Trusting Wall Street

The $1.4 billion settlement reached this week between 10 of Wall Street's largest firms and their overseers serves as another warning to investors: Know thy broker.

The settlement didn't elicit admissions of guilt from the investment banks and brokerages. But the evidence exposed, mainly in their e-mails, clearly shows how most of the firms failed to avoid inherent conflicts of interest in both advising investors on stocks based on research and helping corporate clients sell those stocks.

One e-mail from an analyst at Lehman Brothers just about said it all: "Ratings and price targets are fairly meaningless anyway.... The 'little guy' who isn't smart about the nuances may get misled, such is the nature of my business."

The firms will suffer from much more than fines. Their reputations now are tainted, and they can expect a wave of private lawsuits from cheated investors. They will also be required to restructure their internal workings to prevent conflicts of interest.

The worst betrayal of trust lies in not ensuring independent research on securities. While the settlement aims to restore that trust through various requirements, the firms will need to make sure they hire people of integrity and provide ongoing training in ethics.

Trying to prevent dishonesty on Wall Street will take more than stiff fines and new regulations that try to impose even more checks and balances on the industry.

Much of the burden to keep the industry clean still lies with investors, who often don't take the time to know their investment advisers, do their own research, and check up on a firm's internal problems. Just throwing one's nest egg at a brand-name investment company without asking enough questions has too many potential pitfalls and places too much faith in government regulation of the industry.

Fortunately, most individual investors now put their money in mutual funds, rather than in brokerages that also serve as investment banks. That kind of market discipline should do more than government chastisement of the industry.

The '90s financial boom caused many lapses of integrity - from Enron to Wall Street - that are only now being corrected. Each economic boom and bust brings more lessons for both investors and government regulators.