Settlement Leftovers



New York – The end of the Global Settlement attracted a lot of media attention this week. Our own Michael Mayhew, founder of Integrity Research Associates, was interviewed by MarketPlace from American Public Media, where he asks whether independent research firms that have received settlement money will survive in the post-settlement era starting this July.

However, the key settlement issue covered by the media this week was: What to do with the settlement money leftovers ($79 million)? A/ send it in a doggie bag to the Treasury

This question was put on the desk of Judge William H. Pauley III, who issued a ruling last Wednesday that referred to the SEC’s Global Settlement in less than flattering terms. In particular Judge Pauley highlighted the settlement’s failure to accurately determine which investors qualified to the settlement’s money, and to determine where to allocate the money leftovers ($79 million).

The 31 page judicial decision starts in these terms:

“Six years after the Securities and Exchange Commission’s (“SEC”) much-heralded announcement of the ‘Global Research Analyst Settlement,’ more than $79 million intended for aggrieved investors cannot be distributed and continues to accrue interest. This predicament should have been anticipated the parties prior to bringing these cases and the proposed consent judgment to Court. The quandary of what to do with undisbursable funds presents cautionary lessons for regulators, courts, and all other participants in securities fraud litigation. When such cases settle and the adversarial process melts away-the engagement and commitment of the parties to bring the matter to conclusion weakens. Further, the application of inherently incompatible remedial principles-disgorgement, penalties, and restitution-should be analyzed carefully before a Court is burdened with tortured restructuring and embarrassing consequences.” (p. 1)

In his decision, Judge Pauley applied the “cy pres” doctrine (legal jargon for “the next best use”). The judge rejected the claims from the banks to use the remaining money to fund pending cases, as well as the SEC’s request to distribute the money among regulators that initiated the case. Independent research would have also made good use of these leftovers. However, the decision grants $13.8 million to investors, and $65 million to the Treasury Department.

The substantial section of the decision concludes:

“In the final analysis, this Court does not question the SEC’s interest in bringing to an end improper conduct. Nor does it question the SEC’s interest in recompensing investor victims and deterring future violations. However, whether the SEC has the institutional resolve and commits adequate resources to reach these goals is an open question.” (p. 30)

SEC spokesman John Nestor told the New York Law Journal, that the SEC is pleased that the settlement returned millions of dollars to investors that were harmed by tainted research.

Indeed, it is reassuring to know that harmed investors received justice. However, the SEC spokesman’s comment is oblivious of other substantial issues. Had the parties involved in the settlement established clear parameters for the remaining funds’ allocations, the $79 million could now be benefitting a broader number of investors. One imaginable way is by extending the funding of the independent research industry. Anyway, it is not worth crying over spilled milk. The leftovers have been sent in a doggie bag to the Treasury, and indies will have to demonstrate their value and business capabilities in this coming post-settlement era.

The Global Research Analyst Settlement

In 2003 the Global Research Analyst Settlement was enforced after regulators such as the SEC accused investment banks and analysts of releasing biased research that benefited investment banking business. As a result, 10 of the largest Wall Street firms agreed to pay $1.5 billion to restitute the damages caused by their deceitful research.

The initial agreement between the parties (regulators and investment banks/analysts) sought to reverse ill-gotten gains, assess civil penalties, separate investment banking from research, and compensate aggrieved investors. For this, the parties agreed to the following concrete measures: 1. Create a “China Wall” between investment banking and research; 2. Allocate $460 million for independent investment research; 3. Allocate $432.75 million to disgorgement and penalties; 5. Allocate $85 million for investor education programs; and 6. The preservation of investor’s rights to pursue any other remedy or recourse against the investment banks.

The settlement expires in July, 2009. A caveat to this deadline is that two investment firms (Deutsche Bank and Thomas Weisel) were added to the case a few months after its enforcement, therefore, the settlement obligations for these firms end at a later date.


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