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A Softer Approach in Wall St. Probes

Fines and reforms appear more likely than criminal prosecution of analysts and others accused of wrongdoing.

October 14, 2002|Walter Hamilton | Times Staff Writer

NEW YORK — In this season of white-collar scandal, the government has pursued corporate rogues with an unalloyed zeal, subjecting alleged wrongdoers to humiliating "perp walks" and rushing out criminal charges that could put them in prison.

But when it comes to the many revelations of disgraceful conduct on Wall Street, prosecutors' approach this year has appeared kid-gloved in comparison.

Multiple state and federal probes of the practices of brokerage stock analysts and investment bankers during the bull market have shown "a clear commitment to deception on the part of a major portion of the industry," said William Galvin, Massachusetts' secretary of state.

Yet no criminal charges have been filed against any brokerage or individual analyst, and many legal experts doubt that prosecutors will choose to bring such cases -- even though the scope of alleged Wall Street fraud arguably goes far beyond the insider-trading scandal of the late 1980s.

The government's investigation in the 1980s resulted in guilty pleas and jail terms for an array of well-known financiers, traders and brokerage executives, including investment banker Martin Siegel of Kidder, Peabody & Co., takeover-stock trader Ivan Boesky and Boyd Jefferies, founder of brokerage Jefferies & Co.

The biggest name of all -- junk bond king Michael Milken -- also pleaded guilty to securities law violations, and his firm, Drexel Burnham Lambert, was slapped with a criminal indictment that destroyed it.

This time, major brokerages and regulators are engaged in talks to reach a "global" civil settlement of the various state and federal investigations. If a deal is struck, the probable outcome would be large fines and promises to reform -- but no admissions of wrongdoing.

Some experts say that's the way it should be. Fining the industry and forcing changes in the way brokerages do business could be more effective than locking people up in an effort to make examples of them, say some securities-law professors.

"That would give us an appropriate closure," said Donald Langevoort, a law professor at Georgetown University. "We don't need jail time."

The public, however, may well be mystified as to why the revelations they've heard about brokerage practices in the late 1990s don't rise up to criminal wrongdoing.

From the state and federal probes of stock analysts and investment bankers, investors have learned that some analysts privately disparaged stocks while advising the public to buy them.

Other analysts admitted to touting stocks simply to lure investment banking business from the companies.

A senior manager at one brokerage lamented that conflicts of interest had rendered his firm's research "basically worthless."

Meanwhile, congressional investigations have shown that brokerages routinely awarded shares in hot stock offerings to favored executives of companies the brokerages were wooing for banking business.


Deterrent Effect

Michael Josephson, president of the Josephson Institute of Ethics in Marina del Rey, believes criminal prosecutions could send a strong deterrent message, if the government has sufficiently strong cases.

Analysts "did real and meaningful harm and did it with what I think is malicious intent," said Josephson, whose institute advises corporations and other entities on matters of ethics and conduct. "If we can prove that there was specific intent to defraud, then I think there should be prosecutions" of analysts and their firms, he said.

The government's willingness to bring criminal fraud cases against executives at such failed firms as Enron Corp., WorldCom Inc. and Adelphia Communications Corp. may be whetting the public's appetite for charges against brokerages, some experts say.

But a number of factors are working against a 1980s-style criminal sweep of Wall Street.

Some regulators fear that lengthy criminal prosecutions could spook depressed financial markets and further sap investor trust. And indicting any of the major brokerages at the heart of the government probes -- such as Credit Suisse First Boston and Salomon Smith Barney -- could impair their ability to operate and potentially threaten their existence.

An indictment could force the Securities and Exchange Commission or the New York Stock Exchange to immediately suspend a firm from certain business activities.

"It is highly unlikely that a firm would be prosecuted, regardless of the evidence, for fear of Drexelizing the firm," said Jacob Frenkel, a former SEC attorney. "The indictment alone would be fatal."

In New York, regulators also don't want to exacerbate the brutal Wall Street downturn that has spawned large-scale layoffs.

"We will not act in a way that jeopardizes the stability of the main investment houses that are the backbone of the city, state and national economies," said New York Atty. Gen. Eliot Spitzer, who has been at the forefront of the Wall Street probes.

Yet some regulators say criminal prosecutions, even of the biggest brokerages, may be needed.

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