Wall Street: How Hard a Wrist Slap?

According to our readers, financial houses that fed tainted research to investors should get hit a lot harder they've been

Investors have lost their tolerance for shenanigans on Wall Street -- and none of the penalties that the Street's firms have accepted so far are likely to appease them (see BW Online, 12/20/02, "Spitzer's Slap: Small Change on the Street?"). That's the primary finding from our Dec. 13 Reader Survey on the topic of Wall Street's punishment for tainted research.

Of the 330 readers who responded, 81% thought both fines and jail time are appropriate for firms that bilk individuals -- and for the executives who run them. When it comes to fines, moreover, 75% thought the amount should be arrived at not so much via negotiation with authorities, but rather should be based on the amount of money investors lost as a result of a firm's misdeeds.

Some 49% of those who responded thought that a fine of more than $1 billion per Wall Street firm would be appropriate in the case of big-name brokerages. Some 23% would have settled for $500 million to $1 billion, while a scant 15% would have been satisfied with $100 million to $500 million per firm.


  A sign of how strongly investors feel is that 65% wanted fines to be levied without regard to whether the amount would endanger a firm financially, vs. the 29% who thought that the effect on a firm's viability should be taken into account. The companies -- not all banks -- that readers blamed for doing the most damage to investors in 2002 were, in order: Enron (ENRNQ ), Merrill Lynch (MER ), Citigroup (C ), WorldCom (WCOEQ ), and Tyco (TYC ).

A majority of readers -- 64% -- thought sufficiently large fines would deter unethical activity in the future, while 25% doubted that they would. Significantly, some 87% of those who responded said they'll take into account a brokerage or investment bank's history of wrongdoing and fines when deciding who they'll do business with.

Incidentally, those who responded to the survey aren't fans of regulators, either: Some 86% characterize the job done by state and federal officials as reasonably bad or very bad. Here are the full results of the survey, which as always was unscientific, since anyone who wished to could participate:

Do you think the appropriate penalty for a firm that consciously misleads investors should include:

Option Total %  
Fines 20 6.10 %
Jail time for those responsible 35 10.67 %
Both 265 80.79 %
Neither 5 1.52 %
Not sure 3 0.91 %

In such an instance, should the fines levied be:

Option Total %  
Negotiated by regulators and the companies that cheated 28 8.64 %
Based on the amount of money investors lost as a result of the misleading information 243 75.00 %
Assessed against individual wrongdoers, but not against their companies 47 14.51 %
Don't know 6 1.85 %

How large a fine do you think is appropriate for big-name Wall Street firms that misled tens of thousands of investors?

Option Total %  
Less than $100 million 19 5.83 %
$100 million to $500 million 48 14.72 %
$500 million to $1 billion 75 23.01 %
More than $1 billion 159 48.77 %
Not sure 25 7.67 %

Should regulators avoid levying fines so high that they leave the firms financially vulnerable?

Option Total %  
No 212 65.23 %
Yes 95 29.23 %
Not sure 18 5.54 %

Do you think hefty fines against Wall Street firms will deter them from engaging in unethical practices in the future?

Option Total %  
Yes 210 64.22 %
No 82 25.08 %
Not sure 35 10.7 %

When you look for a broker or investment bank, do you take into account its history of wrongdoing and fines?

Option Total %  
No 23 7.10 %
Yes 283 87.35 %
Not sure 18 5.56 %

Based on what you've read in the news, which of the following companies do you think did the most harm to investors in 2002:

Option Total %  
Merrill Lynch 61 18.83 %
Enron 138 42.59 %
Citigroup 56 17.28 %
WorldCom 54 16.67 %
Tyco 12 3.70 %
Adelphia Communications 3 0.93 %

Until now, how good a job do you think federal and state regulators have done at keeping brokerages and investment banks on the straight and narrow?

Option Total %  
Very good 2 0.61 %
Reasonably good 38 11.59 %
Reasonably bad 89 27.13 %
Very bad 193 58.84 %
Not sure 6 1.83 %
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