the fines would be mere slaps on the wrist unless they're much higher than $100 million. "If a firm had been fined $100 million 12 years ago, it would be the equivalent of about $170 million today. That makes today's amounts seem small by comparison," he says. "A hundred million dollars just isn't what it used to be."

And banks can afford to shell out more. In 1990, a $600 million fine against Drexel Burnham Lambert played in a role in the junk-bond investment bank's bankruptcy. But this time, the banks involved "have tens of billions of dollars of equity capital," says Prudential Securities senior brokerage analyst David Trone. "Fines would never come remotely close to creating a threat of bankruptcy."

Some sources close to negotiations expect it could take until 2003 for regulators, law enforcers, and bankers to reach an agreement. But it may be worth the extra time. Conflicts of interest, tainted research, and compromised analysts helped contribute to one of the worst losses of investor wealth in Wall Street history. That's why those setting the figures are so convinced that banks should pay -- dearly. Law enforcers shouldn't rush. What's more important is that the punishment fit the crime.

Wall Street's Past Penalties

Here's the tab in fines for its previous transgressions:

Year: 1986

Amount: $100 million

Inflation-Adjusted (2002 dollars): $165 million

Charge: Ivan Boesky settles Securities & Exchange Commission

charges of insider trading and goes to prison

Year: 1990

Amount: $600 million

Inflation-Adjusted: $829 million

Charge: Drexel Burnham settles SEC charges for its involvement

in Milken's alleged insider trading, then declares bankruptcy

Year: 1992

Amount: $1.3 billion

Inflation-Adjusted: $1.7 billion

Charge: Final settlement by Michael Milken and his associates

of charges related to insider trading

Year: 1992

Amount: $290 million

Inflation-Adjusted: $375 million

Charge: Salomon Brothers settles SEC charges that it rigged bids

in Treasury bond auctions

Year: 1995

Amount: $250 million

Inflation-Adjusted: $300 million

Charge: Goldman Sachs settles lawsuits and other costs related to its role

in the collapse of the pension funds of Robert Maxwell

Year: 1997

Amount: $1 billion

Inflation-Adjusted: $1.13 billion

Charge: 36 firms settle claims of conspiracy to manipulate Nasdaq stock sales

By Emily Thornton in New York

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