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Wall St. Settlement Funds Won't Go Toward Investors' Arbitration Costs

August 26, 2003|From Reuters

NEW YORK — U.S. District Judge William Pauley on Monday blocked an effort to redirect toward arbitration costs about $400 million earmarked for individual investors who lost money because of tainted stock research.

Pauley, whose approval is needed before a landmark $1.4-billion settlement reached in April between regulators and 10 major brokerages can take effect, said allowing the move would have added confusion and delay.

Lawyers representing more than 12,000 individual investors filed papers last month aimed at convincing Pauley that $400 million of the settlement money should be used to cover legal fees for arbitration claims against brokerages, rather than simply being divided among investors who lost money because of brokerage misconduct.

Critics of the settlement said investors stood a better chance of recouping more of their losses by having their individual claims heard before arbitration panels.

The 10 brokerages, along with the Securities and Exchange Commission, quickly filed responses recommending that the judge deny the "motion to intervene" on the basis that it could disrupt the elaborately crafted pact.

Pauley agreed in his 15-page decision Monday, saying that permitting the motion to intervene "would open the floodgates to a multitude of potential intervenors."

The $400 million in question is the only money under the agreement that was set aside to repay individuals who lost money as a result of stock research hype dished out during the 1990s dot-com craze. The remaining $1 billion goes to various regulatory coffers.

Arbitration claims typically cost about $1,000 to initiate but can end up costing investors much more than that to press, depending on the size of a case and how it progresses.

By routing the $400-million distribution fund to cover a flood of arbitration claims, lawyers for individual investors had hoped to pry more money from the Wall Street firms in the long run.

In his ruling, Pauley paved the way for "any interested person" to submit comments to the court concerning the implementation of the $1.4-billion settlement.

"The court recognized that other voices need to be heard and allowed for comments to be officially docketed and reviewed," said Robert Weiss, an attorney whose firm filed the motion Pauley denied Monday. "We consider this a partial victory."

Weiss said his firm would submit more comments to the court.

Since U.S. stocks peaked in March 2000, about $6 trillion in market value has been lost, according to Wilshire Associates.

The brokerages that agreed to contribute to the $1.4 billion in penalties under the settlement with regulators were Bear Stearns Cos., Citigroup Inc., Credit Suisse First Boston, Goldman Sachs Group, Lehman Bros. Holding Inc., Merrill Lynch & Co., Morgan Stanley, J.P. Morgan Chase & Co., UBS and U.S. Bancorp.

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