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SEC Chief: Losses Go Beyond Money

Spitzer, NYSE's Grasso also to testify on settlement pact

May 7, 2003 |

More than a week after clinching a landmark $1.4 billion settlement with Wall Street firms, Securities and Exchange Commission Chairman William Donaldson said investors have suffered losses that go beyond money.

Donaldson, appearing before Congress Wednesday, said the commission continues to investigate the roles played by analysts and their supervisors.

"Although the monetary relief secured in the settlement is substantial, unfortunately the losses that investors suffered in the aftermath of the market bubble that burst far exceed the ability to compensate them fully," Donaldson said. "They can never fully be repaid."

New York Attorney Eliot Spitzer, who spearheaded the investigation against the investment banks, is to testify before the Senate Committee on banking, housing and urban affairs later Wednesday.

New York Stock Exchange Chairman Richard Grasso, National Association of Securities Dealers Chairman and CEO Robert Glauber and North American Securities Administrators Association President Christine Bruenn are also slated to testify.

The resolution

A week ago, 10 firms agreed to pay $1.4 billion to formally settle a probe by regulators into analyst conflicts in Wall Street research. The formal resolution instituted various prohibitions at the firms, including the barring of links between research and investment banking and cutting ties of analyst compensation to investment-banking activities.

Aided by Spitzer, regulators also accused Citigroup's, Salomon Smith Barney, Merrill Lynch and Credit Suisse First Boston of issuing fraudulent research.

The 10 firms: which also include Goldman Sachs, Bear Stearns, Lehman Bros., J.P. Morgan, Morgan Stanley, UBS Warburg and U.S. Bancorp Piper Jaffray paid $875 million in disgorgement and civil penalties.

About $400 million will go to a "distribution fund" to be used to compensate investors. A court-appointed fund administrator is expected to pay out that money, Donaldson said.

Before the settlement was formalized, it was feared that the firms would attempt to deduct the fines or unload their payments to an insurer. But the SEC imposed language that expressly prohibits the firms from taking such tax deductions or seeking to recover money paid out from their insurers. See full story.

Donaldson labeled those provisions significant "because when it comes to penalties, the public-policy imperative in the tax code and in court decisions interpreting insurance policies is very clear: Penalties ought to be paid by those upon whom they are imposed and should not be deductible."

As part of the $1.4 billion settlement, the 10 firms are paying $387.5 million in disgorgement, of which some will be used for the distribution funds. The SEC did not include language that would prohibit the firms from deducting the disgorgement. "We did not think it was wise for us to substitute our judgment for that of Congress or the IRS," Donaldson said.

The SEC chairman also denied that the regulator engaged in "horse trading" by agreeing to lesser penalties or disgorgement payments in return for higher independent-research or investor-education payments.

Donaldson also said it was a "complicated" matter whether the money being paid to fund independent research and investor education could be passed on to insurers. "It likely will be up to the courts to determine, as a matter of state law, whether they are insurable," he said.

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