An Insult to Pigs and Dogs

"Let's put some lipstick on this pig." That's how one retail brokerage firm described the sales practices of its rivals recently.

The sound bite sums up what a lot of individual savers with shrinking 401(k) accounts this year began to suspect had been going on throughout the stock market bubble of the 1990's.

Last week, regulators announced an agreement with Wall Street's 10 largest investment firms that requires them to pay $1.4 billion to settle conflict-of-interest charges and a promise to mend their ways.

But the settlement is barely a slap on the wrist.

Furthermore, nothing in the announcement offers any compelling argument that the settlement will discourage unfair dealing in the future.

Fortunately, the agreement still must go before the full membership of the Securities and Exchange Commission. Before the commission finds itself bewitched by gussied-up farm animals, it should take a look at increasing penalties for repeat offenders.

The SEC has a serious problem on its hands. Corporate scandals of the past year in accounting and investment businesses show a dangerous breakdown in the regulation of the nation's securities industries.

The precise accusations against the companies will be described in a coming report and will be available for investors pursuing civil suits. But the essential nature of the accusations are well known and not that complicated.

Companies that did investment-banking business with big brokerage firms often got favorable stock ratings that couldn't be reconciled with actual performance.

Brokerage firms frequently provided an inside track to executives of such client companies to acquire stocks in hot new companies before those stocks were available to the investing public.

Brokerage firms actively encouraged investors to buy stocks that, in private e-mails, their traders disparaged as "dogs".

The New York state attorney general's office did well to press for investigations, beginning with its own probe of Merrill Lynch that resulted in a $100 million fine last spring.

When expressed in the aggregate, billion-dollar fines always sound impressive. But the amounts to the individual firms aren't that great.

Citigroup got slapped with the biggest fine, $300 million. Credit Suisse First Boston got hit for $150 million. The other firms will pay $50 million each.

As the Wall Street Journal noted recently, Citigroup was getting away paying far less than the value of its stock rise after the announcement - generally a signal of a positive development.

The scope of these accusations call for more than has been proposed so far. That includes full disclosure, punishment to fit the crime, and regulations that discourage unfair trading practices in the future.

If individual American investors are going to feel comfortable putting money in the stock markets again, it will require better assurances from the SEC than has been shown so far. That means legal requirements for firewalls between research, advice, and underwriting functions at investment firms.

When the full commission considers the settlement with Wall Street's leading firms, it should look to restoring investor confidence in the fairness of the markets. That will have to include penalties with enough deterrent quality to reduce the likelihood of repetition by wrongdoers.

The SEC and other regulatory bodies have a job to do. Wall Street mustn't be permitted to wag this watchdog.