Wall Street Settlement
With Ben White
Post Financial Staff Writer
Tuesday, April 29, 2003; Noon ET

On Monday, federal and state regulators unveiled a $1.4 billion legal settlement with 10 of Wall Street's biggest securities firms. The deal brings to an end a year-long probe into allegations that Wall Street misled investors about stocks during the 1990s boom and favorably rated some stocks in exchange for investment banking business from certain companies.

Washington Post reporter Ben White, was online Tuesday, April 29 at Noon ET, to discuss the settlement.

Below is the transcript.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Ben White: Hi folks. Ben White in the New York bureau of the Post here. Bleary-eyed from reading too many Wall Street e-mails. Happy to take your questions on this remarkable $1.4 billion setlement.

Mt. Lebanon, Pa.: Now I know the NY state authorities and the Federals are all going to say that they worked hard, and it was like probing the caves of Minos looking to kill the Centaur before he devoured us, blah blah blah. Still, $1.4B. Compared to the combined net worth of these Wall Street behemouths that's got to amount to a nuiance check. Those outfits probably spend that much on catering. So as far as this U.S. taxpayer is concerned, if after the dust settles no one is sporting designer orange jump suits, then the results of this collosal investor scumbaggery are, in the words of the Car Talk guys.. BO-GUS. Your take on whether "justice" has been served. Thanks much. HLB

Ben White: Good points, HLB. The regulators never thought they could get all the money back to investors who lost a great deal in the market crash.

But they hope that the thousands of documents released will go a long way in helping investors with arbitration claims and class actions. So in the end the cost to the firms could be a lot more than $1.4B

Baltimore, Md.: After reading about all these scandals, it would appear to me... a relative stock market illiterate... that the only sane thing for a small investor to do is put money in some sort of index fund that follows broad sectors of the market and be happy with your historical 10% annual rate of return. Buying individual stocks would seem to be a sucker's game, unless you're relatively well connected. And the Bush whitehouse seems in no mood to level the playing field, either. They held on to Harvey Pitt just long enough to weather the pre 9-11 financial storm and sink meaningful SEC and accounting reforms. About the only thing a small investor can be confident in these days is that the deck is stacked against him.

Ben White: I'm not really in the business of giving investment advice, though many professionals say index funds are the way to go.

But it's clear that the revelations in these probes have soured a lot of people on Wall Street brokerage firms. Only time will tell whether the reforms, intended to produce honest research from Wall Street analysts, will really work. In fact it may take another bull market to really put the reforms to the test.

Scranton, Pa.: I'm concerned that this amount among 10 firms is not a sufficient detterent. Are their any other actions being taken? Please elaborate.

washingtonpost.com: SEC Approves Wall Street Settlement (Post, April 28)

Ben White: Many share your concern with the amount, which represents only a fraction of what the firms made during the boom.

But there are other actions being taken. Federal, industry and state regulators and prosectuors continue to investigate individual analysts and bankers (see Frank Quattrone, formerly of CSFB). The SEC has also said it is looking into the supervisory practices of top executives at all the firms involved in the settlement. As SEC enforcement chief Steve Cutler said yesterday, "Just wait."

Columbus, Ohio: Yet another Wall Street scandal, in step with the string of others we now know so well.

Mr. White, I'm one of the purported "little investors." Ten dollars to YOU if you can give me one good reason why I should ever put my money into Wall Street hands again ...

Ben White: Hello Columbus. Good to hear from Ohio (where I went to college).

I can't really give you any good reasons but the SEC, NYSE, NASD, the New York AG and a bunch of other states tried to give you several yesterday. They believe the new structures they've set up will end practices that harmed the "little investor." They say Wall Sreet will no longer hand out all the hot IPO shares to executives at firms that are also banking clients and that analysts will no longer produce hyped up reports on banking clients.

Will this happen? I don't know.

One good thing could be that the little investor will now get other sources of research from Wall Street. Would that be useful to you?

Ithaca, N.Y.: Are investors actually better off as a result of this settlement? Does the current settlement merely allow Wall Street big mea culpa, whilst at the brokerage, it is business as before?

Should the Attorneys General continued the litigation? Why take this agreement at this time? It would seem the compensation funds are paltry, perhaps jail-time would have been a better option?

Ben White: All good questions, Ithaca.

As I've said, only time will tell if investors are really better off.

As for the decision to settle, some have criticzed Spitzer for not going to the wall against Citigroup and its chief executive, Sandy Weill. There are those who say Wall Street firms only take you seriously when you start leading people away in cuffs.

Spitzer, for his part, has said he didn't want to destory any of these firms (perhaps damaging the market in the process) but wanted them to change what he viewed as a system rife with conflicts of interest.

And probes into individuals are ongoing.

Washington, D.C.: Did the scandals and settlements dated back from the Clinton/Gore years? Enron, Global Crossing, Andersen all could have been prevented.

