Wall Street settlement threatens to unfold

The $1.5bn (£950m) settlement of claims that Wall Street's biggest investment banks deliberately misled investors during the stock market boom is in danger of unravelling.

At least two of the American states participating in the broad coalition of securities regulators have threatened to walk out on the deal that was agreed in principle at the end of last year.

The alliance had hoped to publish the settlement by the end of January but differences persist over the final wording. Talks between the two sides are said to have become increasingly fractious as the banks seek to limit the findings against them in the published document.

The banks fear that it could open them to billions of dollars in lawsuits from private investors. The reality of their concerns was underlined yesterday when new figures showed that investors are filing arbitration claims against brokers in record numbers. NASD Dispute Resolution, which runs the arbitration system for the Nasdaq Stock Exchange, said 7,704 cases were filed last year, up 11% on 2001 and 39% on 2000.

The two states threatening to break the alliance led by New York state attorney general Eliot Spitzer are New Jersey and Massachusetts. If they break away it could undermine the historic settlement and reopen a wound that Wall Street had hoped to close for good.

The banks, including Merrill Lynch, JP Morgan Chase and Goldman Sachs, agreed to $1.5bn in fines but the details of the settlement were left unresolved. The banks were accused of misleading investors by publishing overly optimistic research in the hope of securing investment banking fees.

A spokesman for acting New Jersey attorney general Peter Harvey confirmed reports that he was beginning to lose patience with the talks.

Mr Harvey told USA Today: "Negotiations have been contentious and protracted. If difficulties persist you may find Wall Street firms facing a multitude of actions from individual states in return for playing hardball."