Now Wall Street Pays

By Sharon Epperson Thursday, May 08, 2003
    • ILLUSTRATION FOR TIME BY STEPHEN KRONINGER

    George Zicarelli, A 62-year-old videotape editor in New York City, claims he lost more than $455,000 by following the advice of a Wall Street superstar. He invested his life savings in the telecom stock Global Crossing. And he did it, he says, based on tainted research reports by former Salomon Smith Barney analyst Jack Grubman, a onetime guru who has been barred from the securities industry for life.

    Zicarelli is one of many burned individuals with a keen interest in the nearly $400 million restitution fund set aside for investors last week as part of the final, $1.4 billion settlement between 10 Wall Street firms and securities regulators. He knows he may recoup only a small part of his loss — even $400 million won't cover collective damages estimated to run in the billions.


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    But the settlement may prove to be a gold mine in another way. The volumes of Wall Street documents released through the historic settlement — including memos and e-mail — contain some evidence highly damaging to the securities firms. These documents could help investors bring their own cases or join class actions. New York attorney general Eliot Spitzer, whose 2002 investigation and settlement with Merrill Lynch have nourished a number of investor suits, has made thousands of pages of documents available on the Web (www.oag.state.ny.us). Investors have several paths to seek restitution:

    THE DISTRIBUTION FUND. This fund, held by the Securities and Exchange Commission (SEC) and administered by a federal court appointee, will parcel out the nearly $400 million pot to investors who bought certain stocks — including AT&T;, Global Crossing and Worldcom — through certain investment firms. A fund administrator will determine who can make a claim, and details will be posted on the SEC website sec.gov ). Setting up a distribution plan could take a year. After a plan is announced, investors should have several months to respond. It's not clear whether mutual-fund investors, who lost plenty, will get anything. It may be up to funds to make any claims, which puts them in a delicate spot: they would have to admit that they relied on others' stock ratings.

    CLASS ACTION. Millions of investors will probably benefit from lawsuits initiated by institutions or other individuals on behalf of all those harmed. Anyone can try to initiate such a suit, but most affected investors will simply be notified, probably by mail, that they have been included in one. Note that if you are part of a very large class action, your slice — though equitable, based on your damages — could be only a small part of what you lost. The lawyers often take the lion's share.

    ARBITRATION. If you're a customer of a brokerage firm, odds are that you signed an agreement saying that you would take any disputes to binding arbitration rather than to court. Arbitration cases are brought before the New York Stock Exchange or the National Association of Securities Dealers, and with the backlog of claims, a case filed now might not be heard for many months. Don't assume that you have a strong case just because you lost money in the market. To win money back, you would have to show, say, that you made decisions based on advice that turned out to be bogus.

    That is Zicarelli's claim. He says his trades were often executed on the same day that Grubman released a new research report. To prove it, he has attached a dated list of his trades and losses to his arbitration claim. Now he will have to get in line — but at least the line is moving.

    Sharon Epperson is a correspondent for CNBC Business News