Ben White: The scandals that led to the settlement do date back to the Clinton/Gore years, though I'm not sure it really mattered who was in the White House. The market was booming and everyone seemed to be getting rich. To some extent the fact that analysts at brokerage firms were hyping stocks of banking clients was pretty well known to regulators and market participants at the time.

But the real extent of the conflicts of interest and the disservice they did to small investors who weren't in on the game only became clear later.

Waltham, Mass.: Is there going to be any change in management among these firms as a result of the settlement?

Ben White: That's a very good question. So far it doesn't seem so, at least at the very top.

Merrill Lynch has a brand new chief executive, Stan O'Neal, and I don't think he's going anywhere anytime soon.

Sandy Weill is very well entrenched at Citigroup, though he has shaken up a lot of people beneath him, bringing in Sallie Krawcheck to head up the new brokerage and research unit. Figuring out who might eventually succeed Weill is a favorite Wall Street parlor game. There is no clear heir apparent, which some say is a problem considering Citi is the nation's biggest financial services firm.

Don't see any big shakeups coming at the other firms. But who knows. Wall Street is full of surprises.

Virginia: Can the SEC investigate when their top people are leaving?

Ben White: Another good question.

The SEC has historically been short on investigative resources. But even with the switch in top leadership, the enforcement team has consistent leadership in Steve Cutler. (Note to Steve: Why don't you return my calls?)

What the SEC does is try to pick its spots (like this investigation into alleged research conflicts) and make a difference and try to deter future misconduct. But its budget (or lack thereof) is a constant problem.

washingtonpost.com: Business section: Wall Street Probe

Washington, D.C.: Hello,
Do you know any of the details yet on how the restitution fund will distribute money to investor?

Ben White: Hi there. I imagine this is a question on a lot of investors' minds.

I don't know many details, unfortunately. The SEC is still working this out. Sounds like they will try to limit the disgorgement to investors who actually bought stocks mentioned in the complaints against the individual firms. IE, people who bought XO Communications or Metromedia Fiber Networks from Salomon Smith Barney.

If they do it this way, which seems to make sense, it may not be as hard to figure out who gets what as it at first seemed. That said, its a relatively small pot of money (about $390 million) compared to what people lost on these stocks in the market.

My advice: Call the SEC. They're in the book.

Washington, D.C.: Could you please clear up my confusion? I've read that investors will have a hard time bringing lawsuits against these Wall Street firms since they had to sign arbitration agreements when they initially opened accounts, would a class action suit get around that?

Ben White: Super question (one I got from an editor last night!).

Individuals generally sign arbitration agreement when setting up a brokerage account. This means they agree not to sue in civil court but to go through an arbitration proces set up industry regulators.

BUT. If investors band together and form a class to persue a securities claim they can go through regular civil courts. This is because, I believe, the arbitration courts are not equipped to deal with the complexities of a class action. Caveat emptor: I would also put this question to a trained lawyer, which I am not.

This Web site has great info on securities class actions:
http://securities.stanford.edu/

Logan Circle, Washington, D.C.: Touting a stock that the analyst and his superiors knows is lousy should be a crime punishable by the loss of personal riches and the freedom to work in any position of trust with money.

Why is this not the case?

Ben White: Well, some of the analysts are losing personal riches (Grubman $15 million, Blodget, $4 million) though not as much as they made during the bull market.

To your second point, both of those gentlemen did agree to lifetime bans from the securities industry. So they won't be handling any money but their own considerable fortunes. In many cases, white collar settlements also ban individuals from serving as executives or directors at publicly traded companies.

So regulators do at least try to put these people out of business for good.

Washington, D.C.: Basic question: Who gets the $1.4 billion?

Ben White: Easy answer, D.C.: I get it.

Ha.

In all seriousness, about $390 million is to go back to investors. Around $500 million will pay for independent research while $80 million will go to investor education. The rest gets split up between the states and will go, for the most part, into their general treasuries to be used or any purpose.

Alexandria, Va.: How closely did Spitzer and the feds work together on this? Were there any political issues, given Spitzer is a Dem. and the SEC is run by the Bush admin.?

Ben White: Great question, Alexandria.

It was an uneasy alliance at first. Spitzer got things started with the Merrill Lynch probe and federal regulators were accused of being asleep at the switch.

But late last year state, federal and industry regulators agreed to work together and Spitzer struck up a remarkable friendship with Steve Cutler at the SEC. The pair of them worked very closely from then on.

While the SEC chairman is a Bush appointee the agency isn't (or at least shouldn't be) "run" by the White House. It's run by the commissioners and the professional staff. And even if Republicans wanted to shut the probes down, Spitzer generated so much momentum and public pressure that there is no way that could have happened.

Arlington, VA: Who's in charge of managing the restition fund and how will they insure that it's disbursed fairly?

