Benefit from Wall Street's Settlement

Physician's Money Digest, August15 2003, Volume 10, Issue 15

Unscrupulous investmentbanking firms are finallypaying for taking the smallinvestor for a ride. Securities regulatorsrecently announced a huge settlementwith 10 Wall Street firmsaccused of issuing misleading stockresearch during the late 1990s in aneffort to secure investment bankingbusiness. What does that mean for theindividual physician-investor?

Wall Street Journal

According to a report, the historic $1.4-billion settlementcreates a $387.5-millionrestitution fund to repay somemoney to investors who were victimsof the brokerage firms' deception. Inaddition, the settlement mandatesthat brokerage firms:

  • Put $432.5 million over 5 yearsinto an independent research funddesigned to provide investors withunbiased stock market analysis;
  • Establish an $80-million investoreducation program;
  • Make public every quarter atally of each firm's analysts' performance;and
  • Abolish the practice of allocatingshares of hot initial public offeringsto corporate executives andboard members as a way to attractinvestment banking clients.

New York Times

After the SEC recommends a distributionfund advisor, a court willmake the appointment. The processof setting up a distribution plan couldtake a year. Investors will likely haveseveral months to respond after aplan is announced. A article indicates that it's not clearwhether mutual fund investors, wholost plenty of money, will receive anything.It may be up to firms to file aclaim, which puts them in a delicatespot. They would have to admit thatthey relied on others' stock ratings.


Arbitration attorneys contend thatthe fund set aside for investors isn'tnearly enough to compensate forwhat could amount to billions of dollarsin losses. However, 2 other componentsof the settlement may helpindividual investors tremendously.

One is that brokerage firms mustdisclose how proficient their analystsare at rating stocks and pickingtarget prices. Also, the New YorkState Attorney General's office hasmade volumes of the Wall Streetdocuments released through thesettlement available on the Web( These documentscontain evidence that is highlydamaging to the securities firms,and could help investors recoverlosses through lawsuits or arbitrationactions.

To be eligible for restitution, investorswill be required to prove thatthey had an account with 1 of thefirms and lost money buying at least1 of the specific stocks named in thesettlement during the time periodcovered. You can find a list of thenamed companies on the SEC's Website (


The SEC doesn't require investorsto show that they relied ontheir broker's recommendation toqualify for restitution. However,investors do have to prove that theanalyst's rating was the reason forbuying the stock. A articlestates that sufficient evidencemight include a printout of an e-mailfrom your broker urging you not to"bail out of Focal CommunicationsCorp because Jack Grubman continuedto rate it a buy." Even if you don'thave strong evidence, you may stillget some compensation. But it won'tbe as much as you could otherwiseget if you had documentation showingyou relied on tainted advice.


Because your distribution fromthe fund is likely to be small, youmay want to consider going to arbitrationif you have a large claim.Your chances of winning an arbitrationcase are better if you can proveyou bought a stock on the recommendationof your broker and thatthe broker was relying on an analyst'srecommendation.

USA Today

Arbitration cases are broughtbefore the New York Stock Exchangeor the National Association ofSecurities Dealers. An arbitrationvictory could get you the fullamount, plus attorneys' fees and lostinterest, according to an article in. However, many securitieslawyers aren't interested in caseswhere the claim is for less than$25,000. Therefore, if your claim issmall, your best bet is the restitutionfund. If you do go to arbitration, beaware that a case filed now might notbe heard for many months due to aclaims backlog.

Countless investors will probablybenefit from lawsuits (ie, class actionsuits) initiated by institutions or otherindividuals on behalf of all thoseaggrieved. Affected investors will likelybe notified by mail that they havebeen included in such a class action.If you are part of a class action, highattorneys' fees could mean that youget only a small part of what youlost.