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Citigroup to Separate Operations

A new research and brokerage unit is aimed at eliminating potential conflicts of interest.

October 31, 2002|Walter Hamilton | Times Staff Writer

NEW YORK — Citigroup Inc., which has been at the center of government probes into alleged Wall Street misconduct, said Wednesday it will create a new unit to house its stock research and retail brokerage operations, and has hired a well-respected executive to run the division.

The surprise move is aimed at eliminating the potential conflicts of interest that have sparked multiple government investigations of Wall Street's practices in the late 1990s, Citigroup said.

The unit, which will include more than 300 analysts and 12,500 brokers, will be headed by Sallie L. Krawcheck, a onetime stock analyst who had been running Sanford C. Bernstein & Co., a highly regarded independent research firm.

Krawcheck, 37, will report to Sanford Weill, Citigroup's chief executive.

Previously, Citigroup's research and brokerage chiefs answered to the head of the firm's Salomon Smith Barney investment banking unit.

Federal and state probes of brokerage practices during the bull market have shown that analysts at major firms, including Salomon, say they felt pressured to hype stocks to help their bankers win fee-rich corporate-financing business.

"We think this model of splitting off the [brokerage] business and the research product from the rest of the investment bank, and bringing in somebody who's had an incredibly long success record ... is a major advantage," Weill said in an interview at the financial services giant's Park Avenue headquarters.

Regulators have struggled in recent months with reform ideas that would insulate analysts from banking pressure. Major brokerages have been in intense talks with regulators over the last few weeks to reach a "global" settlement involving reforms.

Regulators initially considered forcing the companies to spin off their research units into stand-alone firms. But brokerages argued that analysis by itself is unprofitable, and regulators feared that a complete separation would reduce the amount and quality of research.

However, critics say that placing research under a new corporate designation within the same firm is only a cosmetic gesture.

Citigroup on Wednesday stopped short of implementing more dramatic changes that some critics say are needed, such as banning all interaction between analysts and bankers.

"I don't think this is a big structural reform," said John Coffee, a Columbia University securities-law professor.

Citigroup's brokerage and research units would technically remain part of Salomon Smith Barney. But the brokerage and research operation would use the name Smith Barney, dropping the Salomon reference.

Citigroup did not go further in its reforms because it doesn't want to "jump out ahead" of whatever industry-wide reforms regulators may eventually order, Krawcheck said.

Her unit would be funded by fees, such as commissions, generated by individual and institutional investors, and would be profitable on its own, she said.

Krawcheck has been lauded as head of Bernstein, which has no investment bankers. She covered brokerages for Bernstein before being named head of research in 1999, then CEO in 2001.

Citigroup's announcement came as major Wall Street firms told regulators Wednesday that they agree in theory with a proposal that they subsidize the research of independent firms and offer it to their own customers, in addition to in-house research.

That plan was floated by regulators last week. However, several firms said Wednesday that they won't consent to a deal until they know how much they would have to pay in both fines and subsidies, sources said.

Regulators and lawyers for the major firms will meet this morning to discuss details.

Citigroup, by taking the initiative Wednesday, hopes to remove the cloud of scandal that has tainted its image and helped drive its shares sharply lower. The stock gained 58 cents to $37.08 on the New York Stock Exchange on Wednesday.

Though all of Wall Street has been scrutinized, Citigroup has been under an especially intense glare and has anxiously sought a settlement with regulators.

Salomon in the late 1990s was a leading underwriter of telecom stocks, many of which left investors with enormous losses. The firm's former star telecom analyst, Jack Grubman, was one of the sector's biggest cheerleaders. He resigned in August.

Weill and other Citigroup executives also have come under the microscope personally. New York Atty. Gen. Eliot Spitzer is probing whether Weill pressured Grubman or other analysts to talk up certain stocks. Weill has denied wrongdoing.

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