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Utah Gets $4M in Settlement

May 6, 2003 | The Salt Lake Tribune

Utah will get nearly $4 million as its share of last week's $1.4 billion securities-analyst settlement, but little of that money will go to the state's investor education effort and none will go to reimburse Utah investors who fell victim to the brokerage industry's overly optimistic stock market research.

Initially, Utah's share of the billion-dollar settlement with Citigroup, Credit Suisse, Goldman Sachs and seven other rival securities firms will flow into the state's Securities Investor Education Fund, said Tony Taggart, director of the Utah Securities Division.

However, at the end of Utah's fiscal year June 30, any money in that education fund over $100,000 must be surrendered to the state's general fund. "I wish we could keep it for investor education but it is just not going to happen," Taggart said.

Utah is not alone.

About half the states are required by state law to deposit any penalties they receive from the securities industry into their general funds.
"Obviously how that money is going to be used will vary from state to state," said Jerry Munk, spokesman for the North American Securities Administrators Association.

For example, Nebraska will use some of the money it receives to endow a chair in business ethics at its state university, he said. Missouri is considering using what it receives to set up a restitution fund for investors.

The settlement stems from Wall Street's role in the stock market boom of the late 1990s. Securities analysts at securities firms touted hundreds of stocks to the investing public while privately disparaging many of those same companies.

Regulators, including investigators in Utah, started looking into those stock research practices after investors lost more than $8.5 billion in stock value following the market downturn in March 2000. After signing on with the joint state and federal probe, Utah specifically was charged with investigating Goldman, Sachs & Co., which agreed to pay $110 million to settle claims against it.

Taggart explained that the inquiry focused on concerns that brokerages recommended stocks they knew were risky to get investment banking fees. "In one instance, we found an analyst who knew his recommendations for AT&T and WorldCom were not justified but didn't do anything about it because of investment banking concerns," he said.

Although many states, including Utah, will be unable to provide restitution to those who relied on securities analyst research to guide their investment decisions, the U.S. Securities and Exchange Commission is setting up a $399 million fund to offer at least some relief.

"We are recommending and are asking the federal court to approve the appointment of a fund administrator who will come up with a plan to address the question of how restitution can be provided to investors," SEC spokesman John Heine said.

While the SEC's fund will be inadequate to address all the potential claims that investors may levy against the securities industry, that may not be a big issue, Taggart said.

"If an investor arbitrates or gets a court ruling against one of the brokerage firms involved, it [the brokerage] is going to have pay, regardless of whether the money comes from the SEC's settlement fund or from the firm itself," he said.


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