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Where’s WorldCOM?

Forbes

NEW YORK – Lawyers for jilted Wall Street investors have been anxiously waiting months for regulators to finalize their stock research settlement. Now that they have, and the supporting documents are public, plaintiff attorneys say it offers little help in pressing claims against allegedly crooked brokers, analysts and securities firms. Among the omissions: any mention of the now notorious relationship between Citigroup Global Markets (formerly Salomon Smith Barney) and WorldCom.

The settlement, finalized April 28, calls for ten of Wall Street’s largest brokerages to pay fines, restitution and investor education costs totaling $1.4 billion. The payments were in response to findings by New York Attorney General Eliot Spitzer and other regulators that the firms produced stock analysis tainted by their own drives to drum up investment banking business with the firms covered.

Topping the chart is Citigroup Global Markets, a unit of Citigroup (nyse: C – news – people ), which agreed to pay $400 million. It was followed by Merrill Lynch (nyse: MER – news – people ) and Credit Suisse Group’s (nyse: CSR – news – people ) Credit Suisse First Boston at $200 million each. The findings contain allegations that each of the firms “issued fraudulent research reports” in violation of the Securities Exchange Act of 1934.

Also named in the settlement were Morgan Stanley (nyse: MWD – news – people ); Goldman Sachs (nyse: GS – news – people ); Bear Stearns (nyse: BSC – news – people ); J.P. Morgan Chase (nyse: JPM – news – people ); Lehman Brothers (nyse: LEH – news – people ); UBS Warburg, a unit of UBS (nyse: UBS – news – people ); and U.S. Bancorp Piper Jaffray, a unit of U.S. Bancorp (nyse: USB – news – people ).

Notable to securities attorneys is the fact that all ten firms agreed to the settlement without admitting the allegations. What is more, while they agreed not to disparage the settlement publicly, each reserved the right to contest regulators’ findings during legal proceedings and securities arbitrations, a record 1,463 of which were filed in the first two months of the year.

“The most helpful part of the settlement is that it’s finished,” says Melvyn Weiss, a partner at Milberg Weiss Bershad Hynes & Lerach, which is suing 55 securities firms for a legion of alleged misdeeds, including the way they distributed initial public offerings. “When defendants of this type have the government Sword of Damocles hanging over their heads they don’t pay much attention to civil litigation for fear it will hurt their official negotiations.”

To plaintiff attorneys, the most avidly anticipated part of the settlement was the evidence of wrongdoing accompanying regulators’ findings. To be sure, it includes hundreds of pages and a legion of details on how research was conducted, plus potentially damaging e-mail exchanges among analysts and investment bankers. However, many securities attorneys hoped the evidence would be admissible in arbitration or court as statements of fact. Instead, it was released as regulatory findings that defendants can contest.

“The findings should be admissible (as fact) and the scope of the investigation should have been broader,” says Phil Aidikoff of Aidikoff and Uhl in Beverley Hills, Calif. “The firms haven’t cleaned up anything and they’re fighting these (arbitration) cases tooth and nail, making claimants who’ve lost money fight very pitched battles.”

Some plaintiff attorneys were also disappointed by what was not contained in the evidence. Most prominently that includes any discussion of Citigroup Global Markets’ relationship with WorldCom (otc: WCOEQ – news – people ). A 100-plus- page document known as an Affirmation of Discontinuance outlined in detail the Citigroup unit’s handling of several stocks.

WorldCom, the firm most prominently associated with now-infamous Citigroup analyst Jack Grubman, was not among them. (Grubman agreed to pay $15 million and was barred for life from the securities industry as part of the settlement.)

“Where’s WorldCom?” asks Seth Lipner, a securities attorney in Garden City, N.Y. “Most of the mass tort lawyers trolling for cases are trolling for WorldCom, so it was a great victory for Citigroup to keep it out of the findings.”

Regulators left WorldCom out because “we did not find Grubman’s public and private views were divergent,” says Darren Dopp, a spokesman for Spitzer’s office. Instead, the evidence regulators disclosed focused on less well-known firms–such as Metromedia Fiber Networks (otc: MFNXQ – news – people ) and Focal Communications (otc: FCOMQ – news – people )–for which Grubman touted positive ratings despite private doubts, Dopp said.

One bright spot for brokerage clients who believe they were wronged is that the settlement will likely make more sympathetic securities arbitrators presiding over panels for the National Association of Securities Dealers and New York Stock Exchange, attorneys say.

“The fact that some firms were being paid by others to act like shills and put out favorable research is shocking,” says Thomas Grady, a Boca Raton, Fla.-based plaintiff attorney. “It says something about the ethical quality of the firm, and at the end of the day arbitrators and juries want to do justice.”