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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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May 8, 2003
"The Wall Street Settlement Might Change How You Invest"
After much legal wrangling, 10 of the top Wall Street firms have finally
settled with all the major regulators, such as the SEC, NASD and the New York
State Attorney General, to pay $1.4 billion for a litany of fraud and
wrongdoing committed over the last few years. So, how will the biggest
settlement in Wall Street history affect you, the individual investor? Let
us count the ways:
- A $387 million restitution fund is being funded to pay investors back for
at least some of the losses they suffered over the last 3 years from
following Wall Street advice and buying high-flying tech stocks. The SEC
will appoint an administrator to hear cases and distribute the money, but
since investors lost over $7 trillion, don’t expect to come out completely
whole.
- You can still sue your broker, either individually or in a class action
against the firm, if you feel you have a good case of being defrauded. In
order to win money, you will have to show you bought a stock named in the
regulator’s settlement with your brokerage firm. A great amount of material,
such as damaging e-mails, was uncovered in various cases of conflict of
interest, so lawyers feel it may be easier to win lawsuits. If your case
doesn’t go to court it might be settled in arbitration, though investors tend
to lose the vast majority of these cases. To find a lawyer for your
arbitration case, contact the Public Investors Arbitration Bar Association
at www.piaba.org.
- You should expect less stock research out of Wall Street. In the "good old
days," research was being subsidized by investment banking fees, and in fact,
research was used to hype new issues brought public by investment bankers.
With the settlement, there is supposed to be a strict separation of research
and investment banking, so the subsidy goes away. According to Zack’s
Investment research, in March 2000, there were 3,600 analysts covering 5,900
stocks. That has now dropped to 3,000 analysts covering 4,500 stocks, and you
should expect that number to fall much further. This means it could be harder
to get research on smaller, fast-growing-but-obscure companies than it was
before. For the research that remains, brokers are going to have to post
analysts’ stock recommendation performance on their Web sites every quarter.
The settlement calls for $432 million to go into an independent research
operation, but no one is clear how this will work and what happens to it
when the money runs out. There are some firms like Standard & Poor’s,
Morningstar and Value Line that do offer independent research, but they are
followed by a relatively small number of investors now. The settlement also
calls for $80 to go into investor education, so you might see more
educational opportunities created in schools around the country.
Overall, some people think that all the rules and restrictions on Wall
Street will prevent these abuses from happening again -- but I think it will
be a long time before investor faith in Wall Street research is restored.
For More Financial Tips From Jordan Goodman
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