LABJ FORUM

Wall Street Shakeup Or Not?

Closing yet another in a seemingly endless series of chapters in bad corporate behavior, securities regulators last week announced a $1.4 billion settlement with a number of Wall Street firms. This time it was over the duping of smaller investors with research tainted by the desire to maintain corporate investment banking clients. With investor confidence shaken and the question of business ethics on everyone’s lips, the Business Journal asks:

Do you think the most recent settlement will change the way business is conducted?

Bill Urquhart

Partner

Quinn Emanuel Urquhart Oliver & Hedges

If I looked at that event in isolation the answer would be no. You have to see it on a continuum, starting with the problems with Enron. The result of all this stuff is that there will be profound changes in the way investment banks do business. The settlement itself is like a sneeze, it’s not the cold. The business community will be better for it in the long run.

Steve Kaufhold

Litigation Partner

Akin Gump Strauss Hauer & Feld LLP

Maybe. It’s a little bit early to see how business practices will develop. The provisions call for separating the analysts and the bankers, and there’s a fund for education. It’s a real punishment, it’s a real amount of money being paid and reforms are being called for. It’s premature to say if the provisions will be effective. The bottom line of it all is you always have to take analysts reports with a grain of salt. That was true before the settlement and it’s true after.

Richard Earnest

Fund Manager

Highmark Value Momentum Fund

I think the settlement will not have much of an impact. The amazing thing is that people have not been named who were in charge of what went on. The people who got involved didn’t necessarily think of what they were doing as a plan, but as they progressed, seeing how much money they were making by playing this game, they let their morals slip. I think indictments are in order. The fines just come out of the pockets of the shareholders, not the individuals.

Dan Gardenswartz

Principal

Sage Group LLC

It sent a clear signal to the market that the modus operandi has changed. The allegations against the securities industry shook investor confidence badly. The attorneys general and the industry cooperated in this pretty well hopefully that cooperation and the settlement will mean that confidence will return to the investment market. It’s a symbolic instead of a monetary victory because only a small fraction of the value lost is being recovered by the settlement.

Avanidhar Subrahmanyam

Professor of Finance

UCLA Anderson School of Business

It’s going to have an impact in the short run. For the next couple of years, analysts will be more careful. It will restore a bit of confidence, but we still have a ways to go. Investors don’t trust regulators or analysts at this point. The fine will go the SEC, not to investors. As long as investment banks employ analysts and sell securities, there’s going to be a problem. There has to be a sea change in the way in which the security business is conducted on a daily basis. It’s now controlled by a handful of investment banks, and the more you can separate out their activities, the better. Analysts give an opinion, and you can’t regulate an opinion.