When people think about where it is smart to put their money these days, the stock market frequently doesn't make the short list, and that's a serious challenge for the nation's securities industry.
"People say, `Where do I put my money? Whom do I trust?'" said Thomas Grzymala, a financial planner in Alexandria, Va. "All the people losing their retirement plan money is the straw that broke the camel's back. And the straw is still being piled high.
"Right now, there is a big gaping hole of trust and confidence between individual investors and the major wire houses in America."
Experts say the damage is deep.
Investors have lost hundreds of billions of dollars in companies that were later found to have inflated earnings, juggled their accounting, or been involved in other questionable practices. And analysts, who are supposed to provide objective research, were revealed to have hyped stocks, while in some cases privately trashing them, to win lucrative investment banking business.
"There was no justification for investor confidence," said Barbara Roper, director of investor protection for the Consumer Federation of America. "My real concern is that confidence will come back too easily. If the market continues to steadily move up, investors will forget about all the abuses that contributed to their losses."
Securities industry officials know they are in trouble and say the industry is waging a campaign to convince the public that it has mended its ways.
"We have gotten the message," Marc Lackritz, president of the Securities Industry Association, which represents more than 600 brokerages, said last week.
"We have changed our behavior," Lackritz said. "We are changing our organization. We are realigning incentives and doing a much better job to make sure everyone in the industry understands that we have to put the interest of the customer first. Our customers will see that over time."
Some experts predict it will take about two years for investors to trust the stock market again.
And that's only if the industry works with publicly traded companies to restore transparency to the market and assure investors that they are playing on a level field, said Ellyn L. Brown, a Towson securities lawyer and a former Maryland securities commissioner. The public also will demand that a price be paid, such as penalties and prison time, she said.
"People want to say, `I'm mad. Fix it. Put someone in handcuffs and walk them out to the car and give me reasons to believe that I can get a fair deal,'" Brown said.
Some of that is happening, though slowly.
Last week, ImClone Systems founder Samuel Waksal was sentenced to more than seven years in prison in an insider trading case and ordered to pay a $4.2 million penalty. The week before, Martha Stewart and her broker were indicted on charges of securities fraud and conspiracy on the sale of her ImClone shares.
And in April, 10 Wall Street firms reached a record $1.4 billion settlement with regulators over allegations that they deceived investors with tainted recommendations.
"We're definitely past denial," Lackritz said. "Ten firms aren't going to pay $1.4 billion in fines and penalties and restitution unless they get the clear message that there have been some problems."
The Securities Industry Association's annual investor survey shows how far that trust has eroded.
Last year, 41 percent said "dishonesty" was the main issue facing the industry, up from 8 percent the year before.
Julie Szymaszek of Lutherville, a member of an investment club, said that while she trusts her broker, her confidence in the securities industry and corporate management has waned.
"The industry at times is shameful," Szymaszek said. "My husband and I just had a discussion about Martha Stewart. Will she ever see the inside of a jail? Who knows if she will? Where are the Ken Lays, where are the Bernie Ebbers, where are the CEOs of Adelphia? When is enough money enough?"
Tage Pearson, 96, of Englewood, Fla., said he will never trust a broker again. The retired engineer said he went to a broker a few years ago seeking investments that would generate income to live on and was sold a long-term growth fund.
Pearson, now $15,000 poorer but wiser, said the investment was inappropriate for him. "It's so fundamentally incorrect," he said. "I was 94 at the time. I'm not going to live forever."
Randallstown accountant Andrew Gorode said the industry needs a "coming clean" for his skepticism to subside.
"I haven't seen very much in the way of admission of wrong-doing or admission of somewhat questionable practices even though it seems apparent now that kind of activity or behavior was going on," he said. "It doesn't really give me as much confidence as I would like right now."
The industry is taking serious steps to repair investor confidence, thanks to the SEC settlement and other changes mandated by securities regulators in the past year, Lackritz said.
