$1.4 billion penalty levied on 10 brokerages
Advertiser News Services
Ten of Wall Street's biggest firms will pay about $1.4 billion and adopt reforms to resolve allegations that they issued biased ratings on stocks to lure investment-banking business, federal and state regulators announced yesterday in a bid to shore up investors' confidence.
The unprecedented industrywide settlement, calling for one of the largest penalties ever levied by securities regulators, follows a lengthy investigation by the Securities and Exchange Commission, New York Attorney General Eliot Spitzer and other state regulators, and market regulators.
The settlement, based on a tentative agreement reached in December, will change the way major investment firms — including Citigroup, Merrill Lynch and J.P. Morgan Chase — do business.
The brokerage firms will have to sever the troublesome links between financial analysts' research and investment banking, pay a total $432.5 million over five years for independent stock research for their customers and finance an $80 million investor education program.
A fund of $387.5 million will be set up to compensate customers of the 10 firms; $487.5 million in fines will go to states according to their population.
The firms neither admitted nor denied allegations that they had misled investors, although internal e-mails showed their analysts privately had a low opinion of stocks they were touting to the public. Allegations against Merrill Lynch — the nation's biggest brokerage — Credit Suisse First Boston and Citigroup's brokerage business Salomon Smith Barney reached the level of securities fraud.
So what will it all mean for the average investor? Here are answers to some of the questions individuals may have about the scandal settlement with 10 major brokerages:
Q. If I think I was cheated by brokerage practices in recent years, am I entitled to some restitution?
A. In theory, yes. Federal regulators are setting up a $388-million fund for investor claims. The states will share another $388 million in funds for restitution.
Individual investors also have the right to initiate arbitration cases against brokerages for alleged abuses. And numerous class-action lawsuits have been filed against the industry, though none has yet been granted that status by any court.
Q. Realistically, what are my chances of getting paid from the government restitution funds?
A. If millions of investors file claims, the odds of receiving a significant claim would appear to be low.
Just do the math: Say three million investors were to try to tap the federal fund, alleging that, in the late 1990s, they bought Internet stocks the government now says were misrepresented by corrupt brokerage analysts. If all of the claims were legitimate, and the investors received equal settlements from the federal fund, each would get a check for $129.
The Securities and Exchange Commission, however, says the plan for the federal fund is for a court-appointed administrator to distribute the money in an "equitable" manner and that the payments will be "meaningful" for those whose claims are judged to have merit.
In any case, when the administrator eventually explains how to file claims — those details still have to be worked out — an investor would have nothing to lose by doing so: According to the SEC, "a recipient of funds from these settlements is not precluded from pursuing any other remedy or recourse against a firm."
To check on whether stocks you own or owned are covered in the regulators complaints, go to: www.sec.gov/litigation/litreleases.shtml and read the releases dated April 28.
