Tough Road for Investor Payback

Just owning tainted stock is no guarantee of restitution

By Kathleen Pender, San Francisco Chronicle

Investors who lost money on stock they purchased based on tainted research will have a tough time getting their money back.

Federal and state regulators congratulated themselves profusely Monday for their settlement with the 10 brokerage firms whose analysts allegedly spewed out conflicted research. But the regulators, whose primary job is investor protection, provided almost no guidance for people who may want to pursue claims against these brokerage firms or collect from a nationwide restitution fund.

Under the deal, the 10 firms will pay a total of $875 million in penalties and disgorgement.

The federal regulators -- the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange -- will place their share of these payments -- almost $400 million -- "into a distribution fund for harmed investors," SEC Chairman William Donaldson says.

"A fund administrator will be appointed to allocate funds to individual customers of each (brokerage) firm based primarily on whether each customer purchased any of the limited universe of securities identified in the commission's complaint," Donaldson says.

When I asked SEC spokesman John Heine to identify this "limited universe," he said, "we do not have a comprehensive list of all the names of companies whose securities are at issue here."

He says investors would have to wade through the individual settlement agreements to see if they owned stocks that may have been the subject of tainted research.

My colleague Todd Wallack and I assembled such a list, shown on Page B5. (Click here for list.)

Just owning one of these stocks doesn't guarantee investors a dime. Restitution likely will depend on when they bought the stock, from whom and the circumstances of each case.

For gory details, go to Click on Global Settlement Litigation Releases.

The regulators allege that Credit Suisse First Boston, Merrill Lynch and Solomon Smith Barney issued fraudulent research in violation of federal securities law.

This is the most serious charge. "It's the inner circle of hell," says John Coffee, a securities-law professor at Columbia University.

Regulators say Bear Stearns, CSFB, Goldman, Lehman, Merrill Lynch, Piper Jaffray, SSB and UBS Warburg issued research reports "that were not based on principles of fair dealing and good faith," in violation of NYSE and NASD rules.

UBS Warburg and Piper Jaffray allegedly received undisclosed payments for research in violation of federal securities laws and NASD and NYSE rules. Those two companies, plus Bear Stearns, J.P. Morgan and Morgan Stanley, allegedly made undisclosed payments for research in violation of NYSE and NASD rules.

Coffee says the restitution fund administrator may give more money to customers of firms that allegedly committed fraud than to clients of firms accused of lesser, regulatory violations.

Barry Goldsmith, head of enforcement for the NASD, would only say, "When a restitution plan is submitted, it will say, 'People who bought and sold the following stocks within a certain time period are eligible to submit claims.' Right now there is no fund administrator. There is nothing for investors to do but hold onto their records."

No matter how the pie is divided, it's not likely to satisfy anyone. "The $400 million given to the fund administrator is probably under 1 percent of the losses investors will claim," says Coffee.

Investors can pursue individual arbitration claims at the NASD or NYSE. However, attorneys generally will not take small cases.

"Your loss would have to be $100,000 or more to hire a lawyer," says Melvyn Weiss, a senior partner with class-action law firm Milberg Weiss Bershad Hynes & Lerach.

Investors could go into arbitration without a lawyer. "With the documents filed on the Internet, I think you'd have a pretty good chance. These are devastating documents," Weiss says.

But Christine Bruenn, president of the North American Securities Administrators Association, says, "Often it is not cost effective to pursue an arbitration over a small claim."

The NASD handles most arbitrations. For more information go to

A third option is to join in a class-action lawsuit.

Hundreds of class-action cases have been filed alleging that brokerage firms manipulated the market for initial public offerings, and analyst conflicts of interest are part of those cases.

A fewer number of cases have been filed on the conflict of interest issue alone. None have been certified as class-action cases, and it's uncertain whether any will.

To look up class-action suits, go to  and click on the alphabetical Index of Filings. If you click on M for Merrill Lynch, you'll find more than a dozen cases alleging that Merrill's former Internet analyst Henry Blodgett issued misleading research reports.

Joe Tabacco, a San Francisco class-action lawyer not involved in these cases, says investors might not have to prove they read tainted research to participate in a class-action suit.

"Plaintiffs will say that anybody who bought a stock on the open market is a victim of market manipulation. It doesn't matter if you bought it through Schwab or E-Trade or Merrill Lynch. You paid too much because of what these analysts were saying," he says.

"The defendants will probably argue that you had to be a customer of ours to make a claim," Tabacco says.

Class-action suits generally take two to five years to settle. In cases that have been filed since the end of 1995, the median settlement has been 4.4 percent of estimated damages, according to Cornerstone Research.

As part of Monday's settlement, the states will share $487.5 million in penalties and disgorgement.

California, which expects to receive about $40 million, will put $4 million into a statewide program to prevent predatory financial practices and $36 million into the general fund.

"North Carolina is putting its share into investor education, Mississippi is hiring two new investigators, Nebraska endowed a chair at the University of Nebraska on corporate ethics," says NASAA's Bruenn.

Bruenn is also the securities administrator of Maine, which is putting its share into the general fund. She says state regulators would have preferred giving the money back to investors, but there wasn't enough to go around.

"I could have given investors enough to buy a pizza. In Maryland, they'd only get enough for a Starbucks coffee," she says.

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