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Spitzer, States Rebuffed SEC on Giving More Money to Investors

Apr 30, 2003 | Bloomberg

New York Attorney General Eliot Spitzer and other state regulators rebuffed a Securities and Exchange Commission plan to give twice as much money to investors from the $1.4 billion Wall Street settlement.

SEC Enforcement Director Stephen Cutler asked state securities regulators in an April 25 letter to add their $387.5 million portion of the penalty paid by the 10 securities firms to the federal share also $387.5 million that is now earmarked to be paid to investors harmed by biased stock research.

``We believe it is in the public interest to return as much of that money to investors as possible,'' Cutler wrote to Maine securities regulator Christine Bruenn, a lead negotiator for the states. ``The distribution payments will be more meaningful if the states make their portions of the relief available to investors.''

The states' rejection of the SEC proposal shows how investors' concerns sometimes fell through the cracks as the agreement's details were hammered out in negotiations involving Citigroup Inc. and nine other securities firms on one side and the SEC, two self-regulatory groups and the states on the other, shareholder advocates said.

``This undercuts the credibility of the state regulators as investor advocates,'' said Barbara Roper, director of investor protection at the Consumer Federation of America. ``We would rather see the money go to investor restitution than into state coffers where it won't even necessarily support securities regulation.''

No Choice

Spitzer's spokeswoman, Juanita Scarlett, said the state regulators had no choice about what to do with money paid as penalties. ``In New York, fines and penalties are returned to the state's general fund,'' Scarlett said. Neither Bruenn, who is president of the North American Securities Administrators Association, nor Cutler returned calls seeking comment.

When the Wall Street settlement was announced Monday, Bruenn said each state will follow its own law in deciding what to do with the payments. Maine's law requires the money go to the state treasury, while North Carolina will use the money for investor education and Mississippi is hiring two additional securities fraud investigators, Bruenn said.

Spitzer said on Monday it's not possible to return New York's share of about $50 million to investors.

``There is no structure when fines are paid to the state of New York to permit that allocation of funds back to investors,'' Spitzer said. ``If we were to put an ad in the paper tomorrow saying we have this available to be distributed among investors, I think our system would crash.''

Civil Lawsuits

The states are counting on investors to file their own civil lawsuits against securities firms, using the regulators' disclosure of thousands of internal e-mails and other documents as evidence. ``We are providing these facts for the public record so everybody can have his or her case heard,'' Spitzer said.

Spitzer, who initiated the investigation into biased stock research two years ago, was the first to disclose internal e-mails that revealed analysts privately disparaging stocks that they publicly advocated to help their firms win investment banking business.

Besides fines and investor restitution, the $1.4 billion settlement a record payment for violating securities laws requires the 10 Wall Street firms to change the way they supervise and pay their research analysts. It limits contact between research and banking departments, and requires the firms to pay for outside research and investor education.

Last year's Sarbanes-Oxley corporate-governance law allows the SEC to put penalties paid from securities settlements into investor restitution funds, instead of returning the money to the U.S. Treasury.

Merrill Settlement

Republican Representatives Michael Oxley of Ohio and Richard Baker of Louisiana added the provision to the bill after Spitzer, a Democrat, didn't return to investors any of the $100 million from his earlier settlement with Merrill Lynch & Co.

``I was very disappointed that the amount of restitution made available under the settlement terms was so insignificant,'' said Baker. ``I think it ironic that we still can't understand that giving the money back to the people from whom it was taken is a good idea.''

The SEC, the New York Stock Exchange and the National Association of Securities Dealers split with the states the $775 million assessed on the firms Monday as penalties. The SEC and the self-regulatory groups put their share of the money, $387.5 million, into a restitution fund for investors.

The 10 securities firms are Citigroup, Credit Suisse First Boston, Merrill Lynch, Bear Stearns Cos., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Morgan Stanley, UBS Warburg LLC and U.S. Bancorp.


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