Wall Street Deal Will Mean $450 Million for States

By: - January 2, 2003 12:00 am

A proposed $1.4 billion settlement between state regulators and the nation’s leading investment firms is expected to put an estimated $450 million in states’ coffers once the agreement is formally inked and approved.

It will be up to the states to decide how to spend the money, but first, state, federal and Wall Street bigwigs have to nail down final details of the accord. The proposed settlement, announced Dec. 20, aims to end conflict of interest on Wall Street and restore investor confidence.

Some states are expected to use the money from any approved settlement to beef up securities enforcement, others will likely launch investment education programs while other states are expected to put the funds in their general treasuries.

As part of the proposed $1.4 billion settlement, 10 of the county’s top securities firms agreed to sever the links between research and investment banking, including the practice of paying analysts for equity research. The biggest chunk of the money will go to a “restitution fund” for shareholders who lost millions when they invested money in stocks that analysts had publicly hailed, but had privately thought were not good buys.

Negotiators are still drawing up the final documents with the hope of having a done deal within a month or so. As part of those talks, negotiators are putting the final touches on the formula that will be used to decide how big of a payout each state will get. The formula will take into account states’ population, according to Marc Beauchamp of the North American Securities Administrators Association (NASAA), a Washington, D.C.,-based organization that represents all 50 state securities agencies. It’s likely that the final accord will include a minimum “floor” amount for small, sparsely populated states.

New York Attorney General Eliot Spitzer led the charge against Wall Street shenanigans, but several states went after Wall Street. Some 35 states were involved in the settlement talks. The eye-popping $100 million settlement that Spitzer reached with Merrill Lynch last May is expected to serve as the model for the final terms of this “global” Wall Street settlement.

As part of the Merrill Lynch settlement, the securities giant agreed to separate its analysts from its investment-banking business. Just under half of the $100 million of the Merrill Lynch settlement went to New York and the remaining $52 million was shared among the 49 states, District of Columbia and Puerto Rico.

The Merrill Lynch settlement was the fist volley in the states’ war against conflict of interest on Wall Street. Massachusetts, for example, filed a complaint against Credit Suisse First Boston Corp. in October ’02.

The global settlement, if approved, would put an end to various investigations that states launched into conflict of interest issues on Wall Street. Here’s a list of the states and the firms states were investigating: Alabama: Lehman Brothers; California: Deutsche Bank; Connecticut: UBS; Massachusetts: Credit Suisse First Boston Corp.; New Jersey: Bear Stearns; New York: Morgan Stanley, Merrill Lynch and Solomon Smith Barney; Texas: J.P. Morgan Chase; Utah: Goldman Sachs; and Washington: US Bancorp and Piper Jaffray.

Other parties to the settlement include the Securities and Exchange Commission, NASAA, New York Stock Exchange and the National Association of Securities Dealers.

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