Monday, August 29, 2005

States Squander Stock Research Settlement Funds?

We all know that the Spitzer Research Settlement funds were not going to go to investors. Although $400 million is supposed to go to investors, that has not happened yet. While the sum is not significant when compared to the losses suffered by investors, they have not even seen that money, despite the passage of nearly three years.

Spitzer also did not get an admission of wrongdoing, or anything that investors could use against the firms in their individual arbitrations. He left investors on their own in their arbitrations, leaving them to prove the fraud on their own, over and over again in each individual arbitration. No admission of wrongdoing, no court order that found fraud; nothing.

What Spitzer did get was great press, a ton of headlines, and tons of money for his office and the other Attorneys General. The states all split the other $1 billion dollar settlement among themselves.

That money was supposed to be used for investor education and to address the fraud that occurred, but that simply is not happening.

The reason? Give a politician money, and he will do what he does best - he will spend it. Whether is it is a tax dollar or a settlement dollar, they can't seem to help themselves - they just spend it.

Sure, $52 million is tied up in court, but the rest is gone, according to Forbes. You see, the politicians decided that the money, 1 BILLION dollars was not enough to make meaningful restitution to investors, and it was "too hard" to figure out who should get what, so they just spent the money.

California used its $43 million to plug a budget gap, using just $3 million for investor education (whatever that means). Virginia politicians tried to get its $8.9 million in to the general fund, but state law prevented them from doing that, and the money is going to a special fund for building schools. (Not exactly investor education, but at least it is something).

While the entire concept of giving the money to the States, rather than the SEC for distribution to investors, was foolhardy, it appears that some politicians actually figured out a good use for some of the money. Some states created programs to teach high school students about the market, and money, but in large part it appears that this money was simply used by the states to plug budget gaps.

Some of the money has been placed in a pool waiting for worthwhile projects. What happened to that pool of money? The administrator of the pool invested it, AND LOST $75 MILLION IN THE MARKET!

This is simply an outrage. The underlying analyst fraud was bad enough. Investors lost millions and millions of dollars in the market crash in 2000, a large part of which was caused by the research analysts. The firms ponied up significant bucks $1.4 billion dollars in penalties and settlements, and the states are simply squandering it, filling in their own budget gaps, and hoping to keep the politicians in office.

Speaking of which, according to Forbes, the Georgia Secretary of State used half of its settlement funds on an advertising campaign promoting investor awareness - featuring the Georgia Secretary of State, who just happens to be running for Governor. Never mind the fact that no reasonable person could believe that running TV commercials is meaningful or lasting investor education, the Secretary of State featured herself in the commercials!

We need another investigation - this time of the politicians't they have a fiduciary duty to us? Isn't this a clear breach of that duty?
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