Settlement Is Expected to Aid in Lawsuits by Investors

Although investors won’t get much money from regulators’ $1.4-billion settlement with Wall Street firms, the evidence dug up by government investigators is expected to prompt a new wave of private lawsuits and arbitration claims.

Depositions and internal brokerage firm e-mails and other documents obtained by regulators in New York and other states could make it possible to bring cases that otherwise would be too expensive or difficult for investors to pursue, according to experts in corporate and securities law. The detailed evidence could help the lawsuits survive dismissal motions and make settlements easier to reach with the investment firms’ defense teams, they said.

“That kind of stuff is sometimes very hard for private plaintiffs to get,” University of Texas law professor Henry Hu said. “Here you may not have to pay for it -- it could be handed to you on a platter, courtesy of the New York taxpayers.”

State and federal officials on Friday announced the so-called global settlement with the Wall Street firms -- a series of tentative deals that must be approved by the Securities and Exchange Commission. The investment firms admitted no wrongdoing in settling the cases.

Only as finalized settlements are released in the coming weeks will the scope of the cases become public. Regulators, including SEC enforcement chief Stephen Cutler, said they would release detailed findings, which could be used to support claims filed by investors against the firms.

But observers said it was unclear whether private attorneys would get access to all the documents that regulators used to support their charges. Some of those documents touch on issues of immediate concern to investors burned during the market bubble of the late 1990s, such as e-mails in which brokerage analysts privately disparaged stocks that they were touting in their published reports.

“The SEC usually does not release documents it obtains,” said Thomas Ajamie, a Houston attorney who represents investors in claims against their brokers. But he noted that the New York attorney general’s office, which took a leading role in the case, “has already provided the public with much more information than the SEC ever has.”

Even before seeing the finalized settlements, some securities lawyers were passing harsh judgments. Joseph Cotchett, a prominent Bay Area plaintiffs attorney, said the deals may serve as a “giant corporate shield” to protect officials at the investment firms from criminal liability.

“Those analysts, executives and supervisors created trillions of dollars in losses to the public. Police pensions, fire pensions were lost all across America, and they’re walking out of this for an amount that is infinitesimal compared to the damage they have caused,” Cotchett said.

He said he and other attorneys representing shareholders “are going to have to pursue this in the courts.”

“I assure you we’ll be filing the appropriate motions with the courts to get all the evidence out in the light of day,” said Cotchett, who is representing California’s teacher pension fund in lawsuits seeking to recover money lost on failed investments. “We want the public to see who the individuals behind this are, and what really went on.”

Regulators haven’t yet devised a plan to determine how much of the $1.4-billion settlement investors will get, when they’ll get it or how it may be divided. Of the settlement, $900 million represents fines, $450 million is earmarked for independent research and $85 million is for investor education.

One thing is certain, though: With stocks worth trillions of dollars less than a few years ago, the settlement funds won’t go far toward making investors whole, and the “main mechanism” for investors seeking to recover losses will remain the judicial system or arbitration, New York Atty. Gen. Eliot Spitzer said.

Spitzer aides said the regulators would adopt a technique like one used by New York in its lawsuit this year against Merrill Lynch & Co. In that case, state regulators published a lengthy complaint on the Internet with references to a host of internal Merrill documents.

Attorneys in private lawsuits were given access to the e-mails, documents and depositions cited in the case, which Merrill settled for $100 million.

Spitzer spokesman Darren Dopp said he expected “a huge document dump” about firms such as Citigroup Inc.’s Salomon Smith Barney unit, which Spitzer’s office investigated. Citigroup agreed to pay the largest fine, $300 million, and the company faces dozens of lawsuits related to stock research.

But a Spitzer legal aide said the information, though considerable, would be less extensive than in the Merrill lawsuit, and the settlement language less harsh. It is unclear how aggressive regulators from other states, who investigated other firms, will be in releasing evidence.

As attention turns from the public enforcement action to private legal claims, defense attorneys said they expected a wave of claims against brokers. But they added that investors may not realize how difficult it is to prove their losses resulted directly from wrongdoing by an investment firm.

Isolated private e-mails from sharp-tongued analysts, dissing a favored stock that subsequently collapsed, aren’t sufficient by themselves to prove an intent to deceive, no matter how inappropriate they appear, the defense attorneys said.

“As an investor, you’d need to prove you actually received the research, relied on the research and that the research was tainted,” said Gerald F. Rath, a Boston attorney who frequently represents investment companies. “After all, during the exuberant days in the market people were buying stocks for a lot of reasons.”

Brian Amery, a New Jersey attorney, said most of the claims he defends for brokers are brought by investors in their 40s and 50s who are educated, successful and financially aware -- and thus have a hard time proving they were suckered into buying unsuitable investments.

“These are the people that had the big money in the market,” he said. “They rode it way up, and they rode it way down.”

But Hu, the Texas law professor, noted that arbitration proceedings -- the required way for most individual claims against brokers to be resolved -- often dwell less on details of the law than on overall fairness.

If e-mails or other evidence appear particularly bad, they could exert a strong influence on arbitrators, “who don’t need to issue detailed reasons [for their decisions], the way judges often do,” Hu said.