Wall Street Settlement With Securities Regulators. The state and West Virginia investors have a stake in the record $1.4-billion settlement agreement reached between some of Wall Street’s largest firms and securities regulators.
West Virginia State Auditor and Securities Commissioner Glen B. Gainer II announced Tuesday that the state will get at least $3.87 million in penalties from the settlement between nine Wall Street firms and the securities regulators.
Settlement negotiations also are ongoing with one other unidentified firm, which will bring the state’s total above $4 million, Gainer said.
Last year, Gainer disclosed a similar settlement totaling $500,000 with Merrill Lynch. The state received that payment in November, a spokesman for the Auditor’s office said.
More than two-thirds of the $3.87 million in penalties will come from two firms: Citigroup’s Salomon Smith Barney unit, which will pay $1.5 million to the state; and Credit Suisse First Boston, LLC, which will pay $750,000.
Those firms and Merrill Lynch allegedly issued fraudulent research reports and engaged in other questionable practices, according to the U.S. Securities and Exchange Commission.
By law, the money will go into the state’s General Revenue Fund, Gainer said. It won’t go to investors who lost money because of tainted research advice.
“The monies we are collecting are just fines and penalties,” Gainer said in a telephone interview.
But investors can file private lawsuits or engage in class action suits to attempt to recoup at least a portion of their stock market losses, he added.
Farmer, Cline and Arnold, a Charleston law firm, filed a class action lawsuit last August against Merrill Lynch seeking millions for West Virginia investors who bought technology stocks through that firm since 1999.
That case has been since consolidated with other class actions in the southern District of New York, according to Steve Farmer of Farmer, Cline and Arnold.
cases against Merrill Lynch
Farmer said Tuesday his firm now is focusing on filing individual cases against Merrill Lynch, Salomon Smith Barney and possibly others. “Thus far we have filed five and we will be filing more,” he said.
While they are sitting there getting rich, we have clients who have lost their pension money on it, Farmer said. “Hopefully, we can be successful in returning some of the money.”
He noted the amount of the fines disclosed Monday underscores its importance. The settlement shows the brokerage firms understand they got caught doing something wrong, he said.
The case against Merrill Lynch is based in part on internal documents from the firm’s Internet division, which called certain stocks “a piece of crap” or a “dog” while the company was publicly recommending that investors continue to buy or hold those stocks.
Stocks involved in that case include many former Internet and telecommunications high-fliers such as AOL, eBay, Global Crossing, Internet Capital Group, Lycos, pets.com, Yahoo! and Priceline.
This week’s settlement sets a number of precedents. First, it attempts to fundamentally change the way Wall Street firms do business, cracking down on blatant conflicts of interest and rebuilding the “Chinese wall” separating stock research analysts and investment bankers.
In the heyday of the 1990s stock market boom, many big Wall Street firms hyped stocks to land investment banking business for their firms.
The settlement also slaps stiff fines on many of the country’s top brokerages. It requires that they pay $432.5 million over five years to fund independent research for their customers and also sets aside another $80 million for an investor education fund.
“Our first concern has always been the investor,” Gainer said.
He thinks the action will help restore confidence in the markets. The investors realize we have to put faith back in the industry, he said. For the survivability of the markets, this has to succeed.
Others weren’t as hopeful on the prospects of the settlement forcing Wall Street to change its ways. “They’ve done a good job of managing conflict of interest,” said Martin Weiss who heads the Weiss & Co., an independent research firm. “What they should do is eliminate the conflict of interest.”
Chester Thompson, deputy commissioner of securities, said the state’s settlement discussions began last April. “The structure and design of this whole thing is to allow the investors to be able to recover in some fashion,” he said.
He noted that the $437.5 million set aside for settlements with individual investors nationwide is not a cap, but only a starting point.
“The whole thing was designed for people who need to bring the private litigation or class actions,” Thompson said. “The claim is there. The incidence of impropriety is there. The evidence is there.”
Under the agreement, the brokerage firms will be required to distribute $30 million over five years to the Investor Protection Trust. From those funds, financial literacy education programs in West Virginia will receive $300,000, Gainer said.
The seven other firms included in the settlement and the amounts they are paying to the state are:
Bear, Stearns & Co. Inc, $250,000; Goldman Sachs & Co., $250,000; Lehman Brothers Inc., $250,000; J.P. Morgan Securities Inc., $250,000; Morgan Stanley & Co., Inc., $250,000; UBS Warburg LLC, $250,000; and U.S. Bancorp Piper Jaffray Inc., $125,000.
The findings of fraud prove that now more than ever, investors need to investigate the person and the firm as much as the investment that is offered, Gainer said in a statement.
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