Judge Sends $65M in Leftover Settlement Funds to the Treasury

     (CN) – A federal judge in Manhattan criticized a number of investment banks and the SEC for lacking a plan on how to distribute more than $79 million earmarked for aggrieved investors, six years after the $1.4 billion Global Research Analyst Settlement. U.S. District Judge William H. Pauley III ordered $14 million to go to investors and the remaining $65 million to revert to the Treasury.




     Judge Pauley rejected the banks’ request to use the remaining funds to settle similar cases against them, and the SEC’s proposal to have regulators retain the money.
     Bear Stearns, Citigroup and JPMorgan were a few of the 10 firms targeted in 2003 by former New York Attorney General Eliot Spitzer and the SEC, who claimed analysts published misleading material and failed to disclose conflicts of interest in their research reports.
     The SEC also filed a civil suit against two analysts, Jack Grubman, formerly of Citigroup, and Henry Blodget, formerly with Merrill Lynch. The investment banks Deutsche Bank and Thomas Weisel were also named in the complaint.
     The parties submitted proposed consent judgments, which included $460 million for independent investment research, $528.5 million in disgorgement and penalties to the states, $432.75 million in penalties as a federal payment and $85 million for investor education programs.
     However, the SEC offered “no specificity” regarding how much of the federal penalties should be used for restitution, according to the judge.
     He slammed the commission and the settling investment banks for their lack of forethought as to the “destiny of the disgorgement and penalties.”
     Judge Pauley appointed a distribution fund administrator, who embarked on a five-year effort to identify and locate potential claimants. The judge details the administrator’s efforts and difficulties distributing more than $432 million in the 31-page opinion.
     He wrote that the proposed consent judgments failed to offer a clear framework and instead left those matters to the court.
     “In short, the parties proposed to end the adversarial process the very day the lawsuits were filed and pass to the court responsibility for freighting this substantial consignment,” Pauley wrote.
     “Disgorgement, penalties and restitution should be analyzed carefully before a court is burdened with tortured restructuring and embarrassing consequences.”
     Pauley said it was “unprecedented” to ask the court what to do with $79 million in unclaimed funds.
     He endorsed a proposal by law schools to give them a portion to fund investor-protection clinics. The SEC and the banks rejected the request.
     The judge declined to authorize payment to FINRA, formerly the NASD foundation, due to their “disappointing performance” in awarding grants for investor-education programs. He lampooned the SEC again, this time for its failure to properly oversee the foundation.
     “When will the SEC exercise its responsibility to ensure that these substantial sums are expended to educate the investing public?”
     The judge concluded by writing: “This court does not question the SEC’s interest in bringing to 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.”

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