Citigroup separates stock research from investment banking
NEW YORK (AP) – Citigroup is separating its stock research from its investment banking operation in a bid to placate securities regulators and the New York attorney general, who are investigating conflicts of interest at banks and brokerage houses. The new business unit – which will include both equity research and Citi’s private banking business – will be led by Sallie L. Krawcheck, currently chairwoman and chief executive officer of the independent research firm Sanford C. Bernstein, Citigroup announced Wednesday.
“Sallie is a strong advocate for research quality and independence,” said Citigroup chairman and CEO Sanford I. Weill.
“This organizational change, with Sallie at the helm, is a giant step forward for Citigroup’s continuing effort to rebuild investor confidence and provide our clients with the highest quality service,” Weill said in a statement.
The unit will include more than 12,500 financial consultants and will operate under the Smith Barney name. Krawcheck, 37, will have the title of chairwoman and CEO of the unit and will report directly to Weill.
The announcement by Citigroup, the nation’s largest financial institution, came the same day regulators and top brokerages had set as a deadline to resolve conflicts of interest in Wall Street stock ratings. Regulators and top brokerages discussed creating a separate boutique research entity to be funded by the large investment banks last week. The parties have agreed to that general framework, The New York Times said Wednesday.
That arrangement would avoid any conflict between a firm’s researchers rating a company’s stock and its investment banking executives seeking to lure that company’s business. Weill did not address those discussions in his statement, but he said: “Over the last several weeks, we have been working closely with our regulators and have been considering a number of ways to address the issues challenging the industry. … Our constructive conversations with regulators will continue, and we will quickly implement any additional changes that are part of the revised regulatory framework.”
He said that creation of the new unit at Citigroup “is consistent with the goal of assuring the impartiality of research, which we share with our regulators.”
In September, Citigroup paid $5 million to settle administrative charges by the National Association of Securities Dealers that a former star telecommunications analyst, Jack Grubman, misled investors with his pronouncements on Winstar Communications Inc.
Citigroup neither admitted or denied the charges. Grubman contends he has done nothing wrong and continues to challenge them.
Meanwhile, the NASD and New York Attorney General Eliot Spitzer also are looking into conflicts of interest in Citigroup’s Salomon Smith Barney shop, including allegations researchers touted telecommunications stocks help Citigroup get the companies’ investment banking business. There also have been allegations that Citi may have offered potentially lucrative shares in initial public offerings to corporate executives who made banking decisions.
Spitzer and the Securities and Exchange Commission have been investigating conflicts of interest and other abuses at several big investment firms. Spitzer has said the conflicts cost countless small investors millions of dollars, as they were advised to buy stocks that analysts privately derided.
In May, Merrill Lynch & Co., the nation’s largest brokerage firm, agreed in a settlement with Spitzer’s office to pay a $100 million fine and to separate its analysts from its lucrative investment-banking business.
Krawcheck, who was raised in Charleston, S.C., is a former investment banker. She holds a bachelor’s degree from the University of North Carolina at Chapel Hill and an MBA from Columbia University.
She joined the ranks of Sanford C. Bernstein – which provides securities analysis for 5,000 institutional clients – in 1994 and was made director of research in 1998. The company was acquired in 2000 by the Alliance Capital money management firm, and Krawcheck was named CEO of the Sanford C. Bernstein unit in June 2001.
In a statement, Krawcheck said she hoped to make her new division at Citi “a model for the industry.”
She added: “Delivering high quality, independent research is the right thing to do for our clients.” Wednesday’s announcement was the latest in a series of steps Citigroup has taken to try to restore confidence amid allegation of misconduct.
In September, Citigroup named a new manager for its corporate and investment banking operations in a move that appeared aimed at speeding up resolution of probes into loans to collapsed energy trader Enron Corp. and into initial stock offerings.
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