Sec. Cox Concludes Enforcement Actions With Nine Top Investment Firms

“Global Settlement” Involving Conflicts of Interest Between Research and Investment Banking Results in Penalties and Recovered Costs of Over $4.7 Million, Largest Ever Paid to Georgia in a Securities Enforcement Action

$5.4 Million Also Paid By Firms to Investment Protection Trust to Fund
Georgia Investor Education Programs
 

ATLANTA … Secretary of State Cathy Cox announced that she has concluded enforcement actions with nine of the nation’s largest investment firms, finalizing Georgia’s part of a national “global settlement” related to conflicts of interest between research and investment banking activities at the firms.  The settlement agreements resulted in civil penalties and recovered investigative costs totaling $4,715,388 paid to Georgia, the largest sum ever collected by the state in conjunction with a securities enforcement action.

            Secretary Cox, who serves as Georgia’s Commissioner of Securities, said that in addition to civil penalties and investigative costs, the firms agreed to pay over $5.4 million to the Investor Protection Trust (IPT) to fund investor education and awareness programs in Georgia.

            The amounts represent Georgia’s apportioned share of a comprehensive national settlement with federal, industry and state regulators that, in combination with a 2002 settlement with Merrill Lynch, totaled some $1.4 billion.  By law the maximum civil penalty that can be levied for violations of the Georgia Securities Act is $500,000.  Eight of the nine firms paid the maximum penalty, and the ninth paid in excess of $315,000.

The global settlement provides for not only significant financial penalties, but also a comprehensive national program of independent research and investor education, and mandates wide-ranging reforms in how the nation’s major investment firms conduct their research and investment banking activities.

            The global settlement brings to a conclusion an investigation first initiated by New York Attorney General Eliot Spitzer, which was carried forward by state securities regulators under the leadership of Christine Bruenn, president of the North American Securities Administrators Association (NASAA), of which Georgia is a member, the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE).   The investigation represented an unprecedented partnership between state, federal and securities regulators.  State regulators assembled task forces to work specific segments of the investigation. 

            In addition to Merrill Lynch, which reached a settlement agreement relating to research related conflicts of interest last year, the nine firms who have executed settlement documents with Georgia are: Lehman Brothers, Inc., Bear Stearns & Co., Inc., Credit Suisse First Boston LLC, Goldman Sachs & Co., J. P. Morgan Securities, Inc., Morgan Stanley & Co., Inc., Citigroup Global Markets Inc., (formerly known as Solomon Smith Barney, Inc.), UBS Securities LLC, (formerly known as UBS Warburg, LLC and UBS Financial Services, Inc., formerly known as UBS Paine Webber, Inc.) and U.S. Bancorp Piper Jaffray Inc.

            “I am extremely pleased that, along with other state securities regulators, we have successfully concluded this historic settlement, which in dollar terms is the largest of its kind ever in Georgia,” said Secretary Cox.  “A review of the hundreds of pages contained in these settlement orders is a sobering indictment of some of the business practices at many of America’s largest investment firms – firms we should expect to trust and respect.  Our investigation found widespread abuses in which what was claimed to be objective research was tainted and corrupted by the drive to win huge investment banking deals.  The trail of internal documents, emails and interviews makes clear that the trust of millions of average investors was abused, as analysts provided to the public positive recommendations on stocks that they privately disparaged as poor investments.  Retail customers, and many of the brokers who served them, were misled by this compromised guidance and the portfolios of millions of investors lost substantial value because of these deceptions and dishonest practices,” Secretary Cox added.

            “Just as important as the financial penalties assessed against these firms are the structural reforms within the industry that are mandated by these agreements.  Going forward, research analysts will be insulated from investment banking pressure, and their compensation no longer can be linked to investment banking activities.  In addition, under the terms of the global settlement, the firms will pay $432.5 million to fund independent research for a period of five years, assuring that their customers have access to a wide range of fully independent analyses of investment opportunities,” Ms. Cox added.

            “The $80 million in national investor education funds, along with the more than $5.4 million in payments to the IPT for the benefit of Georgia investors, represents a unique opportunity to develop comprehensive programs to educate consumers about their investment choices and to arm them to protect themselves against investment scams and frauds.  Every day our Securities Division encounters Georgians who have incurred significant losses, in some cases losing their entire life savings, from imprudent investments or from outright fraud and dishonest schemes.  These settlement funds will let us take a giant leap forward to increase the financial literacy of Georgians by giving them the tools they need to make wise investment choices,” Ms. Cox said.

            (The IPT is a charitable trust, directed by securities regulators from several states, dedicated to funding investor education programs nationwide.  The IPT will oversee the disbursement of the funds deposited into the trust specifically for Georgia’s benefit, as well as the $27.5 million received from the global settlement to fund investor education programs in each of the states.)

            “Of great importance,” said Secretary Cox, “I believe this settlement points to the crucial role played today by state securities regulators, who serve as the local cop on the beat to uncover and deter frauds, scams and dishonest and unethical practices.  It’s quite possible that evidence of these conflicts and frauds would never have been uncovered without the vigorous and aggressive investigative efforts of New York Attorney General Spitzer, work that was quickly joined by state securities regulators throughout the country.  For years to come investors in Georgia and throughout the nation will benefit from the dedicated efforts of state securities regulators, who are working every day to deter fraud and to insure fair dealing in the financial marketplace,” Secretary Cox concluded.