Wall Street to Congress: Shut down states` analyst probe

NASAA President Borg calls attempt “shameful and cynical;” asks “What does the industry have to hide?”

WASHINGTON (June 17, 2002)- In a brazen attempt to undermine investor protection, the securities industry is trying to amend a bill scheduled for mark-up Tuesday by the Senate Banking Committee with language that would end a probe by state securities regulators into whether Wall Street analysts lied to investors.

At a press conference in Washington, Joseph Borg, president of the North American Securities Administrators Association, said the language, which he was told was drafted by Morgan Stanley, could be offered Tuesday as an amendment to the “Public Company Accounting Reform and Investor Protection Act.” It would prohibit any “rule, regulation, order or other administrative action” by a state in regard to stock analysts. The net effect, said Borg and other state securities regulators, would be to shut down the multi-state task force created mid-April to investigate whether stock analysts lied to investors.

“The question for the author and supporters of this amendment is this: Are you going to stand with 100 million-plus investors on Main Street who expect and deserve the truth from their brokers or with a handful of rich firms on Wall Street who have a serious credibility problem?” said Borg. “To put it in Enron terms, are you for the managers who took the money or for the employees who got the shaft?”

The states` task force, set up by the NASAA board of directors, is investigating whether analysts lied to investors in their research reports and other public appearances, as well as other possible violation of securities law. The 40-state task force, which is focused on roughly a dozen firms, is co-chaired by California, New Jersey and New York.

Borg noted state investigators are committed to coordinating their investigation with federal regulators and he called on the industry and some in Congress to stop mischaracterizing the intent of the states` investigation.

“Let me be clear: State securities regulators want justice for investors, not a jumble of new regulations,” Borg said. “As we`ve said from the outset, we need to conduct this investigation to find out if laws were broken, who was harmed, what went wrong and to hold those at fault to account. The rhetoric about patchwork regulation coming from the industry and some on the Hill is a red herring. It`s designed to keep us from doing our job and, I fear, to keep the truth from American investors. Let the investigation go on. What does the industry have to hide?

Borg added the states are coordinating their investigations with those being conducted by the SEC, the NASD and the New York Stock Exchange.

“This lets us leverage limited resources,” Borg said. “This job is too big for any single regulator.”

This draft amendment would also strip individual investors of key legal rights, said Royce Griffin, NASAA`s general counsel.

“This amendment would bar investors misled by analysts from either pursuing arbitration claims or suing under state law,” said Griffin. “Interpreted more broadly, this amendment could also give any individual subject to Securities and Exchange Commission rules immunity from state laws, preempting virtually every one of the thousands actions, including criminal actions, brought by state securities regulators and private litigants every year.”

“This is a shameful, cynical and brazen attempt to shut down a legitimate investigation by the local cop on the securities beat of potential widespread fraud on the market,” said Borg. “To see this sort of thing in this post-Enron world, you have to wonder: What does the industry have to hide that it would resort to this sneaky 11th hour attempt to stop this investigation?”


NASAA News Conference
National Press Club
Washington, DC
June 17, 2002

Introductory remarks by NASAA Executive Director Marc Beauchamp

Good morning. Thank you all for coming.

I`m Marc Beauchamp, executive director of the North American Securities Administrators Association, or (NASAA).

We`re on a bit of a tight schedule. NASAA`s president, Joe Borg, needs to get up to the Hill by 11 o`clock for some appointments.

He has some brief remarks and then will take questions.

If you need more information afterwards, talk to me or NASAA`s General Counsel Royce Griffin. Royce….

The reason for this press conference is to blow the whistle on this

-Legislative language that we`re told Morgan Stanley and perhaps others in the securities industry are trying at the 11th hour to attach to a bill the Senate Banking Committee is marking up tomorrow

-Language that could effectively shut down the state-level investigation into whether Wall Street stock analysts at firms like Morgan Stanley and Goldman Sachs intentionally misled investors.

The firm or firms that drafted this language just don`t seem to get it.

They apparently don`t get that Wall Street today faces a historic crisis of confidence.

Given all the recent news-which makes the business pages read more like the police blotter-can you blame investors for wondering if the game on Wall Street wasn`t fixed-with phony numbers, double-talking stock analysts and misleading research?

The way to rebuild confidence in Wall Street and get Main Street investors back in the market is not-repeat not-to shut down this investigation.

The way to rebuild investor trust in our markets is to find the problems, fix them and shine as much sunlight on the issue as possible.

Sunlight, as you all know, is the best disinfectant.

Without sunlight-the kind regulators and the news media provide-this problem will only fester and this crisis of confidence will continue to be a drag on our markets.

Now I`d like to introduce Joe Borg, NASAA`s president and director of the Alabama Securities Commission….Joe…..

