Wall Street Settlement Yields Millions for States

By: - May 13, 2003 12:00 am

California, New York and Texas will get the biggest chunk of an estimated $487 million that states will share as part of a recent mega-settlement that aims to end conflict of interest in Wall Street investment firms. The agreement makes final a proposal that regulators and the top 10 investment firms reached last December.

The amount each state gets from the overall $1.4 billion agreement is based on state population and an estimate of the number of investors possibly hurt, Juanita Scarlett of the New York Attorney General’s office said.

Many investors lost money after taking advice from analysts who hyped stocks that they knew were not good buys in hopes of helping their companies win more investment-banking business. In some cases, analysts were pressured to issue bullish stock recommendations to please investment-banking clients. The settlement between the country’s top 10 investment firms and state and federal regulators, announced April 28, will end such practices by requiring the firms to separate their research and investment departments.

The biggest portion of the $1.4 billion settlement is the $487 million that the 10 firms will pay in penalties, which the states will share. That $487 million includes last year’s Merrill Lynch $100 million settlement. Just under half of the $100 million of the Merrill Lynch settlement went to New York and some $50 million was shared among the 49 states, District of Columbia and Puerto Rico.

Excluding the Merrill Lynch settlement, the five states getting the most money from the remaining $387 million are: California, which will get an estimated $40 million; New York with $26 million; Texas with $25 million; Florida with $20 million; and Illinois with $15 million, according to individual states and the North American Securities Administrators Association (NASAA), a Washington, D.C.-based organization that represents all 50 state securities agencies.

Each state will get $3.8 million at a minimum under the settlement, said NASAA spokesman Jerry Munk.

States are expected to get their money within 90 days.

It will be up to the states to decide how to spend the money, depending on states’ own constitutions and laws, Munk said. Some states are expected to use the money from the 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. New York and Texas, for example, have announced that they will deposit their money into their general revenue funds.

Under the settlement, the firms also will provide $27.5 million to an “Investor Protection Trust,” which states will use to fund investor education initiatives.

The $1.4 billion global settlement puts an end to most, but not all, investigations that states have launched into conflict of interest on Wall Street (see side bar). For example, California said Deutsche Bank is not among the 10 firms included in the global settlement. A statement issued by California Gov. Gray Davis (D) said Deutsche Bank has not turned over subpoenaed documents and the multi-state probe of DB that California is leading continues.

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

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