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Published: Friday, 5/2/2003

Wall Street under repair

There's nothing magical about the government's $1.4 billion settlement with 10 of the country's leading investment firms. By itself, the settlement won't instantly restore investor confidence in a battered stock market or temper Wall Street's built-in culture of greed.

But it's a start.

In addition to $875 million in fines and restitution ordered against the 10 firms, the Securities and Exchange Commission made an example of two of the industry's worst actors, analysts Jack Grubman and Henry Blodget, by throwing them out of the business for good.

Mr. Grubman was the star telecommunications soothsayer who upgraded his opinion on AT&T stock to help get underwriting business for his company's parent, Citigroup. He'll pay a personal fine of $15 million, a dent in the $81 million in pay and severance he has received since 1999.

Citigroup will pay the largest fine of the 10 companies, $400 million. Its chairman, Sanford Weill, who pushed Mr. Grubman to raise the AT&T rating, is prohibited from even speaking to his research analysts without a company lawyer present.

If all that seems draconian, the settlement sounds tougher than it really is.

The $1.4 billion represents less than 7 percent of the entire securities industry's profits last year; none of the companies fined had to admit they did anything wrong, much less criminal, and no one is going to jail. In addition, the companies may be able to deduct at least a portion of their fines on their corporate income tax.

Nonetheless, the mountain of evidence released by the SEC and other regulators provides vivid confirmation of the collective swindle of investors that took place when the stock market bubble burst three years ago.

While the market plunged, many analysts continued to give high ratings to stocks of companies that were secretly paying their firms fees for “research” or other services. It was also the era when brokers provided executives of underwriting clients with access to “initial public offerings” of stocks that were quickly sold for big profits.

The fraudulent or exaggerated research was particularly harmful to small-time investors, who lack the sophistication and other sources of information to avoid being conned.

Evidence of these outrageous practices is expected to provide the foundation for legal action, and possibly criminal charges, on behalf of investors who were duped. “This isn't the end,” said New York Attorney General Elliot Spitzer, who was a prime mover in the settlement. “This is very much the beginning for those who acted improperly.”

Let's hope so. Many investors would prefer to see these white-collar crooks go to jail, but money - in the form of jury awards and other court settlements - is something the denizens of Wall Street really understand.

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