REMARKS BY JOSEPH BORG
NASAA PRESIDENT AND DIRECTOR OF THE ALABAMA SECURITIES COMMISSION
NATIONAL PRESS CLUB
JUNE 17, 2002

We`re gathered here this morning at the National Press Club, on the 30th anniversary of the Watergate break-in, to talk about another attempted cover-up.

This is a shameful, cynical and brazen attempt to shut down a legitimate investigation by the local cop on the securities beat of potential widespread fraud on the market.

In this post-Enron world, I see this amendment, and I have to wonder…what do some in the industry have to hide?

Why are they resorting to this sneaky 11th hour attempt to shut down this investigation?

At the very moment the public is looking to their elected officials to clean up the sleaze in corporate America, this amendment would shut down an investigation that goes to the very heart of capitalism: trust. Did analysts lie to investors?

If this amendment passes, we may never know.

This amendment also has consequences beyond shutting down our investigation.

It could bar investors misled by analysts from either pursuing arbitration claims or suing under state law.

Interpreted more broadly, this amendment could also give any individual subject to Securities and Exchange Commission rules immunity from state laws, preempting virtually every one of the thousands of actions, including criminal actions, brought by state securities regulators and private litigants every year.

It also appears to be unconstitutional because it would create two classes of persons-those covered by SEC rules and those not covered by SEC rules.

For example, it would prevent a state from bringing an action against a research analyst but not a commercial real estate broker who did the same thing, namely inflating the values of his properties while privately writing emails laughing at the investors who accepted these estimates as truthful.

State securities cops have a duty to protect investors in their states, something they`ve been doing longer than the SEC`s been around.

With all due respect, to the federal regulators and some members of Congress, this matter was not aggressively investigated until the New York Investor Protection and Securities Bureau uncovered those emails.

The question for the author(s) and supporters of this amendment is this: Are you going to stand with 100 million plus investors on Main Street who expect and deserve the truth from their brokers or with a handful of rich firms on Wall Street who have a serious credibility problem.

Put in Enron terms, are you for management who took the money or for the investors and employees who got the shaft?

The securities industry and some on the Hill have been trying to change the subject and to spread misinformation. This isn`t about regulatory turf. It`s about fraud, investor protection and getting to the truth.

Let me be clear: State securities regulators want justice for investors, not a jumble of new regulations.

As we said at the outset, we need to conduct this investigation to find out if laws were broken, who was harmed, what went wrong and to hold those at fault to account.

The rhetoric about patchwork regulation coming from the industry and some on the Hill is a red herring. It`s designed to keep us from doing our job and, I fear, to keep the truth from American investors.

Let the investigation go on. What does the industry have to hide?

We`re coordinating our investigations with those being conducted by the SEC, the NASD and the New York Stock Exchange. This lets us leverage limited resources. This job is too big for any single regulator.

If there are new rules required based on these investigations, we`ll work with the federal regulators on them so they are both consistent and consistently applied.

The states have just as much right to investigate this as the SEC or the NASD. After all who`s been ripped off? Investors from California to New York, from Maine to Utah, and from Washington State to Florida.

If you get mugged on your way home, who are you going to call? The local cop on the beat or the FBI in Washington? Who do you think is going to work harder on your behalf?

The U.S. is blessed with the fairest, most transparent, most trusted markets in the world. Why? Our complementary system of regulation-state, industry and federal.

Traditionally, the states have been the early warning system for problems on Wall Street.

In the Nineties the states brought actions against microcap stock manipulators, and fraud by day trading firms and issued warnings about misleading advertising by some online brokerage firms.

Let me call your attention to one of the handouts this morning, a press release highlighting our list of top ten investment scams.

If this amendment or something like it were to become law would we be able to protect investors in our states from those frauds? In most cases, I`m afraid, the answer would be no.

To me, the message of this legislation is obvious: its sponsors and supporters apparently think that lying and cheating is OK. Well, it`s not OK.

And all regulators-state, industry and federal-must ensure that people on Wall Street who lie or who cheat investors are held to account.

When it comes to fraud on the market, no regulator takes a back seat.

Now, let me give you a brief update on the Merrill Lynch settlement. The final legal documents will go out to the states this week. We`re optimistic about getting the states to sign on to the settlement in the coming weeks.

We think it`s a fair deal. Under it, Merrill pays a significant amount of money…they`ve changed the way they do business and other firms are emulating those changes…the investigation spurred rule changes by the SEC and there will likely be more to come.

Maybe most importantly, the investigation educated investors everywhere that they need to be skeptical about analysts` ratings and reports.

Again, we think it`s a fair deal and a practical resolution to the Merrill Lynch investigation and we`re optimistic that the states will agree and sign on.

Thank you. Now I`d be happy to take some questions.

2002 Headlines, Newsroom