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5/1/2003

Investors can get restitution

By Anitha Reddy
The Washington Post

Just what does the $1.4 billion settlement between Wall Street firms and regulators mean for investors?

The agreement, which settled allegations that analysts duped investors by issuing biased research reports to win investment-banking business, is designed to help investors in two ways: by setting up a compensation fund, and by giving volumes of compromising evidence to investors involved in class-action lawsuits or individuals who have filed arbitration cases against their brokers.

Under the settlement, $387.5 million of the money paid by Wall Street’s 10 largest firms will go into a compensation fund. To qualify, investors had to have bought stock specifically named in the regulators’ complaints and purchased it from one of the 10 firms that signed the agreement.

Those firms are Bear, Stearns & Co.; Citigroup Global Markets Inc. (formerly Salomon Smith Barney Inc.); Credit Suisse First Boston LLC; Goldman Sachs & Co.; J.P. Morgan Securities Inc.; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley & Co.; UBS Warburg LLC; and U.S. Bancorp Piper Jaffray Inc.

Other details, such as how to apply and how much will be paid out, have not yet been decided. The agreement gives the fund administrator wide latitude over how money will be distributed, though the final payment plan must be approved by the Securities and Exchange Commission (SEC) and the courts.

An SEC spokesman said the fund’s administrator has not yet been selected but should be in place within a month.

The administrator could propose limiting payouts to investors in only certain stocks, the SEC spokesman said. The administrator must also decide whether investors who lost money through 401(k) plans or mutual funds will qualify for compensation from the fund.

The agency has stipulated that the payouts have to be “meaningful,” which could be an incentive for the fund administrator to limit the number of people who can file for claims.

Meanwhile, as part of the settlement, regulators are making public the evidence they unearthed while investigating conflicts of interest at Wall Street firms. Plaintiffs’ lawyers are just beginning to sift through embarrassing and possibly damaging e-mails, memos and reports that could bolster their allegations that stock analysts were cheerleaders rather than objective evaluators.

Laws governing private securities litigation do not allow investors’ attorneys to subpoena internal documents from a firm until a plaintiff can describe the alleged fraud to a judge’s satisfaction. It has been difficult to meet that standard without the ability to gather internal evidence, plaintiffs’ lawyers say.

“It’s a Catch-22,” said Robert Kaplan, a securities class-action lawyer in New York. “There are a lot of cases that are thrown out because you can’t get details.”

Many of the regulators’ complaints against the Wall Street firms contained enough information to push investors over that legal hurdle, lawyers said. By quoting dated confidential papers and messages, the complaints provided investors and their lawyers with a road map to help them uncover even more evidence.

The documents will also be helpful to investors pursuing arbitration cases against firms. Customers usually sign away their right to sue a broker when they open an account.

If they have grievances, they are heard before arbitration panels that have far less power than a court or regulators to force companies to turn over internal records.

“We have had literally tens and tens of phone calls and e-mails today from people who have read the newspapers and seen the names of certain stocks,” said Thomas Ajamie, a New York lawyer who represents individual investors in arbitration cases against firms.

The firms and analysts who are most vulnerable to suits are those who were accused of issuing “fraudulent” research reports or otherwise engaging in “fraud,” according to plaintiffs’ lawyers.

Regulators charged that Merrill Lynch, Credit Suisse First Boston and Citigroup’s Salomon Smith Barney unit issued fraudulent research reports, a violation of federal securities law.

As part of the settlement, the firms neither admitted nor denied the charges.

Jacob Zamansky, a New York lawyer representing individual investors in arbitration actions against Salomon Smith Barney telecom analyst Jack Grubman, said the materials released Tuesday were the most damning evidence he could imagine short of “a taped confession of guilt.”

For instance, Zamansky pointed to the e-mail in which Grubman wrote, “If anything the record shows that we support our investment banking clients too well and for too long.” In another, Grubman wrote: “Screw the investment bankers. We should have put a Sell on everything a year ago.”

Zamansky said, “That proves the case that research materials were nothing more than selling tools for investment banking.” In a statement issued Monday, Citigroup noted that the settlements “do not establish wrongdoing or liability for purposes of any other proceeding.”

While saying that the company is proud of the way it responded after concerns about its practices were raised, Charles Prince, chairman and chief executive of Citigroup’s Global Corporate and Investment Bank, also offered an apology to customers, shareholders and employees: “We deeply regret that our past research, IPO and distribution practices raised concerns about the integrity of our company.”