Over a decade ago, Henry Blodgett was barred from the securities industry for promoting dot com companies which he personally though were a “piece of crap.” And while nothing has changed since then, and sellsiders dutifully pump companies which deserve to be dumped, but refuse to do so over fears of ruining relationships with management – as a reminder, the only function sellside research provides to the buyside community is arranging one on one meetings with CEOs during which material inside information is often disclosed – today for the first time in years, the SEC fined and suspended a now former Deutsche Bank analyst (who has also worked for JPM and Sterne Agee) for “not meaning what he said.”
Specifically, the former analyst, Charles Grom, did not downgrade the stock for discount retailer Big Lots Inc from a “buy” reco in March 2012, despite having concerns about the company, because he wanted to provide value in the only way he could: maintain his relationship with Big Lots management.
According to the SEC, the March 29, 2012 research report about discount retailer Big Lots which was supposed to accuretly reflect his own beliefs about the company and its securities… did not, because in private communications with Deutsche Bank research and sales personnel, Grom indicated that he didn’t downgrade Big Lots from a “BUY” recommendation in his report because he wanted to maintain his relationship with Big Lots management.
According to the SEC, this is what happened:
- Grom violated the analyst certification requirement of Regulation AC, which requires research analysts to include a certification that the views expressed in a research report accurately reflect their own beliefs about the company and its securities.
- Grom and Deutsche Bank hosted Big Lots executives at a non-deal roadshow on March 28, 2012. Grom became concerned by what he believed to be cautious comments by the Big Lots executives.
- After the roadshow concluded, Grom communicated with a number of hedge fund clients about Big Lots. Four of the hedge funds subsequently sold their entire positions in Big Lots stock.
- The next day, Grom issued a research report on Big Lots in which he reiterated his BUY rating. As required by Regulation AC, Grom signed an analyst certification included at the end of the report stating, “The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer.”
- During an internal conference call with Deutsche Bank’s research and sales personnel within hours after the publication of his report, Grom said, among other things, that he had maintained a BUY rating on Big Lots because “we just had them in town so it’s not kosher to downgrade on the heels of something like that.”
- On April 24, 2012, during another conference call with Deutsche Bank research and sales personnel, Grom discussed disappointing first quarter sales figures at Big Lots and stated, “I think the writing was on the wall [that] we were getting concerned about it, but I was trying to maintain, you know, my relationship with them. So, that’s why we didn’t downgrade it a couple of weeks back.”
The SEC’s take on this matter:
“When research analysts tell clients to buy or sell a particular security, the rules require them to actually mean what they say. Analysts simply cannot express one view publicly and the opposite view privately,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.
And yet they do that every single day in a world in which the average number of Buy recommendations outnumber the Sells anywhere between 10 and 20 to 1.
To be sure, the SEC could have discovered just that about any other sellside analyst; the fact that it picked a former DB staffer is perhaps an indication that the troubles for the German banks are nowhere near over.
via Zero Hedge http://ift.tt/1QJuspq Tyler Durden