State Says Wall St. Penalties Too Lax

NEW YORK —  California’s top securities regulator complained Monday that the fines being sought from brokerages in a proposed settlement over analyst conflicts are far too low -- the first time an official has publicly broken ranks with his counterparts on how much Wall Street should be penalized for its alleged bull-market sins.

Demetrios Boutris, commissioner of the state’s Department of Corporations, said every firm should be forced to pay at least $100 million to resolve multiple investigations of whether stock analysts dished out tainted advice in the late 1990s.

State and federal regulators are demanding the fines in talks aimed at reaching a “global” settlement with a dozen investment banks. In sessions with individual firms Friday, Monday and today, the bulk of the companies are being asked to pay $25 million to $100 million, sources said. Citigroup Inc. and Credit Suisse First Boston would have to pay considerably larger fines.

The proposed fines let the firms “think they can justify their bad behavior as simply the cost of doing business,” Boutris said. “Bad behavior should be punished.”

In May, Merrill Lynch agreed to pay $100 million to resolve a similar probe by New York Atty. Gen. Eliot Spitzer. That amount should serve as a floor for future settlements, Boutris said.

It is rare for an official to publicly question whether his counterparts are going too lightly in settlement talks. The comments by Boutris are noteworthy because California is co-chairing a task force of states examining the analyst issue, and because California’s size forces other regulators to consider its position.

California has lobbied other regulators to raise their demands in a series of phone calls and e-mails in recent days.

In an e-mail Saturday, obtained from a state regulator, a California official warned other states that fining firms less than $100 million risks “opening the regulators to the charge that some banks are getting off easy.” The e-mail was written by William Kenefick, chief deputy commissioner of the California Department of Corporations.

Despite its protests, California is not considering withdrawing from the coordinated settlement or taking steps to derail it, said Andre Pineda, deputy commissioner of the department.

Other regulators disagree with California, Pineda said.

Some states believe California’s actions are political posturing, regulators said.

“What’s the point of this?” asked an official of another state.

In a conference call Saturday, California officials told regulators in other states that “the evidence doesn’t matter” and that the firms should be fined $100 million regardless of facts, one participant said.

In his e-mail, Kenefick wrote, “State of evidence/proof at this time is irrelevant.”

“A number of regulators are flabbergasted by the notion that a law enforcement official would say such a thing,” said a regulator from another state.

California’s point is that the Merrill settlement already has set the floor and that any analyst conflicts warrant a $100-million fine, Pineda said. If government officials ceased negotiations and finished their probes, the firms would be forced to pay far greater sums, he said.