Reverse Spin: Two firms breathe big sigh of relief

The titans of Wall Street are choosing their words very carefully these days.

Morgan Stanley and The Goldman Sachs Group Inc. won’t be cited for fraud in an industry securities settlement. This should give them a leg up against rivals when it comes to defending themselves against a flood of private securities suits headed their way, legal experts say.

Both investment banks are expected to be cited for lesser violations in so-called reports of finding that will be released as part of a $1.5 billion industrywide settlement, according to published reports last Wednesday.

“The use of certain words and charges is very important,” said Thomas Ajamie, a securities lawyer at Schirrmeister Ajamie LLP in Houston. “It will either help investors recover money or make it more difficult.”

By contrast, regulators have collected more evidence against Citigroup Inc.’s Salomon Smith Barney Inc. unit and Credit Suisse First Boston Corp., both of which are expected to be cited for securities fraud.

Career pileup

And you thought you were having a bad week.

Richard Scrushy got out of bed Monday morning only to find he had been fired as chairman and chief executive of HealthSouth Corp., the Birmingham, Ala.-based health-care company at the center of Wall Street’s latest scandal involving accounting fraud.

His dismissal came after two former chief financial officers – Weston Smith and William Owens – pleaded guilty to criminal-fraud charges and agreed to cooperate with the investigation of the HealthSouth founder.

Mr. Scrushy was terminated retroactive to March 19, the date the company’s board placed him on administrative leave.

If that wasn’t bad enough, the Securities and Exchange Commission on Friday filed insider-trading charges against Mr. Scrushy, seeking as much as $743 million, including the return of profits, civil penalties and interest.

“Scrushy has personally profited from the scheme to artificially inflate earnings,” the SEC alleged in the amended lawsuit. The agency accused Mr. Scrushy of making more than $170 million in profits from selling 13,823,000 shares of HealthSouth stock since 1991 “while in possession of material, non-public information concerning the inaccuracies of [the company’s] financial statements.”

Breaking news

OK, the war against Iraq is intensifying. But let’s turn our attention – if only for a moment – to some economic news that used to be important before missiles and bullets started flying.

According to a report released Friday, The University of Michigan’s index of consumer sentiment fell in March for a third straight month – to 77.6, the lowest reading since September 1993. The final February reading was 79.9.

“I suspect if you took the same poll today, you’d already see a bit more of a pullback, because the momentum of the war has bogged down,” said Jade Zelnik, chief economist at RBS Greenwich (Conn.) Capital Markets Inc.

Busy B’s

To B or not to B? That is a question brokers at Morgan Stanley must be asking themselves.

The SEC and NASD are investigating whether some brokers at the firm have been pushing B-class mutual fund shares over classes that may be more appropriate for investors, according to published reports Tuesday.

Declining to comment on whether its B-share sales were being investigated, a spokesman for the company said that “B shares are an entirely appropriate choice for many investors, and we fully disclose all related fees and costs to our clients.”

Closing Quote

“The bottom line is, it’s an outrageous amount of money for essentially part-time employment.”

–Roy Weitz, publisher of Fundalarm.com, on the compensation given mutual fund directors.

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