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Miss. Gets $4M From Fraud Deal

Share of $1.3B Settlement Decided by State Population

Dec 24, 2002 | The Clarion-Ledger

Mississippi will receive $4 million for its part in a national settlement involving conflict of interest charges at Wall Street brokerage and investment banking firms.

The $1.43 billion national settlement, which was announced Friday, will be divided among states and national regulation agencies. The amount each state receives is based on population, Mississippi Secretary of State Eric Clark said at a Monday press conference.

Clark said the joint national investigation began following concerns that stockbrokers were knowingly over-hyping stocks to investors in an effort to secure lucrative investment banking business for their firms. The misrepresentation of the stocks' values resulted in some investors losing money, he said.

Many of these concerns were brought to light after accounting fraud at Clinton-based WorldCom drove the company into bankruptcy and rendered the stock worthless.

The telecommunications giant's accounting fraud is now estimated at $9 billion.

The settlement, which carries the largest security related fines in U.S. history, is expected to produce the most sweeping reforms ever seen on Wall Street as a result. The 10 firms involved have agreed to $900 million in fines. The firms also will pay $450 million over five years for independent research and $85 million for a nationwide investor education program.

Firms agreeing to the settlement are Morgan Stanley, Goldman Sachs, Bear Stearns, Lehman Brothers, UBS Warburg, Deutsche Bank, and Citigroup parent company of Salomon Smith Barney, J.P. Morgan Chase and Credit Suisse First Boston, Clark said.

The firms must also separate their research and investment banking divisions.

"The intent here, which I believe has been achieved, is more control," at stopping fraud of consumers, Clark said.

He said the $4 million will be in addition to $500,000 that Merrill Lynch has already paid to the state in a similar settlement.

Clark hopes to convince the Legislature to hire more people so his office can expand its investigative abilities. He also hopes some of the money can be used for consumer awareness classes.

Rep. Steve Holland, D-Tupelo, said the Legislature will listen to Clark's concerns. But he pointed out there are other needs, such as the shortfall in the state budget.

"Four million dollars, that's not a lot of money compared to the problems we have budgetwise," Holland said. "But we will do our best to expend it wisely and certainly take the suggestion of the Secretary of State in our deliberation."

"(The $4 million) might buy five days of pills for Medicaid. It's $1.3 billion all total, the Medicaid budget. I've been in the Legislature so long now that $4 million is like enough money to buy a Drumstick ice cream."

In addition to the fines, the settlement agreement:

Bans the "spinning" of Initial Public Offerings (IPOs). Brokerages won't be allowed to allocate lucrative IPO shares to corporate officers who could influence investment banking decisions.

Requires firms to provide independent research to investors by contracting with no fewer than three independent research firms.

Requires disclosure of rating and price target forecasts within 90 days to allow for evaluation of performance by analysts.

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