Ben White: The SEC is in charge. They are trying hard to make sure its distributed fairly. I'd get in contact with them if you think you should receive some of the money. See an above answer for more details on how the fund will work.

Washington, D.C.: Ben-
Has this settlement open up the floodgates for the release of potentially incriminating emails and other evidence? And if so couldn't investors use that to bring lawsuits, since the problem w/ individual suits is not only the arbitration agreements they've signed but also the costs-benefits to bring a suit? But now that Spitzer has done the costly part (gathering of evdence) it would be simple and less costly for individuals to litigate?

Ben White: The flood has already burst the gates, D.C.

The documents are all out there now for lawyers and everyday citizens to peruse. (Though we have found that getting hard copy of these docs can be kind of tough).

And yes, the fact that all this free discovery has been done will dramatically lower the cost of persuing arbitration claims and class actions.

Make no mistake, plaintiffs lawyers are eagerly scouring these documents as we type.

Vienna, Va.: I am not part of the investment or corporate world, either as a broker, corporate executive, CEO, accountant, or anything else like this...I am just one of the many ordinary stockholders that lost money in the last three years with stocks and mutual funds. Yet I am STRONGLY opposed to "enforcement" actions taken by the SEC and the rest of the government in this area. Like it or not...ANY stock investment is a significant risk, and no one forced me (or anyone else) to buy them...I alone made that decision. I don't blame the drop in values on CEO's, "corrupt" accounting, or anything else. This is simply one of the risks of investing. The Enron employees voluntarily bought their stock portfolios, and did so KNOWING that stocks are not guaranteed by FDIC or anything else. While I feel sorry for them (and myself), THAT is no reason for the government to "prosecute" CEO's and Execs for "criminal" behavior.

Ben White: Interesting thoughts, not sure everyone would agree.

I'm not an Enron expert but weren't there questions about employees being locked into plans that consisted exclusively of Enron stock?

And of course stock investing is risky. But that doesn't change the fact that regulators have a responsibility to enforce existing rules and try to make the playing field as level as possible and to prosecute people who break the rules.

Arlington, Va.: Could you explain to me how the investor education portion works and who's in charge?

Ben White: Another very good question.

This is something that we will need to do more reporting on. I don't think all the details are really worked out. I do think it will be split between state and national education programs. But please stay tuned on this and we will try to get something in the paper on it because its very important.

North Carolina: Ben,

I had been tracking a stock for several days just recently. It had been hovering around $3.50/share. I was waiting to hear the earnings report before I bought. The afternoon before the earnings report came out somebody bought 400,000 shares! The next day the stock rose above $4.50/share. Of course, when the earnings report came out it was very favorable. This person didn't just buy $400,000 of stock the day before an earnings report if he didn't have insider knowledge.

So, I ask how will this settlement really change things? How do you get the slippery inside traders and future crooks off Wall Street?

Ben White: Hello, N.C.

To answer the last question first, there will always be slippery players on Wall Street. This is an industry exlusively dedicated to making (enormous amounts) of money and it is populated by some very, very smart people who can often outfox regulators. As AG Spitzer said somewhere yesterday, these things are cyclical and regulators usually get to them after the fact. He said we are safe on research conflicts "for now" but that the issue will have to be revisited. If history is a guide though, the next scandal will be different.

On your first point about the stock, I'd let the NASD or NYSE know what you witnessed. They have trained market surveillance pros whose job it is to investigate this exact sort of thing. If someone was trading in advance of the earnings report thats a BIG BIG no no.

Washington, D.C.: So where does a small investor now turn for redress if he bought a once high-flying internet stock touted by Blodgett on the business talk shows ... and then seeing his investment wiped out months later? Is there a special hotline, or does he need to hire a lawyer?

Ben White: Don't think you need a lawyer. I'm sure there will be a hotline but I don't have that number yet. Call the SEC main number and don't give up till you get someone to tell you what to do. They may tell you to hold tight for a few days.

Hartford, Conn.: Ben,
I dispute your one response. I think the SEC cut a deal with some high rollers/polictically connected people like Sandy Weil who I thought got immunity from prosecution. Isn't that right? The well connected (politically and financially) always take care of each other. And the workers suffer.
disgusted

Ben White: Understand your disgust. Not sure if deals were cut.

As for Weill, he got immunity from Spitzer but the SEC does not think the global settlement precludes the agency from looking into how Weill ran the company and whether he "failed to supervise," the industry lingo, his analysts.

Ben White: I'm afraid I'm out of time. Have to go back to the day job.

Those were some superb questions. Doesn't seem like many are convinced this will clean up Wall Street or that offenders are feeling enough heat.

I guess we'll have to wait and see. I'll stay on the case.

Take care, all.

washingtonpost.com:

That wraps up today's show. Thanks to everyone who joined the discussion.

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