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The California Department of Corporations expects a new wave of securities litigation now that regulators have reached a historic settlement with investment banks over analyst conflicts of interest. Although regulators pitched it as a “global settlement,” the deal allows investigators to share with the private bar the evidence they collected — including thousands of e-mails — and does not protect the participating investment banks from claims. “There will obviously be an increase in private litigation because the evidence that was discovered by [the Securities and Exchange Commission] and states during the investigation will be made available to private attorneys and investors,” said Kam Coveyou, a Department of Corporations spokeswoman. Other securities attorneys were more cautious in their predictions. “It depends on what the e-mails say,” said Jordan Eth, a Morrison & Foerster partner who defends securities suits. The settlement announced Monday was expected for several months and is the result of a joint investigation by New York Attorney General Eliot Spitzer, the SEC, the National Association of Securities Dealers, the New York Stock Exchange and state regulators. It requires banks put up a wall between their investment and research divisions and includes $1.4 billion in penalties that will be paid by 10 Wall Street firms and two individual analysts, Jack Grubman, formerly of Salomon Smith Barney Inc., and Henry Blodget, formerly of Merrill Lynch & Co. Once it signs off on the deal, California is expected to get $40 million. The Department of Corporations will get $4 million of that to educate Californians about the dangers of investing. The rest of the money will go into the general fund. Investors can get restitution through a $775 million fund set up by the investment banks. An SEC-recommended, court-appointed administrator will oversee the fund. Although politicians and regulators lauded the settlement as an opportunity to improve consumer confidence in the securities market, corporate finance attorneys were less confident the deal would put any real zing into the struggling economy. “I’m not convinced that it’s going to change much of anything,” said Cooley Godward partner Laura Berezin. For one thing, many of the banks had already publicized reforms after Spitzer’s office announced that it was looking into analyst conflicts of interest, Berezin said. But even before that, “sophisticated institutional investors probably never really expected that research was truly independent,” Berezin said. One thing that’s certain is that the deal probably won’t kill lawyers’ corporate business. Major changes such as the new regulations outlined in the settlement mean more lawyers will have to scrutinize business deals to make sure no laws are being broken, Berezin said. So what about securities litigation? Where some plaintiffs lawyers and regulators said they expected investment banks to take hits because of smoking guns found by investigators, other lawyers said they didn’t expect a boon. “I think that the lawsuits that were going to be filed have been filed,” said Patrick Coughlin of Milberg Weiss Bershad Hynes & Lerach’s San Francisco office. Coughlin said the evidence might help the cases that have already been filed but didn’t anticipate “a new wave,” and pointed out that, while good for investors, the settlement doesn’t include any admission of wrongdoing on the part of investment banks. If the floodgates opened in California, cases probably wouldn’t rocket toward resolution, good evidence or not. That’s because the securities industry is still wrestling with the Judicial Council of California over new ethical rules for arbitrators in the state. The council won round 1 in federal court when a judge threw out a lawsuit filed to block the rules. But then last week, the NASD and NYSE took round 2, when a different judge found that federal law preempted the state rules. Securities arbitrations stalled last fall but now are proceeding, albeit slowly, as long as investors waive their rights under the new rules. Absent from the list of investment banks participating in the settlement are Deutsche Bank Alex. Brown and San Francisco-based Thomas Weisel Partners. California regulators were assigned to examine and then negotiate with those banks when investigators divvied up the nationwide case. Talks with both banks recently came to a standstill, and there’s no way to know when settlements might come through, Coveyou said.

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