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More Lawsuits Possible for the Street's Big 10


Investors shut out of the record settlement between regulators and 10 Wall Street firms accused of gross misconduct during the fast and furious days of the bull run, can further pursue civil action against the firms, the Securities and Exchange Commission said.

Amid confusion about how the settlement will be distributed, the SEC offered clarification on how the funds settlement will be carved up, who will oversee its distribution and what recourse those left out of the settlement will have.

The $399 million set aside to be returned to investors will most assuredly not compensate all who were affected by the shady tactics of many of these firms. "Although the monetary relief secured in the settlement is substantial, unfortunately, the losses that investors suffered in the aftermath of the market bubble that burst far exceeds the ability to compensate them fully," SEC Chairman William Donaldson testified before the Senate Banking Committee earlier this month. "They can never fully be repaid. Moreover, their loss was more than monetary. It was also a loss of confidence and a loss of the hopes and dreams they had built over a lifetime."

Donaldson left the door open for further litigation and action against these offending firms, including civil and class-action lawsuits. "A recipient of funds from these settlements is not precluded from pursuing, to the extent otherwise available, any other remedy or recourse against a firm."

"I think that you're going to see a wave of lawsuits," said Gary Gensler, former undersecretary of the U.S. Treasury. "How the courts will handle them is yet to be seen. I think large financial institutions have taken reserves anticipating they will likely need to settle these claims. Reserves in excess of what they have already set aside for this settlement.

"I think the overall question is, what really changes?" Gensler continued. "Fundamentally, individual investors have to remember analysts are part of the sales function of Wall Street. Beware those who forget that."

Clearing The Air

Last week, the SEC provided greater details about how the monies from the settlement will be distributed. The plans call for the creation of 10 distribution funds totaling $399 million - one fund for each of the nine settling firms, excluding Merrill Lynch, which previously paid $100 million in penalties to the states. The 10th fund will be set up for money received from Henry Blodget, a former Merrill analyst. Jack Grubman's payment will be put into the fund for Citigroup Global Markets, formerly known as Salomon Smith Barney, Grubman's former employer. They will be interest-bearing accounts.

They are repositories for the payments to be made by the investment firms to the Federal Court hearing the cases brought by the SEC. The purpose of funds is to provide an equitable and cost-effective method to distribute the dough to those set to receive compensation.

Additionally, the SEC noted that the settlements are intended to make sure there will be equitable, but not necessarily equal, distribution of the funds. It wants to make sure those funds set to receive a part of the settlement get meaningful payments.

As of early last week, the SEC had not determined an administrator for the distribution funds. For reasons of efficiency, the SEC said a single administrator to oversee all 10 funds is being contemplated. The administrator will be paid for by the firms, including all fees and expenses. Investors will not have to pay for any of the expenses.

The administrator will have a controversial and difficult job, as they will be responsible for devising plans and reports for doling out the settlement's cash. The plans and reports will identify those who are able to receive payment from the settlement, how much they can get and the procedures for distributing the money. There will be a separate report and plan for each of the 10 funds, which the court must then approve.

As with many government functions, the process for distribution is not expected to move swiftly. Six months after an administrator is appointed by the court, they will provide the SEC with plans for review and comment. Two months later, the administrator will submit the plans, with any revisions, to the court. Within nine months of court approval, the administrator will submit distribution reports to the SEC. A week later, the same reports will be presented to the court for approval. Once it is approved, the funds will be distributed to investors in accordance with the plans.

"With the relative small size of settlements, I think individuals shouldn't count on the settlement to help them out with their retirement savings," Gensler said.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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