Brokerage scandal undermines markets

The growing scandal surrounding high-profile brokerage firms and their analysts is threatening to blow sky-high and could delay any stock market recovery for some time.

It’s now reached the point where the latest reports from Wall Street are displacing the Israeli-Palestinian conflict as the lead item on U.S. evening television newscasts.

Investors are being rattled to the core, and with good reason.

Who to trust?
By now, you’re undoubtedly aware of the story so I won’t rehash the gory details. Suffice to say that investors no longer know whom they can trust and that could put stock markets into a deep chill.

It all started with the announcement by New York State Attorney-General Eliot Spitzer that he was looking into allegations of a conflict of interest in analyst reports issued by Merrill Lynch.

Then the U.S. Securities and Exchange Commission (SEC) announced it is lauhing a probe of its own, with 10 Wall Street firms in line for investigation.

The SEC move was made with apparent reluctance and only after intense pressure in Washington in the wake of the Spitzer revelations. These resulted in a public apology from Merrill’s CEO, acknowledging that the actions of some of its analysts were inappropriate.

Damage potential huge
“The e-mails that have come to light are very distressing and disappointing to us,” David Komansky was quoted by the New York Times as saying.

“They fall far short of our professional standards.” 

That’s pretty mild stuff in the context of the gravity of the situation. But don’t expect Komansky or any of his counterparts to go much farther.

You see, there’s a little problem of billions of dollars in potential lawsuits hanging over their heads.

In fact, the possibility of huge awards or settlements is such that it could wipe out some of America’s most powerful investment houses and do untold damage to the U.S. financial system.

Next page: Investors lost money

Investors lost money
Just to give you one example, the CBS Evening News recently profiled one of their technicians who had lost close to US$500,000 on Global Crossing following advice from his broker at Salomon Smith Barney. (How a video editor came into that much money wasn’t explained).

His lawyer, who claims to have already won a similar case, was talking a big-time lawsuit. Multiply that by the millions of investors across North America who have lost money in stocks over the past couple of years, and you start to get some idea of the abyss we could be looking into.

No wonder the markets are spooked. No wonder stocks are falling.

Watch for volatility
At this point, there’s no way of knowing how all this will play out. But you can be sure of one thing–there are going to be a lot more unnerving headlines as the investigations unfold over the next few months.

With markets already rocky and Enron still fresh in people’s minds, the new revelations certainly won’t make a rally any easier. Watch for more volatility in the weeks ahead.

Adapted from an article that originally appeared in the Internet Wealth Builder.