What Deal Means for Average Investors
Wracked by one of its worst scandals ever, Wall Street says it will change its ways and pay $1.4 billion to make amends.
So what will it all mean for the average investor? Here are answers to some of the practical questions individuals may have about the scandal settlement with 10 major brokerages:
Question: If I think I was cheated by brokerage practices in recent years, am I entitled to some restitution?
Answer: In theory, yes. Federal regulators are setting up a $388-million fund for investor claims. The states will share another $388 million in funds that could be used for restitution, though few may apply the money for that purpose.
Individual investors also have the right to initiate arbitration cases against brokerages for alleged abuses. And numerous class-action lawsuits have been filed against the industry, though they still are winding their way through the initial legal process.
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Q: Realistically, what are my chances of getting paid from the government restitution funds?
A: If millions of investors file claims, the odds of receiving a significant payment would appear to be low.
Just do the math: Say 3 million investors were to try to tap the federal fund, alleging that, in the late 1990s, they bought technology stocks the government now says were misrepresented by corrupt brokerage analysts. If all of the claims were legitimate, and the investors received equal settlements from the fund, each would get a check for $129.
The Securities and Exchange Commission, however, says the plan for the federal fund is for a court-appointed administrator to distribute the money in an “equitable” manner and that the payments will be “meaningful” for those whose claims are judged to have merit.
In any case, when the administrator eventually explains how to file claims -- those details still have to be worked out -- an investor would have nothing to lose by doing so. According to the SEC, “a recipient of funds from these settlements is not precluded from pursuing ... any other remedy or recourse against a firm.”
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Q: How about the state restitution monies?
A: The states will receive $388 million under the settlement, prorated by population size. But they aren’t required to use those dollars for restitution.
California, for example, stands to get about $40 million. It will take $36 million into its general fund and use $4 million for investor education programs, according to Kam Coveyou, a spokeswoman for the state Department of Corporations.
State officials felt that a $40-million restitution fund would leave many claimants with payouts so small as to be “insulting,” Coveyou said.
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Q: What about taking a brokerage into private arbitration?
A: Many lawyers are eager for investors to do just that because of the potential to win larger claims -- directly from brokerages -- than might be possible via official restitution funds.
Arguing a case before a panel of professional arbitrators, a lawyer would be able to use the evidence uncovered by regulators to try and prove that an investor was duped. “This is the ammunition we’re going to need to win cases,” said Jacob Zamansky, attorney at Zamansky Associates in New York.
But arbitration can be time-consuming, and there’s no guarantee of success with claims.
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Q: Are there class-action suits I could join against brokerages?
A: A number of suits have been filed seeking class-action status. But lawyers still are building their cases, and success is far from assured.
Attorneys now will attempt to enhance their cases using some of the reams of potential evidence the government is releasing against the brokerages.
Still, it is unclear how significant the payments might be from any group settlements that are achieved.
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Q: How can I check whether stocks I owned or own are in the regulators’ complaints?
A: To see summaries of regulators complaints against the 10 individual brokerages involved in the settlement, go to: www.sec.gov/litigation/litreleases.shtml
and read the releases dated April 28.
Also, voluminous information on certain cases is available on the New York attorney general’s Web site, at: www.oag.state.ny.us/home.html. Click on press releases for April 28.
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Q: How will industry reforms show up in my dealings with my broker and brokerage?
A: Access to independent stock research may be the biggest change: The 10 brokerages will have to make such research available to clients, along with the brokerages’ own reports. The idea: Provide competing opinions from researchers who aren’t influenced by investment-banking considerations.
The challenge for investors may be learning to use any research wisely, said Rich Wyler, spokesman for the Assn. for Investment Management & Research, a Charlottesville, Va.-based organization of money managers and analysts.
“Unfortunately, there’s a tendency among individual investors to focus on [a stock’s] bottom-line rating rather than reading the entire report, as professional investors do,” Wyler said. “It’s a matter of investor education.”
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Q: Can I trust independent research to be more objective, or accurate, than my brokerage’s?
A: Not necessarily. Although an independent consultant will monitor the performance of the outside research a brokerage chooses to give its investors, many of the research boutiques picked will be upstarts with short track records, skeptics say.
“It makes great headlines -- beating up on the ‘meanie’ corporations and helping the little investor who got shellacked,” said Richard Prati, chief executive of American Technology Research, a Greenwich, Conn.-based brokerage and research firm that does no investment banking. “However, the reality is, you’re not helping anybody by creating 50 new research firms with dubious qualifications.”
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Q: What other new data will brokerages provide?
A: Each firm will be required to publish quarterly, on its Web site, a chart showing its analysts’ track records, including stock ratings, price targets and earnings per share forecasts for each covered company.
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Q: I understand that brokerages will no longer hand out “hot” initial public stock offerings to favored corporate clients. Will that increase my chances of getting IPOs, if I want them?
A: Probably not, said Howard Schilit, president of the Center for Financial Research & Analysis in Rockville, Md.
“If less goes into the hands of the corporate banking friends who are No. 1 in the pecking order, that just means more will go into the hands of institutional investors, who are No. 2,” Schilit said. “Individuals are still No. 3.”
Thus, he said, big mutual funds are among the potential winners in the settlement.
