Investors get little in states' settlement with Wall St.: Bulk of $437m to be used by governments
Boston Globe ^ | April 28, 2003 | Jeffrey Krasner
boston.com
The $1.4 billion global settlement of conflict-of-interest charges against Wall Street securities analysts is expected to be announced today, but state regulators are preparing for a backlash because little, if any, of the money won by states will go to investors.
Of the $437 million in settlement money earmarked for the 50 states, most will go to state governments, which plan to use the proceeds to reduce crippling budget deficits, according to regulators briefed on final details of the settlement. The major charge against the brokerages is that they generated favorable investment research to win lucrative investment banking deals.
The Securities and Exchange Commission will also receive $437 million in the final settlement, which is expected to be unveiled in Washington. The SEC will turn over its proceeds to its so-called Fair Fund, a vehicle created last year to return penalty money to investors.
The states' settlement will be distributed according to population, so California will get the most, about $42 million, while states with fewer citizens like Wyoming, Vermont, and North Dakota will get the minimum, according to the regulators briefed on the settlement details. Massachusetts will receive $7.8 million and Connecticut $4.2 million.
Armed with scripted ''talking points'' that were distributed in December and discussed in a conference call Friday, state regulators are bracing for criticism from investors who won't receive any direct benefit from the state settlements.
For instance, payments to California, Colorado, Arizona, Massachusetts, and New Hampshire will be credited directly to those states' general funds, which face substantial deficits or projected losses due to the weak economy.
''Most of our settlement will go to the general fund,'' said Massachusetts Secretary of State William F. Galvin. ''That's where all our fines go. We may get some money for the cost of our investigation.'' Galvin said distributing the settlement to individual investors would yield payments so small ''it wouldn't be worth the postage to claim it.''
The lists of talking points, which were obtained by the Globe, were distributed by a trade group of state securities regulators called the North American Securities Administators Association. The talking points anticipate questions on why investors won't get any money directly. The theme of many answers is that it's just as well to funnel the penalties into states' main bank accounts.
''We're not saying that restitution is impossible; we just don't know how it could be done to provide meaningful relief,'' reads one suggested response. Another says: ''In a fraud on the market, everyone is harmed; so shouldn't everyone get a share of the penalties paid?'' Fines paid by Wall Street firms into state coffers are described as ''Money that will help house the homeless, heal the sick, teach children how to read, protect our neighborhoods from crime.''
The SEC is taking a different approach. Previously, the top federal securities watchdog had to hand over penalties obtained from wrongdoers to the US Treasury. But under the Sarbanes-Oxley Act of 2002, which instituted new oversight of accountants and made other changes to prevent defrauding investors, the SEC can now distribute penalties to investors. The $437 million of the settlement earmarked for the SEC will go to the so-called Fair Fund for reimbursing investors, according to regulators who have seen copies of today's announcement.
It isn't clear exactly how the SEC will distribute the money. An SEC spokesman declined to comment on the settlement.
State securities regulators received a lot of positive attention for leading the investigation, but some are now unhappy about parts of the settlement. ''State regulators, particularly New York, deserve quite a bit of credit for initiating this investigation and unearthing these abuses,'' said Mark Connolly, deputy secretary of state and director of securities regulation for New Hampshire. ''But in a settlement like this, money shouldn't be flowing to the government. It should be given back to the people who lost it.''
Connolly said he'd like to see some of New Hampshire's settlement used for investor education and outreach programs. Other securities regulators felt the same way but can see how growing state budget deficits could hold sway.
''As a regulator, I think at least some portion of the money should go to investor education and additional enforcement,'' said Andre Peneda, deputy commissioner of the Department of Corporations in California. ''But I understand that all the elected leaders around the state are facing big financial crises in their own budgets, and I don't envy their positions.''
The investigation began in 2001 when New York Attorney General Eliot Spitzer opened an inquiry into Wall Street powerhouse Merrill Lynch, looking at how the investment banking firm's research department touted Internet stocks even after those shares lost much of their value.
Spitzer won a $100 million settlement from Merrill Lynch, and then expanded his investigation to a dozen other firms. Other regulators and industry groups, including the SEC, the state regulators' trade group, the National Association of Securities Dealers, and the New York Stock Exchange, joined the investigation. Galvin's Securities Division was lead investigator into Credit Suisse First Boston, the New York division of a Swiss firm, in part because that firm had been so active taking technology firms public.
Last December, the group announced the framework of a comprehensive settlement in which the firms neither admitted nor denied guilt but agreed to pay a $1.4 billion penalty. The agreement forces the brokerage firms to insulate their stock research operations from investment banking activities. The agreement also bans the practice of ''spinning,'' in which executives of favored banking clients get first crack to buy shares from hot public stock offerings.
Two of the 12 investigations announced in December won't be settled today. California regulators said Friday they haven't completed their probe of Deutsche Bank because the firm hadn't yet produced all the e-mails investigators had requested. In addition, the SEC is working to finalize a settlement with Thomas Weisel Partners, a San Francisco merchant bank.
Some regulators contend that because so many investors were harmed by Wall Street's tainted research, it is impossible to determine who deserves restitution and how much they should get. In its guidelines for public statements, the state regulators' trade group highlights the difficulties of determining losses for investors who learned of stock recommendations on TV or the Internet, and those who invested in a mutual fund whose manager relied on the puffed-up research.
''I'd spend $20 million in research just to give out $100,000,'' said Fred Joseph, commissioner of the Colorado Division of Securities. ''Even if I do give out the entire settlement to investors, how much will they end up with? Maybe $7, enough to buy a pizza.'' |
