The tune New York Attorney General Eliot Spitzer and other regulators are humming these days sounds a bit like the jingle for the New York State Lottery: "If I had a million dollars..." But in Wall Street's case, it's more like, "If I had a billion dollars."
Battle lines are forming over what to do with the $1.1 billion that Spitzer and his team of securities watchdogs are trying to squeeze out of a dozen Wall Street firms as a fine for settling probes into tainted stock research.
Some politicians and lawyers think the money should go into a restitution fund to compensate investors who lost money due to the bad research. Others say it should be used to finance a massive investor-education program, replete with slick TV ads -- much like the antismoking ads that are financed with the proceeds from a class-action settlement with the tobacco industry.
Still other ideas include using the money to hire scores of new regulators to monitor Wall Street, providing legal assistance to investorswho lost small sums in the stock market, or simply using the fines to help fill the ever-expanding holes in many state budgets.
Credit Suisse First Boston
are facing the biggest hits to their bank accounts, with regulators seeking to impose fines of $500 million and $250 million, respectively. Sources say other firmssuch as
are looking at paying penalties ranging from $50 million to $100 million.
Those fines are on top of the estimated $1 billion Wall Street firms will shell out the next five years to provide their customers with stock reports produced by independent research firms. (
, which publishes this Web site, recently disclosed plans to establish a separate business unit to provide independent research.)
Spitzer and the other state regulators involved in the settlement talks have a great deal of latitude in deciding what to do with the fines. Indeed, a big criticism of Spitzer's earlier $100 million settlement with
is that none of that money was earmarked for investors who bought tech stocks based on the firm's faulty research reports. Instead, that money is going into coffers of the 48 states that have signed onto the Merrill settlement.
The issue of what to do with the latest round of fines could become a political football early next year.
Rep. Richard Baker (R., La.), chairman of the House Financial Services subcommittee on capital markets, plans to introduce a bill requiring allthe money regulators collect to go toward a shareholder restitution fund. The
Securities and Exchange Commission
, which is participating in thenegotiations, would administer the fund.
The idea of a restitution fund is a measure supported by many attorneys representing investors who have filed arbitration claims and lawsuitsclaiming they were misled by an analyst's research on a stock. But the lawyers say the $1 billion is small change, compared with the overall lossessuffered by investors because of biased research.
And they worry that lawmakers, in setting up a restitution fund, may seek to limit the liability of Wall Street firms from pending and future analyst-related claims.
"A billion is a lot of money, but it's also a drop in the bucket," said New York attorney Jacob Zamansky, who represents investors in a numberof arbitration cases against research analysts and their firms. "I don't see how Congress can impose a cap on liability."
One of the main problems with a restitution fund is deciding how to evaluate claims and administer the fund. Some contend it's difficult to identify true victims, because so much of Wall Street's stock research during the bull market was the product of a deeply flawed system rather than the work of a few bad apples.
"Restitution is a laudable goal," said Marc Beauchamp, executive director of the North American Securities Administrators Association, a group of regulators that is playing an active role in the negotiations. "But in a case like this where there really was a fraud on the market, how do you figure out who the victims are?"
That's why some investor advocates recommend using a portion of the penalty proceeds to provide investors with low-cost legal representation so they can pursue their own claims against analysts and brokerage houses. A big problem for many investors is that their losses in the stock market are too small to entice a lawyer to take on their cases. And that means those investors are unlikely to get any kind of recovery.
Nancy Smith, a former SEC attorney and founder of the investor protection group RestoreTheTrust.com, said the penalty money could gotoward funding programs at law schools to provide representation to investors with losses of just a few thousand dollars. Or it could be usedto set up a process for investors, on their own, to pursue fast-tracked and simplified arbitration claims against analysts and brokerages as part ofplan instituted by regulators. It would be "an assistance program to help investors help themselves," said Smith, who used to run the SEC's office of investor education.
Another possibility suggested by some is using some of the money to pay for a glitzy ad campaign to alert investors about Wall Street conflicts ofinterest. But critics point out that teen-agers still smoke, despite the well-produced antitobacco commercials that regularly are broadcast during prime-time TV programs.
"The best thing would probably be to hire more investigators and regulators," said Donald Langevoort, a securities professor at GeorgetownUniversity School of Law. "But the sad thing is it will probably be some oddly designed, politically palatable solution to make people feel good."