It has been three years since the Global Research Analyst Settlement was announced, but it appears not every firm on the Street got the message. Wachovia Corp.'s capital markets group just cost the firm a $25 million fine, stemming from charges of research-related conflicts of interest. Similar charges were lobbed against Wachovia by a CDO research analyst nearly one year ago.
The North American Securities Administrators Association (NASAA), comprised of state regulators, announced Wachovia Capital Markets agreed to pay a total of $25 million to settle charges that it essentially failed to build a Chinese wall between its research analysts and investment bankers. Wachovia, according to a statement, admits no wrong doing in the settlement, which was the result of a 28-month investigation. (The global equity research analyst settlement was also driven, in part, by the NASAA.)
The penalties disclosed in the agreement make for a compelling read about behavior at the firm: Wachovia will pay $20 million for failing to supervise its employees in connection with potential conflicts of interest between research and investment banking; it will pay $1.65 million for failing to preserve required books and records; another $3 million in penalties will be used for investor education; and Wachovia agreed to dole out $350,000 to the NASAA to cover the costs associated with the investigation.
Stock analysts aren't expecting the fine to have a detrimental impact on Wachovia's bottom line. The firm earned $1.73 billion in 1Q06.
The settlement agreement makes no specific reference to the Sarbox-related allegations charged against Wachovia by its former senior CDO analyst Arturo Cifuentes. Cifuentes alleged he was let go by the firm after he had been pressured to put out research reports around the same time that Wachovia expected to price deals on which it acted as arranger or underwriter. In his complaint filed with the Occupational Safety and Health Administration (OSHA), which handles whistle-blower complaints, Cifuentes produced e-mails as proof of his claims. Wachovia investment bankers, including Anthony Sciacco and Yu-Ming Wang; two Wachovia salesmen, Russ Andrews and Bo Weatherly; and Brian Lancaster, head of structured product research, were all named in the emails that Cifuentes showed to investigators.
In January, Cifuentes settled his case, separately, with Wachovia for an undisclosed sum. He declined to comment on the NASAA settlement.
Sources familiar with the NASAA investigation hinted that Cifuentes's complaints essentially raised the red flag with state regulators, although the charges and penalties announced were not tied directly to his complaints. Rather, the investigation looked at the firm's broader operating methods and found serious Chinese wall violations there, sources said.
It's unclear if Wachovia faces more investigations, however. Late last year, Cifuentes gave his testimony to the Securities and Exchange Commission, which is separate from NASAA. To date, the SEC has been mum on the topic of its investigation; the NASAA investigation was similarly able to maintain a low profile.
It's not uncommon for various regulators to share information among them, noted Jenice Malecki of Malecki Law in New York, who was Cifuentes's attorney. Malecki said she wasn't surprised about the fines levied against Wachovia by the NASAA.
"They're not the only firm that has been criticized in this regard. But this plays on the significant lack of supervision and lack of physical divides between different areas of the bank," she said. Malecki's firm has represented investment professionals and public investors who are willing to cooperate with regulators in investigations linked to wrongful conduct.
A Wachovia spokeswoman, Christy Phillips, told several news outlets that the bank was pleased to settle.
To date, 12 Wall Street firms have paid out a total of just over $1.2 billion dollars involving research related conflicts.
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