Matter of distrust about investment research

Paul Clinton

Local brokers and investors reacted coolly last week to the watershed

corporate fraud settlement reached between federal regulators and

Wall Street’s top firms.

Many said the $1.4-billion settlement that requires millions in

fines and restitution would probably not usher in much change in the

way Wall Street works.

The settlement, announced early last week following months of

intense negotiations between regulators and firms, is meant to

restore the shattered trust of investors who bought stocks on the

glowing advice of research reports that ultimately proved fraudulent.

“Should [the settlement] make investors trust the research again?

I don’t think so,” said Chip Hanlon, the chief strategist at Newport

Beach’s Euro Pacific Capital. “As long as you have research and

investment banking in one firm, it’s always going to raise

questions.”

Large firms such as Citigroup, Credit Suisse First Boston, Merrill

Lynch and others have huge investment banking divisions that usually

account for a high percentage of their revenue.

Several top analysts working for these firms regularly issued buy

ratings on stocks for companies that were also banking clients.

Investigators, which included the Securities and Exchange

Commission and New York Atty. Gen. Eliot Spitzer, uncovered a gold

mine of internal e-mails in which top analysts derided the very

companies they were recommending in the reports.

Corona del Mar resident John Krump, 38, said he has never relied

on research from the top firms. Krump said he has skirted much of the

steep market declines by investing in blue chip stocks.

Krump lauded the advisors at Charles Schwab, where he has an

account, and said he also looks for investment advice from noted

market timer Bob Brinker through his newsletter.

“I tend to be more conservative,” Krump said. “I had my father’s

stories about the Depression.”

The settlement requires the firms to set up a so-called Chinese

wall between their investment bank and research divisions. The firms

must also pay $487.5 million in fines, $432.5 million toward the

distribution of independent research, $80 million for investor

education and $387.5 million to reimburse investors.

Bob Greenberg, a certified financial planner who runs Costa

Mesa-based Financial Network Investments, also questioned whether the

settlement would lead to many changes.

“In my opinion, the settlement is too little to impact how they do

business,” Greenberg said. “The reality is different from the window

dressing.”

Greenberg said he has gained a handful of clients who left the

larger firms in disgust.

While many said the settlement didn’t satisfactorily address a

string of high-profile corporate scandals, Raquel Dawson of Corona

del Mar said she doesn’t harbor much pity for investors who lost

money buying Enron, WorldCom or other inflated dot-com stocks.

“Investing is a lot like gambling,” said the 32-year-old Dawson.

“People got greedy. People wanted to get a 30% return instead of a 5%

return.”

* PAUL CLINTON covers the environment, business and politics. He

may be reached at (949) 764-4330 or by e-mail at

paul.clinton@latimes.com.