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Regulators Encourage Investors' Claims

May 8, 2003 | AP

Regulators who investigated abuses at big Wall Street firms acknowledge that a $387.5 million fund to compensate investors won't be nearly sufficient.

And, while defending the size of the record fines against firms, they're inviting investors to pursue claims through the legal system.

Senators expressed concern Wednesday that the government's $1.4 billion settlement with 10 firms may not adequately compensate their aggrieved customers. "It was not intended to," said New York Attorney General Eliot Spitzer, who triggered the long-running probe of the brokerage industry.

What investors do get are ideas for potential litigation from the regulators, in the form of evidence uncovered by the investigation, said Spitzer and William Donaldson, chairman of the Securities and Exchange Commission.

Dozens of e-mail excerpts made public last week, included in lawsuits the SEC filed against the firms, showing how analysts allegedly misled investors with rosy stock ratings designed to win the firms investment-banking business from the companies issuing the stock.

"There is considerable civil liability out there," Donaldson testified at the hearing by the Senate Banking Committee. "Unfortunately, the losses that investors suffered in the aftermath of the market bubble that burst far exceed the ability to compensate them fully."

In the wake of the settlement, "we're gearing up for a large arbitration load," Robert Glauber, chairman and CEO of the National Association of Securities Dealers Chairman, told the senators.

It will take time to determine how the $387.5 million earmarked for restitution will be parceled out to investors who lost money in the affected stocks.

SEC Enforcement Director Stephen Cutler said it could be six months before a fund administrator, still to be appointed, submits a distribution plan for federal court approval.

Donaldson and Spitzer held open the possibility of future enforcement action against executives of Wall Street firms for failing to properly supervise analysts and investment bankers.

The regulators found fraud at three of the firms: Merrill Lynch, Credit Suisse First Boston and Salomon Smith Barney.

Donaldson last week chastised the head of Morgan Stanley, which is paying $125 million under the settlement, for suggesting that his firm's conduct didn't harm ordinary investors.

Salomon Smith Barney is paying the heaviest fine and restitution to investors $300 million. Its parent, Citigroup, the nation's largest financial institution, recently reported net income of $4.1 billion for the first quarter.

Seeking to restore investor confidence, the regulators are forcing the firms to cut the ties between analysts' research and investment banking, pay a total of $432.5 million for independent stock research for their customers, and fund an $80 million investor education program.

In addition to the fund to compensate investors, $487.5 million in fines will go to states according to their population. Already, investor advocates and lawmakers have criticized the states for largely planning to use the money for things like road improvement and school construction, while only a few will channel it to aggrieved investors.

The six other firms included in the settlement are Bear Stearns, Goldman Sachs, J.P. Morgan Chase, Lehman Brothers, U.S. Bancorp Piper Jaffray and UBS Warburg.

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