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Wall Street Settlement Scrutinized

Lawmakers suggest tougher penalties might be needed to address alleged misconduct at securities firms.

May 08, 2003|Jonathan Peterson | Times Staff Writer

WASHINGTON — Members of Congress on Wednesday expressed doubts about the recent $1.4-billion settlement of alleged misconduct by Wall Street brokerage firms and suggested tougher penalties might be needed to change the attitudes that led to such behavior.

Lawmakers also urged regulators to keep up the pressure on investment firms and to hold accountable top executives who engaged in misconduct.

"I believe that the Wall Street culture must change from the top down, and I am not convinced that the [settlement] has done enough to change attitudes at the top," said Sen. Richard C. Shelby (R-Ala.), chairman of the Senate Banking Committee, which held a hearing on the issue.

At the hearing, lawmakers also expressed concern about a perceived lack of remorse among Wall Street executives and seemed worried that wary investors would continue to hold back the U.S. economy. Further, they said the penalties the brokerages agreed to pay might not pinch hard enough to prompt an overhaul of Wall Street culture.

Under terms of the agreement finalized last week, 10 major investment firms agreed to pay $1.4 billion and implement reforms aimed at maintaining the integrity of analyst research.

The firms were accused of using biased research during the late-1990s bull market, falsely promoting certain stocks to please corporate clients -- and victimizing small investors who trusted the information.

On Wednesday, members of the Senate banking panel grilled securities regulators, all of whom spoke of the settlement as a constructive step toward ending abuses on Wall Street.

William H. Donaldson, chairman of the Securities and Exchange Commission, called the fines "substantial" and said he believed the reforms "will go a long way toward restoring the honorable legacy of the research profession."

Donaldson pledged to "double our efforts" and focus regulatory scrutiny on securities firms' "supervisory chain of command."

Sen. Paul S. Sarbanes (D-Md.), co-author of the principal reform legislation sparked by scandals at Enron Corp. and other companies, said Wall Street leaders needed to show commitment to pro-investor reforms or risk the consequences.

"If the people on Wall Street can't be sensitized to what's happened, then obviously the regulators are going to have to sensitize them," he said.

The $1.4-billion deal total came under scrutiny, with some senators pointing out that a majority of the settlement cost -- perhaps two-thirds -- either might be tax-deductible for brokerages or covered by insurance.

Donaldson said the settlement had an "ironclad" prohibition against firms taking a tax deduction or insurance benefit for the $487.5 million in civil penalties that are a part of the overall $1.4 billion.

But he said the issues were murkier for the remainder of the $1.4 billion, which includes disgorgement of profits, required payments to fund independent research and establishment of an Investor Education Fund.

If two-thirds of the total is covered by insurance or tax deductions, "there may be a stronger sense of outrage," said Sen. Christopher J. Dodd (D-Conn.).

Along with the settlement, regulators last week banned two individuals from the securities business: Henry Blodget, a former Merrill Lynch & Co. Internet analyst, and Jack Grubman, formerly a telecom analyst at Citigroup Inc.'s Smith Barney unit. But lawmakers on Wednesday wanted to know why more individuals had not been singled out for punishment, including Citigroup CEO Sanford I. Weill, who allegedly asked Grubman to reconsider his rating of client AT&T Corp.'s stock in 1999.

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