Private Litigation Looms After Wall Street Settlement

December 20 , 2002
By Lynn Cowan
Dow Jones Newswires

WASHINGTON — Regulators’ $1.4 billion settlement with Wall Street Friday concluded a potentially expensive and lengthy investigation, but all eyes are now on the potential for private litigation against the firms involved.

The settlement requires 10 major investment banks and brokerage firms to pay fines, provide independent research for their customers, end the practice of doling out IPO shares to executives and directors of corporations, and to insulate research analysts’ compensation from the influence of investment bankers. The fines may result in quarterly financial charges at some of the firms, such as UBS AG’s UBS Warburg unit, but the amount is unlikely to seriously affect their earnings.

The firms themselves – Bear Stearns Cos. , Credit Suisse First Boston, Deutsche Bank AG , Goldman Sachs Group Inc. (NYSE:GS – News) , J.P. Morgan Chase & Co. , Lehman Brothers Holdings Inc. (NYSE:LEH – News) , Merrill Lynch & Co. , Morgan Stanley , Citigroup Inc.’s Salomon Smith Barney, and UBS Warburg – reacted with a mixture of relief and reticence Friday, with many refusing to comment on the settlement, and several issuing statements saying they were pleased that the investigations are behind them.

Industry observers say the business changes mandated – such as the end of IPO spinning and separating analysts and investment-banking functions – won’t affect the industry negatively, since all the major firms will have to play by the same rules.

Rather, the biggest issue facing Wall Street now is whether information that comes out of the settlement bolsters individual investors’ ability to litigate and arbitrate cases against the firms.

“I suppose some people may feel very short-term that now the other shoe has dropped” and stock prices will benefit, said Roy Smith, a professor of finance at New York University’s Stern School of Business. “But the serious observers will say this settlement issue was already in the price of the stocks, and the more serious issue [of private litigation] remains.”

The settlement materials released Friday didn’t address what information from the investigation would be released to the public, but The Wall Street Journal reported that New York State Attorney General Eliot Spitzer planned to release e-mails gathered by investigators next month.

Phil Aidikoff, a Beverly Hills, Calif., attorney who specializes in representing investors against brokerage firms, said he and other plaintiffs’ attorneys would like to see regulators release a finding of facts about their investigations, which would provide more ammunition in arbitration cases.

“Any global settlement that doesn’t include a release of the documents at a minimum, and a release of their findings of fact ideally, doesn’t help individual investors,” said Mr. Aidikoff, who added that the restitution fund created by the settlement will likely only repay wronged investors pennies on the dollar, based on past restitution funds in the industry.

Mr. Aidikoff said he believes it is unlikely that the release of facts and information from the investigations will result in a higher volume of investor litigation against Wall Street firms, but it will make the litigation more successful. Mr. Aidikoff, a partner at Aidikoff & Uhl in Beverly Hills, said he won a case for an investor last week against Merrill Lynch for $256,000 using e- mails that Mr. Spitzer’s office had released in its earlier settlement with Merrill. He said the case he won didn’t rely solely on claims of biased research, but combined research issues with charges of recommending unsuitable investments for his client.

“I have 50 to 60 cases just like that waiting,” said Mr. Aidikoff. Lawrence Klayman, a Boca Raton, Fla., attorney who represents investors against securities firms, said any restitution fund is unlikely to stanch the ensuing private litigation against the firms. “Investors will be slugging it out with brokerage firms for years,” after this settlement, said Mr. Klayman. Beyond litigation issues, the settlement isn’t likely to restore investor confidence enough to benefit Wall Street’s bottom line, said observers. Securities firms have struggled to produce profits in the past year as investors sat on the sidelines and corporations slowed mergers and equity issuance. But Wall Street conflicts of interest are just one of several factors affecting investor confidence, said Meir Statman, a professor of finance at Santa Clara University in California. Declining stock prices and concerns about the quality of earnings at companies continue to hurt sentiment, he said. “It’s really very important to note that the way Wall Street makes money is by volume,” said Mr. Statman. ” And after all, both stock prices and volume dipped after the 1987 crash. The stock prices had regained their footing by 1989, but it took until 1991 for the volume to come back. How long it will take this time, I don’t know.” Henry Hu, a corporate and securities law professor at the University of Texas Law School, said the settlement is a good step in the process of fixing what ails Wall Street, but it is by no means the end of the industry’s troubles with conflict- of-interest issues. “We need to be careful not to exaggerate its importance,” said Mr. Hu. “But too many people seem to think this is the end of the process, when more is going to go on after this.”

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