Investors Seek Share of Brokers’ Penalties

Securities regulators and Wall Street firms still are haggling over how much brokerages should pay for the sins of the 1990s bull market, but questions are being raised about whether small investors who lost billions when the bubble burst will see any of that money.

It’s a debate that centers on people such as George Wolfberg.

The 64-year-old Pacific Palisades resident figures he lost thousands of dollars in recent years by following the advice of Jack Grubman, Henry Blodget and other now-disgraced stock analysts. If the major brokerages are forced to pay fines to settle charges that their analysts’ recommendations were tainted by conflicts of interest, the money should go to those who suffered, Wolfberg said.

“It would be great to get some of my money back,” said Wolf- berg, a retired Los Angeles city budget supervisor. “If there’s a restitution fund, the money should go to people who were harmed by the bad behavior of the Wall Street analysts.”

State and federal officials are negotiating with a dozen Wall Street investment banks to settle probes of stock analyst conduct during the 1990s bull market. The firms, including Citigroup Inc.’s Salomon Smith Barney unit, Bear Stearns Cos. and Credit Suisse First Boston, are expected to agree to pay $1 billion or more in fines to avoid battles with regulators. They would shell out an additional $1 billion to fund an effort to distribute independent research.

What to do with the money -- return it to aggrieved investors or pad the coffers of cash-strapped governments -- is becoming a highly charged issue.

Paying restitution to investors is critical, some experts contend, because it could be the only way for many people to recoup any of their stock market losses.

The payback would cover only a sliver of each investor’s losses, according to James Newman, executive director of Securities Class Action Services, which follows class-action lawsuits. Still, Newman added, “if you get a check in the mail for a few hundred dollars ... it’s better that investors get something.”

But regulators in many states, which collectively would receive about half the money paid by the firms, plan to keep it rather than hand it to investors.

A possible exception could be New York, where Atty. Gen. Eliot Spitzer has indicated that he would be amenable to reimbursing investors. After Spitzer reached a deal with Merrill Lynch & Co. this year that required the firm to pay a $100-million penalty, he was criticized for not giving those funds to investors.

The temptation to keep the money is sure to be strong among state governments grappling with budget deficits.

In California, which is facing a river of red ink, settlement money would go to the general fund or to the Department of Corporations to be used for investor education and for beefing up the enforcement unit of its securities division. Gov. Davis would make the final decision.

“We want to help investors protect themselves, as opposed to getting pennies back on their dollars,” said Andre Pineda, deputy commissioner of the California Department of Corporations. “Investors would be better served by getting the tools to prevent them from losing money in the future.”

Budget issues aside, setting up a restitution fund would be a logistical nightmare, some state officials say. Theoretically, everyone who owned stocks, even those who invested indirectly through 401(k) accounts, could claim to be eligible.

What’s more, it would be difficult to determine how much investors relied on analyst advice when buying stocks. Did people invest based solely on a research report, or did they simply watch a 30-second interview on a financial news show?

Even if the number of claimants were whittled down, that would still leave millions of investors who would receive minimal amounts, state officials say.

At least one lawmaker says shareholders deserve the money. Rep. Richard H. Baker (R-La.) said he plans to introduce a bill next year to force states to pay funds collected in actions against brokerages.

If fines are withheld “simply to fatten up government coffers, and no effort is made to reimburse” those who’ve been wronged “I think it would be really difficult to interpret this whole process as anything close to a victory for individual investors,” said Baker, who chairs the House subcommittee on capital markets.

Wolfberg agrees. Encouraged in part by the bullish spoutings of analysts, Wolfberg said he invested in telecom and technology stocks in the late 1990s. Walt Disney Co. and Home Depot Inc. were among other stocks he said he either bought or held on to -- based in part on analyst recommendations. Once highfliers, these stocks lost more than half of their value during the current bear market.

Government officials, Wolfberg remarked, are certainly not shy about raising taxes when they need to plug budget deficits. “They’re always happy to come to us when they screw up,” he said. “So why, when we screw up and get some recompense, should we share it with them?”

State governments are only part of the equation. Federal regulators would get about half of any Wall Street settlement, and it’s unclear what the fate of that money would be.

A major securities reform law passed this summer allows the Securities and Exchange Commission to create restitution funds for investors. But the agency isn’t required to do so, explained John Coffee, a Columbia University law professor.

Under the law, Coffee said, the settlement would have to establish a “disgorgement” fund in which firms gave back illicit profits. Civil fines then could be added to the disgorgement pot, he said.

The restitution fund has taken on added significance because of uncertainty about how investors would fare in the class-action lawsuits that have been filed against brokerages.

State regulators say the best way to help shareholders would be to release detailed findings of brokerage wrongdoing as part of a settlement. Investors could then use that information, which would include incriminating e-mails and other documents, in the class-action suits, they say.

Investors historically have received only a fraction of their losses in class actions, however. Since 1990, the average securities class action has been settled for 12 cents on every dollar in claimed losses, according to National Economic Research Associates Inc., a White Plains, N.Y., consulting firm. That excludes attorneys’ fees, which can lop 30% or more off a settlement.

To Wolfberg, that’s all the more reason to parcel out settlement funds to investors.

“It makes the pain a little less,” he said.