EARNINGS : PaineWebber Estimates Claim Settlement Cost at $200 Million
Seeking an end to an expensive scandal, PaineWebber Group Inc. estimated Thursday that it will cost $200 million to resolve claims that its brokers misled investors about the risks of limited partnerships.
The one-time charge, disclosed in PaineWebber’s quarterly financial report, would be a cheaper resolution than the more than $750 million Prudential Securities Inc. paid to more than 14,000 investors under the special SEC settlement process when it settled claims stemming from such partnerships.
The PaineWebber proposal envisions the creation of a restitution fund for investors similar to one formed by Prudential. But unlike Prudential’s fund, which has a ceiling that has been raised several times, PaineWebber’s proposal would cap reimbursements at a fixed amount.
However, the lead attorney in the main private class-action case against PaineWebber’s partnership sales, said $200 million isn’t nearly enough to cover investors’ losses.
“The damages are well in excess of the reserve number,” said Nicholas Chimicles, an attorney based near Philadelphia who is handling the private case, which has a class of more than 190,000 investors.
“They made a reserve estimate without consulting us,” he said. He would not specify the estimated losses, saying the case, filed in U.S. District Court in Manhattan, is still in the early stages of litigation.
PaineWebber, the nation’s fourth-largest brokerage, sold as much as $2 billion of energy, aircraft-leasing and other partnerships between 1980 and 1992. Thousands of investors allege they lost money on the investments after being reassured by Paine-Webber brokers that they were safe.
PaineWebber said it is confident the $200 million would be sufficient to resolve claims from the Securities and Exchange Commission, state regulators and investors around the world. The Wall Street firm hopes to wrap up negotiations with the SEC, a watchdog agency for the industry, in two to three months.
Donald B. Marron, PaineWebber’s chairman and chief executive, said the charge allows the firm “to address these matters fairly and will relieve our clients, shareholders and employees of any undue uncertainty.”
The brokerage said the charge, equal to $126 million after taxes, resulted in a $90.5-million loss in the second quarter. But analysts said that even without the charge, PaineWebber’s results lagged profit rebounds recently reported by many Wall Street rivals.
Robert Burson, assistant regional director of the SEC’s Midwest office in Chicago, confirmed that the SEC is talking with PaineWebber but he declined to elaborate, citing agency policy.
PaineWebber said its second-quarter loss came to $1.06 per share, compared to a loss of $25.1 million, or 35 cents per share, in the same quarter a year ago. Revenue, subtracting interest expenses, rose 42.5%, to $824.8 million from $579 million.
PaineWebber said that without the charge it would have earned $35.4 million in the quarter, up sharply from $9.1 million in the year-ago quarter, excluding a one-time 1994 charge related to troubled investments in the company’s mutual funds. Its second-quarter 1995 adjusted earnings, however, were only slightly higher than first-quarter profits of $34.3 million, or 27 cents per share.
