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Regulator, Lawyer Discuss Wall Street’s Settlement

Wall Street Journal Online

Christine Bruenn, a securities regulator, and Phil Aidikoff, a securities lawyer, discuss the ramifications of the settlement, and what lessons investors should take away.

Christine Bruenn is president of the North American Securities Administrators Association. Ms. Bruenn, the securities administrator for Maine, worked with other regulators in drafting the settlement reached with Wall Street firms. She talked to us about effect the settlement will likely have on investor confidence.

What does this settlement mean for investors?

I think for individual investors it is the delivery on what I call our promises, which are to change the way Wall Street does business, to get meaningful penalties from the firms and to provide information to arm investors with so that they can pursue their own arbitrations, or help them with class-action suits.

Will this inspire more confidence in the market?

I think it will, for several reasons, including that it shows them that regulators are on the case and looking out for them.

Do you expect a lot more claims to be filed against firms now?

Yes, I think from just the calls I’ve received from attorneys in the private [sector], they’ve been waiting for this to be finished. They’ve been poring over it and trying to figure out whether it helps their specific clients or not. Investors are going to be looking at this very closely.

How useful do you think the settlement will be for investors in their claims? The firms didn’t admit to any wrongdoing.

When a firm doesn’t admit to it, it’s not as helpful as if they would admit to it. And the attorneys will have to figure out, within the rules of evidence and procedure, what they can use the settlement for. We were very careful in this settlement to say that we weren’t limiting the uses of the documents for investors. We’ve done these investigations, and … we want investors to be able to use the results. The settlement means the firms don’t have to admit to anything, yes, but they also can’t deny it, either.

One of the components of the settlement is a warning that research reports be used only as one of several tools for making investment decision. Have investors been relying too heavily on these reports?

Yes, they have. In the market mania of the 1990s, investors were watching television each night and listening to celebrity research analysts tell them to buy this stock. I think what we need to emphasize more is that individual investors need to take responsibility for their portfolios, and remind them that nobody is going to watch out for their money like they will themselves.

You expect a jump in arbitration claims. How far is the restitution fund going to go in addressing those claims?

The restitution fund isn’t the sum total of how much money the firms may have to pay in arbitration. If an investor bought securities from a firm and they think they were wronged, they should go ahead and file an arbitration claim. When the SEC figures out the details of the restitution fund, they should file with that fund as well. They shouldn’t wait, because there are time limits on these things.

The $400 million number is the least that the firms are going to have to pay.

You expect that they will pay much more?

Yes, I think so.

Why didn’t you pursue criminal charges?

I think that a number of the regulators still have open cases against individuals, and they are evaluating whether there are going to be criminal charges or not. For the firms, in my view, what we found in these investigations was settled appropriately as civil actions. We found that they allowed the conflicts of interest to go too far, and really corrupt the process. In some instances, it is clear that individuals did engage in fraud, and they ought to be held accountable. But for the firms themselves, I don’t think we found that level of culpability.

How do you balance efforts to protect investors from being defrauded, with the fact that people sometimes just make lousy investment decisions? How much do investors need to be protected from themselves?

This is the challenge that regulators face every day. In my office in Maine, we get called all the time from investors who say, “I bought this stock and lost all my money.” As a regulator, I tell them that regulations aren’t in place to make sure that they make money. They are in place to make sure that the brokerage firms and others who participate in this business follow minimum standards, and the law, and maintain ethical standards. When an investor does lose money and there has been an ethical breech, you have to figure out how much of that loss is due to the breech, and how much is due to the fact that the market went down. That’s a real challenge in this case, and it will be a challenge in administering the restitution fund.

Settlement Provides ‘Road Map’ for Claims

Phil Aidikoff is a securities lawyer in Beverly Hills, Calif. His firm has more than 100 cases pending against major Wall Street firms. He talked to us about the impact Monday’s settlement is likely to have on those cases, and on future claims.

What does this settlement mean for investors who have filed claims against these firms?

The settlement is a road map. It provides a structure, including some documents, that will be important to investors as they bring their claims. I’ve read a few of the specific agreements. With Smith Barney, for instance, the settlement prohibits any inference that this is an admission of liability. But then it goes on to say that Citigroup can’t deny anything in there. So while it doesn’t give investors the absolute nail in the coffin, it provides the roadmap.

Are there documents here that would have otherwise been difficult or impossible for investors or their lawyers to come by?

I already have most of this stuff, and a lot of attorneys already have most of it. But wronged investors will now have documents in hand that will enable them to be more effective in presenting new claims.

A chunk of the money from this settlement will go to a large fund for paying restitution to investors. Will participating in that fund prevent investors from bringing other claims?

We really don’t know. That was one of the things we were looking for at that press conference, but there was very little information about the restitution fund or how it is going to be administered. Clearly the fund of $400 million is just a drop in the proverbial bucket.

Have your clients been asking whether or not they should seek money from that fund?

Some have, but I think the fund is mainly for people whose losses are fairly minimal. We tend to take larger claims, so our clients are going to need to go through arbitration. If you lost, say, $20,000 or less, you are probably going to be better served by not filing an arbitration, which will take time and energy and money, and require an attorney.

Do you think we’re going to see a wave of new claims against firms now?

Yes, I think that’s probable.

Would you now expect any change in strategy in the way Wall Street firms handle arbitration cases?

No. Their strategy has been the same since day one, and it will continue to be. They deny any wrongdoing, they refuse to admit there was a conflict of interest and they fight every case. They always blame it on the investor.

Do you think that most investors really didn’t know the connection between the investment banking and research sides of these firms?

I think most investors have no clue. When they saw a rating [on a stock], they assumed it was an independent rating and acted in accordance with that rating. So if Merrill Lynch or Smith Barney told them to buy, they bought.

What about claims brought recently? Allegations of wrongdoing at research houses has been on the front pages of newspapers for some time.

I don’t think [investors] realized the scope, or how it affected the information they were getting. You have to realize that these recommendations were made by brokers they trusted. The broker would call and say, “We suggest you purchase this security.” Most investors did not look beyond that.

One component of the settlement is a requirement that research reports carry a warning that they should be used as one of many factors in making an investment decision. Why haven’t investors been doing that all along?

I think most investors don’t do their own research. I think that’s extraordinarily naïve. Most investors rely on what they are told by the broker. How many investors actually pour over different research reports and look at 10k’s and 10q’s, and go to the Edgar site? Very few.

Don’t they then bear some of the responsibility if they end up making bad investment decisions?

I disagree with that. And the reason I disagree is it is not supposed to be caveat emptor. The brokerage firms have a fiduciary duty to make full, complete and accurate disclosures to their customers. The brokerage firms say, “You should have known we were lying,” and that’s just nonsense. Sure, a small percentage of investors are that sophisticated. But I dare say that even most of your readers, though they may read The Wall Street Journal, are not sophisticated enough to determine where the puffery ends and the conflicts begin.