On Dec. 20, 2002, state and federal regulators gathered amid holiday decorations at the New York Stock Exchange to announce a $1.4 billion settlement with 10 of Wall Street's biggest firms over allegations that analysts at the firms wrote biased research to curry favor with banking clients.
Regulators said they hoped that much of the money would go to investors who were misled by the research. But they admitted that figuring out who lost money based on individual research reports would be exceedingly difficult.
"I'm not Publishers Clearing House," New York state Attorney General Eliot L. Spitzer, the driving force behind the settlement, said at the time. He warned that investors "won't be getting checks in the mail anytime soon."
He was right.
Around the nation, shareholders are clamoring to be made whole after losing billions of dollars in the accounting frauds and Wall Street scandals of the past several years. But if history is a guide, average investors face daunting obstacles to recovering even a small portion of the money they lost -- even with the help of regulators and prosecutors.
Nearly a year and a half after the settlement of the biased research case, the $400 million investor fund set up as part of the settlement is still just getting off the ground. Other investor restitution programs in the WorldCom Inc. and Enron Corp. cases, set up using provisions in the landmark 2002 Sarbanes-Oxley securities law, also are just getting started.
The problems with investor restitution are simple -- there is never enough money to go around -- and complicated -- it can be difficult to determine who should get what little money there is. The efforts often end in frustration.
"There's a real potential for people to be disappointed about what the restitution program can provide and come away feeling even more cynical about the process," said Barbara Roper, director of investor protection for the Consumer Federation of America.
Investor scams are nothing new, of course, and authorities for years have attempted to help victims recover at least some of the money they lost in smaller, more common fraud schemes. Take Merilyn Walter, a widowed retiree who invested more than half of her savings in what turned out to be a massive pay phone scam in 2000.
The Securities and Exchange Commission, 25 states and the District of Columbia sued ETS Payphones Inc., a Georgia telephone leasing firm, and its chief executive. In all, government officials said, the Ponzi scheme bilked 10,000 investors out of $300 million.
Walter, now 81 and living in a Seattle retirement center, said she has received just $4.27 in cash and ETS stock worth about $11,000 more -- a tiny slice of her initial $210,000 investment.
"I just kind of think it's a lost cause, but I wish it weren't," said Walter, who is still hoping for money out of a class-action lawsuit that was amended this week. "I'd like to just get out from under the whole mess."
The fund set up to distribute money to investors in the research settlement illustrates the difficulty of the restitution exercise.
In February, U.S. District Judge William H. Pauley III named Duke University law professor Francis McGovern to oversee the fund.
McGovern, a leading expert in the field of mass claims, is hiring staff to help him design complex algorithms to apply to each of the firms that paid into the settlement. The different formulas are intended to distinguish between firms such as Goldman Sachs Group Inc., which deals mainly with large institutions, and Morgan Stanley, which caters to individual investors.
All of the firms are required to provide McGovern with data on which of their customers bought and sold stocks named in the settlement in the time frame covered by the settlement.
Then McGovern must somehow determine which of those investors suffered losses directly attributable to individual analyst reports. He must also decide how to compensate small investors in proportion to hedge funds and other market professionals.
In addition, there is the matter of finding investors who owned shares of companies covered by the settlement through mutual funds. Asking the funds to identify such investors could wind up costing more money than would eventually go back to fund investors.
McGovern probably won't have his plan in place until summer. Then he must present it to the SEC and Pauley. There is no target date for returning money to investors. In the end, investors counting on the fund for significant payback are likely to be disappointed because there isn't nearly enough money to go around.
"Investors will probably be able to get a hamburger at McDonald's or a cup of coffee at Starbucks with their distribution," said Jacob H. Zamansky, a lawyer who represents individual investors in lawsuits and arbitration claims.
That is why Spitzer said in December 2002 that he viewed class-action suits and arbitration claims as a better avenue for investors. He said his biggest achievement in his research probe was to provide a "road map" for investors to make their own claims.
But few investors have won arbitration cases claiming they lost money based on allegedly biased research. In almost every case, the claims have been dismissed, and investors have been stuck with thousands of dollars in legal bills.
Meanwhile, a federal judge is considering a distribution plan for investors shattered by the 2002 WorldCom bankruptcy. The company has turned over $500 million in cash and $250 million more in stock to be doled out to shareholders who lost the most money and who have little chance of recovering it through ongoing class-action lawsuits and bankruptcy proceedings. Richard C. Breeden, a former SEC chairman who is to apportion the money, did not return calls for comment about the pace of the payouts.
