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Wednesday, April 30, 2003

Wall Street: Fraudulent behavior


Restitution

Finally, a victory for the little guy. Wall Street will have to clean up its act and pay restitution to investors who lost millions, following the advice of double-dipping stock analysts who pushed bad stocks to make money for their investment banking clients.

Ten of Wall Street's largest investment firms will have to pay $1.4 billion in fines, including $387.5 million in restitution, to settle charges of fraud.

It's really a piddling amount, only 7 percent of what the industry made in 2002 profits.

But, more important, the settlement may pave the way for individual investors to recoup their losses through private litigation, and requires investment houses to undertake sweeping accountability reforms.

Wall Street sold the public lots of snake oil during the boom-boom 1990s, unethically breaching the wall between investment banker and stock analyst. The same people who were supposed to be conducting legitimate research for investors on the performance of companies were pressured by their investment-banking clients to offer favorable reports on those companies.

The New York Times recalled one case in which a Bear, Stearns analyst participated in a conference call by an Internet company whose shares Bear, Stearns sold publicly, telling a colleague that "he was trying to make the company look good with his questions."

Specifically, the Securities and Exchange Commission, regulators and the state of New York accused Salomon Smith Barney, Merrill Lynch and Credit Suisse First Boston of fraud.

As part of the agreement, firms are expected to follow new guidelines that will build a barrier between investment bankers and stock analysts. That should help restore trust.

New SEC chairman William H. Donaldson was right to call the event a sad chapter in American business at Monday's news conference.

More people than ever participate in the stock market, either through employment plans or traditional investing, and many are unsophisticated. This settlement must succeed to protect their interests and restore their trust.




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