Business Research Ethics

Business Research Ethics Donald Vosburg RES 351 November 5, 2012 Instructor: Harold Graff

Business Research Ethics Business Research Ethics Citigroup Inc. is a diversified global financial services company providing services to consumer and corporate customers. All off Citigroups services can be divided into three main business segments: Global Consumer, Corporate and Investment Banking, and Global Wealth Management. Citigroup has several brands including Citibank, CitiFinancial, Citistreet, Citi, Primerica, Banamex, and Solomon Smith Barney (SSB). Citigroup has a 200-year-old legacy of innovation and success. But, with great success they have had numerous corporate scandals, investigations, and legal settlements. In 2001, the office of Ney York State Attorney General Eliot Spitzer began an investigation in to possible conflict of interest problems with Citigroups investment banking practice. This joint investigation was resolved and settled in 2003. Payment of $400 million was paid and Solomon Smith Barney (SSB) was required to adopt a series of reforms and corporate changes. Unethical Behavior Citigroup Inc. and other top Wall Street securities firms were accused of misleading investors. The securities firms research divisions did this misconduct. The analysts used biased research to sell stock that they knew were not good buys. The analysts ignored the legitimate research because of concern over backlash from their investment bankers. They were encouraged to do this by the investment sections of their companies in return for bonuses and stock options. It was fueled by corporate greed, and showed a zero regard for ethics and good business practices. The investigation found that the research and stock ratings issued by analysts were not performed with integrity.

Business Research Ethics (SSB) business practices encouraged research analysts to provide favorable ratings of companies that were also investment banking clients. You would think that a large company as Citigroup would comply with the law instead of striving for greed. However, the evidence strongly suggests that corporations are not ignoring cost-benefit evaluations when making decisions on legal compliance. (Di Lorenzo, 2006). In some cases, the analysts recommended stocks that they knew were no good. Citigroup was the parent of Salomon Smith Barney at the time of the ethical misconduct. Jack Grubman was a notorious telecommunications analyst for Solomon Smith Barney. He touted his relationships throughout the industry and earned an estimated $20 million per year. In 10 different deals, he helped SSB earn $24 million in fees from investment banking with WinStar Communications.(The Asian Wall Street Journal, 2002). In January 2001, Grubman assigned a $50 price target and classified WinStar with a Buy rating. With the stock subsequently trading at $13, Grubmans assistant e -mailed a large investor statin, Buy here and sell in the low$20s. However, Grubman did not change his price target or rating in public. In fact, he maintained the status quo even when WinStar shares were trading at less than one dollar and the company was on the eve of bankruptcy. He later noted in e-mail, we support our banking clients too well and for too long.(CNBC Business Center, 2002) "In April 2001, Grubman stated privately the need to downgrade Focal but nevertheless once again advised investors to buy Focal (Di Lorenzo, 2006). Some stocks went from $80 to $2 a share but the analysts were still pushing the stock. These unethical practices went on for years.

Business Research Ethics Injured Parties One of the injured parties were the investors who initially bought stock based on Citigroups analysts research. They bought the stock and continued to buy the stock even while the prices were going down. They lost money because they listened to the unethical research reports, and often invested in companies until the stock totally plummeted. Other injured parties include the companies whose stock was being sold because of the biased research. They were getting a false sense of success because of the stock being sold in a disregard for compliance to law. The everyday tax payer, was also a injured party because when a Bank as large as Citigroup fails it impacts not only corporate investments but also the hard working middle class investor. Unethical Behavior Affect The unethical behavior affected the individual and society because the unethical and biased analysts robbed them. By the end of 2002, the effects of the various allegations were weighing heavily on Citigroup. The amount of money owed by Citigroup grew by billions because of the costs of regulatory and private litigation. Many people and organizations lost money because of these analysts reports. This may have eroded trust in Wall Street and the stock market, not just for the injured parties but also for the public at large. Avoiding Unethical Behavior The unethical behavior could be avoided by making Ethics a more important part of corporate training. Instead of companies always pushing profits at all costs, they can make sure to instill more Ethical training to researchers that will be put in these situations in the future. The unethical research conduct could have been stopped if the company put

Business Research Ethics checks and balances and divided the research and investment segments of the business. If the researchers work for the investors and the investors make direct commissions based off the analysts research then of course this type of behavior would continue to occur. As part of the lawsuit Citigroup had to break up those divisions and created a Five Point Ethics Plan to change the culture of the company.

Business Research Ethics References

Citigroup to pay $5 million fine to NASD, CNBC Business Center, September 23, 2002.

Di Lorenzo, V. (2006). Does The Law Encourage Unethical Conduct In The Securities Industry? Fordham Journal of Corporate & Financial Law, 11(4), 675-805. The Asian Wall Street Journal, (2002). Soloman Agrees to NASD Fine.

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