Three years have passed since New York’s Attorney General Elliot
Spitzer exposed one of Wall Street’s dirtiest little secrets – research
reports issued by the nation’s most well-respected investment banking
firms had been tainted by conflicts of interest and undisclosed bias.
Other regulators hardly could ignore the embarrassing scandal uncovered by Spitzer’s office. Rather than compete with the New York Attorney General for headlines, the regulatory community joined hands to craft an historic settlement. Ten of the nation’s leading brokerage firms, including Citigroup, Merrill Lynch, Goldman Sachs and Morgan Stanley, agreed to pay $1.4 billion to settle charges related to the tainted research reports. At the time, regulators promised that the funds would be used for investor restitution, investor education, and to pay penalties imposed on the investment banks.
While the settlement seemed huge, it paled in comparison to the profits realized by the ten firms during the period they issued the research reports. For example, Citigroup, which contributed $400 million to the settlement, realized $5.7 billion in profits in 2003.
Restitution certainly appeared to be an appropriate goal – and a priority. Investors had been induced to rely upon misleading research reports and make unsuitable investments. Many of those investors had suffered significant losses while the investment banking firms that issued those reports enjoyed incredible profits.
Now, it seems that those investors are being disappointed once again. According to an August 29, 2005 report from Forbes, only a small fraction of the settlement funds have been distributed to the suffering shareholders. Sadly, investors should not expect to receive any significant payments in the future. Rather than return money to aggrieved investors, federal and state regulators have been arguing over the best way to craft investor education programs.
This impasse should come as no surprise to those who have followed the settlement’s slow progress. Some of the state regulators resisted restitution from the onset. SEC Enforcement Chief, Stephen Cutler, initially asked the state securities administrators to consider adding $413 million in state settlement funds to the federal restitution pool. The states demurred, claiming it would be too difficult to identify which shareholders would be entitled to payment.
How have the state allocated those funds? Investors have not fared well. Some states used the money to close budget gaps. California, which received $43 million, placed $40 million in its general fund and reserved $3 million for investor education. Other states have used their funds to finance documentaries, support lecture series and build schools. Shareholders who rejoiced at the prospect of restitution have been severely disappointed.
Federal authorities are poised to distribute a significant portion of the settlement. The federal administrator of about $433 million will soon distribute those funds to investors. That, however, represents just a small portion of the estimated $7 trillion lost by investors as a result of recent stock scandals.
Another $52 million held by federal regulators remains in limbo. The SEC initially named money management expert, Charles Ellis, to oversee distribution of those funds, but Ellis found himself in conflict with the SEC and soon withdrew. The SEC then asked the court to appoint NASD Foundation, a non-profit organization, to handle the funds and make grants. The Investor Protection Trust, which administers $30 million of investor education funds for the states, has opposed the NASD Foundation appointment, claiming the organization is too closely tied to the securities industry.
Meanwhile, shareholders wait with empty pockets and few realistic hopes.
Other regulators hardly could ignore the embarrassing scandal uncovered by Spitzer’s office. Rather than compete with the New York Attorney General for headlines, the regulatory community joined hands to craft an historic settlement. Ten of the nation’s leading brokerage firms, including Citigroup, Merrill Lynch, Goldman Sachs and Morgan Stanley, agreed to pay $1.4 billion to settle charges related to the tainted research reports. At the time, regulators promised that the funds would be used for investor restitution, investor education, and to pay penalties imposed on the investment banks.
While the settlement seemed huge, it paled in comparison to the profits realized by the ten firms during the period they issued the research reports. For example, Citigroup, which contributed $400 million to the settlement, realized $5.7 billion in profits in 2003.
Restitution certainly appeared to be an appropriate goal – and a priority. Investors had been induced to rely upon misleading research reports and make unsuitable investments. Many of those investors had suffered significant losses while the investment banking firms that issued those reports enjoyed incredible profits.
Now, it seems that those investors are being disappointed once again. According to an August 29, 2005 report from Forbes, only a small fraction of the settlement funds have been distributed to the suffering shareholders. Sadly, investors should not expect to receive any significant payments in the future. Rather than return money to aggrieved investors, federal and state regulators have been arguing over the best way to craft investor education programs.
This impasse should come as no surprise to those who have followed the settlement’s slow progress. Some of the state regulators resisted restitution from the onset. SEC Enforcement Chief, Stephen Cutler, initially asked the state securities administrators to consider adding $413 million in state settlement funds to the federal restitution pool. The states demurred, claiming it would be too difficult to identify which shareholders would be entitled to payment.
How have the state allocated those funds? Investors have not fared well. Some states used the money to close budget gaps. California, which received $43 million, placed $40 million in its general fund and reserved $3 million for investor education. Other states have used their funds to finance documentaries, support lecture series and build schools. Shareholders who rejoiced at the prospect of restitution have been severely disappointed.
Federal authorities are poised to distribute a significant portion of the settlement. The federal administrator of about $433 million will soon distribute those funds to investors. That, however, represents just a small portion of the estimated $7 trillion lost by investors as a result of recent stock scandals.
Another $52 million held by federal regulators remains in limbo. The SEC initially named money management expert, Charles Ellis, to oversee distribution of those funds, but Ellis found himself in conflict with the SEC and soon withdrew. The SEC then asked the court to appoint NASD Foundation, a non-profit organization, to handle the funds and make grants. The Investor Protection Trust, which administers $30 million of investor education funds for the states, has opposed the NASD Foundation appointment, claiming the organization is too closely tied to the securities industry.
Meanwhile, shareholders wait with empty pockets and few realistic hopes.
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