Citigroup Inc. on Monday said it would pay WorldCom stock and bond holders $2.65 billion to settle a class-action suit faulting the bank for keeping investors in the dark about WorldCom's finances. The settlement means investors won't have to wait years for the case to be resolved, but it is not likely to provide more than a few cents on the dollar. Class-action suits against other banks that helped finance WorldCom and Enron are ongoing.
Investors who lost billions of dollars in the collapse of Enron will have to wait longer for restitution. The SEC has collected $430 million so far in settlements with investment banks and former employees of the Houston energy company, but the agency is awaiting more settlement money before it begins to allocate it, said spokesman John Nester. In the meantime, Nester said, the $430 million is collecting interest in an account overseen by a federal judge.
Roper of the Consumer Federation stressed that consumer groups support SEC and Justice Department efforts to use fines and penalties to compensate shareholders for their losses. But, she said, "restitution only really works when you have identifiable victims, quantifiable losses and funds available to provide restitution that bear some semblance of equating to the losses."
In another series of high-profile settlements with mutual fund companies accused of trading improprieties, the SEC is collecting tens of millions of dollars. Officials who will distribute the funds are still being appointed in many of the cases, an agency spokesman said. That is prompting questions among shareholders and observers.
"We don't have any idea how that money is finding its way back into shareholders' pockets or how it's being allocated," said Mercer E. Bullard, a professor at the University of Mississippi School of Law and a vocal critic of mutual fund abuses. "We don't really know whether these are political settlements, or whether there's some relationship between the fine and the abuse."
The mutual fund scandal has involved two principal types of abuses: illegal trades after the markets were closed and market timing.
Bullard said regulators should be able to measure mutual fund investor losses by tracking improper late trades and evaluating changes in value of the funds' portfolios on those days. Bullard said it may be more complicated to value damages to investors from market timing, or frequent trading in and out of funds, often to take advantage of stale prices of the fund shares. But he said various academic studies provide a basis for the assessment. Market timers sought to exploit discrepancies in pricing to the harm of average investors, who saw the value of their shares diluted and their administrative costs rise.
In recent years, the General Accounting Office has criticized the SEC and the Justice Department for failing to put in place more rigorous systems to collect and distribute money to bilked investors. The SEC sent a report to Congress in January 2003 analyzing the agency's collections for the previous five years. The report also highlighted troubles inherent in seizing funds, including defendants hiding assets overseas and the difficulty of recovery when most of the money has been spent.
For instance, according to the report, to enforce a $73 million judgment against electronics retailer "Crazy Eddie" Antar, SEC lawyers searched the world for his assets, eventually finding $64 million. The agency said in the report that it is increasingly using asset freezes and temporary restraining orders to ensure that defendants do not spend money that could otherwise go to shareholders.
Things were even worse before Congress passed the Sarbanes-Oxley Act. That law for the first time gave the SEC the power to channel civil financial penalties, not simply disgorgement of bonuses and salaries, back to investors who had been defrauded. SEC Chairman William H. Donaldson said in a speech Wednesday that the agency had won orders for about $1.7 billion in penalties and disgorgement in the past eight months. It's unclear how much of that money will be collected and eventually returned to shareholders, though.
Joel Seligman, dean of the Washington University School of Law in St. Louis and author of a history of the SEC, said returning money to investors has become a higher priority at the agency in the past few years.
"It's not appropriate to expect the commission instantly to return the funds," Seligman said. "The question really is, are they making systematic efforts to identify and locate those who have been injured?"
The SEC is asking Congress for the power to seize more assets from wrongdoers who otherwise might shelter them under the protection of state bankruptcy laws and for the ability to hire outside law firms to help it collect payments. A House bill that would give the SEC that authority is pending before the Judiciary Committee.
Former SEC staffer Bullard said the public shouldn't demand that the agency invest a substantial portion of its resources into collecting penalties from wrongdoers. He said that is a task better suited to plaintiff lawyers.
For Merilyn Walter, recovery can't come quickly enough. She is spending $1,100 per month on rent for an apartment in a senior living community and has few independent sources of income.
"Any money at all I have I put in CDs," she said. "Low-risk and low-paying, but the money's always there."