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Now It’s Fraud

New York Post

Regulators will find that some of Wall Street’s biggest firms committed fraud by issuing bogus research, in a development that has plaintiffs lawyers for burned investors salivating.

While regulators won’t use the term “fraud” against most firms, some, including Citigroup’s Salomon Smith Barney and Credit Suisse First Boston, may be tagged with it, sources said.

“This is a monster event,” said Jacob Zamansky, a securities lawyer who represents individual investors. “We have been chomping at the bit to get our hands on these documents. Lawyers who represent public investors can use this as ammunition in cases against these firms.”

“This is the largest fraud ever perpetuated on the investing public,” New York Attorney General Eliot Spitzer told a meeting of the New York City Bar Association yesterday.

Some of the firms, he said, will have to admit to fraud for issuing glowing research on companies they derided privately.

“The majority of firms will not include fraud language,” said Joseph Borg, director of the Alabama Securities Commission and the lead investigator of Lehman Bros.

He would not specify which firms would be targeted, but sources close to the investigation suggest it will likely be Salomon Smith Barney and CSFB.

Spitzer’s office declined comment, as did all of the firms.

It’s unclear if Merrill Lynch will have to admit fraud. While regulators say that’s possible, Merrill execs have argued that their deal was already signed and can’t be changed.

What’s the magnitude of potential losses?

The firms have set aside more than $3 billion to cover the settlement.

Many firms fought against using the term “fraud” in the settlement because of the possibility that shareholders would sue, and because the ‘fraud’ language would make it harder to make claims to insurers.

“They don’t want to admit any liability,” said one person close to the settlement.

Another key issue dragging the settlement along is language regarding how the evidence will be used.

“They want something that says the evidence cannot be used in any other proceedings,” says Borg. “Any reference to a document or a quote that supports our finding will be made public. I believe others agree with me.”

According to people who attended the lunch with Spitzer, the AG said he would release all the evidence against Morgan Stanley and Salomon Smith Barney, the firms whose cases he is handling.

The settlement still has some logistical hoops to go through, Borg said. Each state has to settle with its corresponding banks, after which all 50 states have to approve it.

The NYSE, the SEC and the NASD then have to sign on, meaning the total agreement will include upwards of 550 orders. The fines will be divided – 50 percent for the NYSE, the NASD and the SEC, and 50 to be divvied up among the 50 states according to geographic size.

Sources say that Lehman Bros. has no plans to seek reimbursement.

Calls to the Wall Street firm’s insurance attorneys were not returned.