- The Washington Times - Tuesday, May 13, 2003

Senators expressed skepticism yesterday that the government’s $1.4 billion settlement with 10 major investment firms will fundamentally change Wall Street’s culture, saying that top executives need to be held accountable.

Discouraged by what they see as a lack of contrition on the part of brokerage-industry leaders, members of the Senate Banking, Housing and Urban Affairs Committee suggested that the new accord does not go far enough. Some appeared to hunger for new prosecutions.

“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” of the big investment firms, Sen. Richard C. Shelby, Alabama Republican, the committee’s chairman, said at a hearing called to examine the accord. “Without holding executives and CEOs personally accountable for the wrongdoing that occurred under their watch, I do not believe that Wall Street will change its ways or that investor confidence will be restored.”

William Donaldson, chairman of the Securities and Exchange Commission, held open the possibility of future enforcement action against executives of Wall Street firms.

“Ongoing actions by the SEC will be directed toward supervisory” responsibilities of brokerage executives, Mr. Donaldson testified.

Despite the signing of the settlement, which found industrywide abuse as well as fraud at three of the firms, some Wall Street executives continue to appear blind to the problems, said Sen. Paul S. Sarbanes of Maryland, the committee’s senior Democrat.

“And yet we have this denial,” Mr. Sarbanes declared.

In an unusual public rebuke, Mr. Donaldson last week scolded the head of Morgan Stanley, which is paying $125 million under the settlement, for suggesting that his firm’s conduct didn’t harm ordinary investors. Mr. Donaldson also warned Chairman and CEO Philip Purcell in a letter that Morgan Stanley like the other firms is legally prohibited from denying the allegations.

The SEC and state regulators have exposed Wall Street’s culture in an investigation that found analysts misled investors with stock picks designed to win the firms investment-banking business from the companies issuing the stock.

Dozens of e-mail excerpts made public last week, included in lawsuits filed against the firms by the SEC, portray an industrywide pattern of abuse, financial incentives and pressures that sometimes led analysts to publish falsely rosy stock reports.

Mr. Shelby suggested that the amount of fines being paid by Wall Street’s biggest firms was “relatively small.”

Mr. Donaldson disputed that, noting that the penalties were records for the SEC. They also represent an intangible cost for the firms’ reputations, he said, and “there is considerable civil liability out there” that enables investors who believe they were defrauded to privately sue the firms to recover money.

Still, Mr. Donaldson acknowledged: “Unfortunately, the losses that investors suffered in the aftermath of the market bubble that burst far exceed the ability to compensate them fully. They can never fully be repaid.”

Seeking to restore investor confidence, the SEC and state and market regulators are forcing the firms to cut the ties between analysts’ research and investment banking, pay a total of $432.5 million for independent stock research for their customers, and fund an $80 million investor-education program.

A fund of $387.5 million will be set up to compensate customers of the 10 firms, and $487.5 million in fines will go to states according to their populations.

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