Maine To Get Share of SEC SettlementApr 30, 2003 | Press Herald Maine's state government is slated to receive $4 million from a $1.4 billion settlement between some of Wall Street's largest brokerage firms and securities regulators.
The deal announced Monday with the 10 firms came after more than a year of regulatory probes that found analysts misled investors with stock picks designed to win their firms investment banking business.
For three of the firms Merrill Lynch, the nation's largest brokerage, Credit Suisse First Boston and Citigroup's brokerage business Salomon Smith Barney - the research reports were not only misleading but also fraudulent, according to the Securities and Exchange Commission.
Salomon Smith Barney is paying the heaviest fine and restitution to investors under the settlement: $300 million.
The 10 brokerage firms will have to sever the links between financial analysts' research and investment banking, pay a total of $432.5 million over five years for independent stock research for their customers, and fund an $80 million investor education program. A fund of $387.5 million will be set up to compensate customers of the 10 firms; $487.5 million in fines will go to states according to their population.
Most of the state settlements will go to treasuries, not investors. Christine A. Bruenn, securities administrator for Maine and president of the North American Securities Administrators Association, a trade group, told The Boston Globe that it would be up to each state whether to reimburse victimized investors.
"We don't think meaningful restitution can be made, but if they want to try it, fine," she said. Maine's payment will go to the general fund, she said.
Much of the evidence against the firms consists of e-mails in which analysts derided stocks they were publicly recommending and discussed the pursuit of banking fees.
For example, when asked his three most important goals for 2000, a Goldman Sachs analyst wrote in a message: "1. Get more investment banking revenue. 2. Get more investment banking revenue. 3. Get more investment banking revenue."
The door now appears open to a flurry of private litigation by investors who believe they were cheated. The investors will have at their disposal the information compiled by Securities and Exchange Commission investigators, New York Attorney General Eliot Spitzer, and other state regulators.
"It will take time, but because we put all this information in the public record, investors will be able in due course to recover the funds that they lost on false research," Spitzer said.
Barbara Roper, director of investor protection for the Consumer Federation of America, said that would be "the real compensation."
Now that the settlement is in place, Roper cautioned investors not to "rush to bestow renewed trust on Wall Street firms."
"There are too many questions that only time will answer about the effectiveness of the new requirements," she said.
Moreover, the SEC could still take action against top executives of brokerage firms for failing to properly supervise financial analysts and investment bankers.
Final approval of the accord, in which the brokerage firms neither admitted nor denied misleading investors, comes after a year in which American investors' trust was rattled by a series of stunning accounting scandals at big companies, which brought the strictest new anti-fraud law for U.S. corporations since the Depression.
Last week saw the arrest on obstruction-of-justice charges of a former star investment banker, Frank Quattrone, who personified the go-go environment on Wall Street during the high-tech stock boom.
And two formerly celebrated analysts, Internet expert Henry Blodget of Merrill Lynch and telecom specialist Jack Grubman of Salomon Smith Barney, agreed under the settlement to pay $19 million in fines and penalties. They also will be banned permanently from the securities industry to settle fraud charges. Blodget and Grubman neither admitted nor denied wrongdoing.
SEC Chairman William Donaldson called the cases against Wall Street's powerhouses "an important milestone in our ongoing effort both to address serious abuses that have taken place in our markets and to restore investor confidence and public trust by making sure these abuses don't happen again."
Also under the settlement:
Certain analysis from an investment house will have to be made public within 90 days after each quarter concludes, to allow investors to compare the performance of analysts from different firms and promote objective rankings.
Brokerages will be banned from giving executives and directors preferential access to shares of companies going public that they have courted as investment banking clients.
An independent monitor will be assigned to each firm to make sure the settlement terms are met.
Other firms included in the settlement were: Bear Stearns, Lehman Brothers, U.S. Bancorp Piper Jaffray and UBS Warburg (now UBS Paine Webber).