United States of America
In the Matter of
Robertson Stephens, Inc.,
|ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 15(b)(4) OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING SANCTIONS|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted against Robertson Stephens, Inc. ("RSI"), pursuant to Section 15(b)(4) of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of these administrative proceedings, RSI has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings herein, except as to jurisdiction of the Commission over RSI and over the subject matter of these proceedings, which RSI admits, RSI consents to the issuance of this Order Instituting Administrative Proceedings Pursuant to Section 15(b)(4) of the Securities Exchange Act of 1934, Making Findings and Imposing Sanctions ("Order"), as set forth below.
On the basis of this Order and the Offer submitted by RSI, the Commission finds that:1
This matter involves the publication of materially misleading research reports by RSI, in violation of Section 15(c) of the Exchange Act and Rule 15c1-2(b) thereunder, and RSI's failure reasonably to supervise a senior research analyst with a view toward preventing the analyst's violations of the antifraud provisions of the federal securities laws arising from undisclosed conflicts of interest caused by the analyst's personal investments. This matter also involves RSI's failure to preserve and maintain for the requisite period of time and promptly furnish to the Commission's staff, e-mail communications concerning RSI's business, in violation of Exchange Act Section 17(a) and Rule 17a-4 thereunder.
In 1999 and 2000, a senior equity analyst at RSI ("the Research Analyst"), who covered companies in the networking and telecommunications industries, issued research reports on two public companies that had announced proposed mergers with private companies in which he had personally invested. In both cases, the Research Analyst praised the proposed mergers in research reports and in statements that he made in the mass media, without disclosing that he owned stock in the private companies that, if the mergers were completed, would be exchanged for stock in the acquiring public companies worth several million dollars.
In addition, in January 2001, the Research Analyst was consulted, privately, about another company he covered by a committee that made investment decisions for three partnerships, known collectively as the Bayview partnerships, in which certain RSI employees had invested. The Research Analyst's statements to the committee were not consistent with his then-existing public "buy" recommendation on the covered company. After consulting with the Research Analyst, the committee B comprised of senior RSI executives B unanimously voted to sell all of the covered company stock held by two Bayview partnerships. In addition, the day after the Research Analyst revealed to the committee that he held views that were inconsistent with his then-public recommendation, the Research Analyst and all but one of the committee members present at the meeting sold most or all of their shares in the covered company. Two days after these sales, the Research Analyst issued another "buy" recommendation on the covered company following the company's announcement of its quarterly results.
RSI never corrected the materially misleading research report that preceded the sales of the affected stock, and did not disclose the sales or the Research Analyst's contrary belief in a research report that it published two days after the sales.
RSI has been registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act since February 13, 1997, and is a member of the New York Stock Exchange and NASD. RSI's principal place of business is in San Francisco, California. On November 6, 2002, RSI filed a broker-dealer withdrawal form ("BDW").
RSI and certain senior executives of the firm formed a series of investment limited partnerships referred to collectively as the "Bayview" partnerships. An entity controlled by RSI was the general partner of each of the limited partnerships. Two of the limited partnerships ("Bayview 99 I and II"), formed in 1999, were intended for investments in a portfolio of companies that was chosen by an investment committee consisting of senior RSI executives. Another limited partnership ("Bayview Corvis"), also formed in 1999, invested solely in Corvis Corporation, a telecommunications and Internet equipment company that, at the time of the Bayview investment, was privately-held.
At all relevant times, RSI research analysts wrote research reports on specific companies, as well as on industry sectors. After an analyst had drafted a research report, the analyst would send the draft to a Series 16 supervisory analyst in RSI's equity research department for approval.
After a report had been approved for issuance by RSI, the report was distributed to several research reporting services, including Multex and FirstCall. The reports also were available on the firm's website, where they could be accessed by RSI clients and others using a password. RSI also mailed copies of research reports to its clients. Some of RSI's research reports and ratings were also broadly publicized through press releases issued by RSI.
RSI's research reports typically included a rating on the covered company. During the relevant period, RSI used a five-level stock rating system: Strong Buy; Buy; Long-Term Attractive; Market Perform; and Market Underperform. The research reports also included a standard disclaimer paragraph that appeared at the end of the written portion of the report, in small print. RSI also included the standard disclaimer in its press releases about its research reports. Prior to September 2000, the disclaimer paragraph included the following statement: "Robertson Stephens, its managing directors, its affiliates, and/or its employees may have an interest in the securities of the issue(s) [sic] described and may make purchases or sales while this report is in circulation." The disclosure was revised in September 2000, as follows: "Robertson Stephens, its managing directors, its affiliates, its employee investment funds, and/or its employees, including the research analysts authoring this report, may have an interest in the securities of the issue(s) [sic] described and may make purchases or sales while this report is in circulation."
In 1998 and 1999, the Research Analyst made numerous personal investments in private technology companies. RSI's policies and procedures, in effect at that time, required employees to provide written notice to RSI prior to making any outside investments. The Research Analyst, however, failed to follow these procedures before making his private investments.
In 1999, RSI's chief executive officer learned that the Research Analyst had made investments in private companies. In September 1999, the person who was RSI's general counsel and chief administrative officer, asked RSI's director of research to obtain a list of the Senior Analyst's private investments from the Senior Analyst. That month, the Senior Analyst provided RSI's director of research with two memoranda, both listing his investments in eleven private companies and one also listing the dollar amount of each investment. As had been requested, the director of research forwarded both memoranda to RSI's general counsel.
Thus, by September 1999, members of RSI senior management were aware that the Research Analyst had repeatedly violated RSI's policies on private investments. Despite this, RSI did not adopt any procedures to either monitor the Research Analyst's private company investments or to review his personal investments for potential conflicts of interest in light of his work as a research analyst.
One of the private companies in which the Research Analyst had invested, and which was identified in the memoranda that the Senior Analyst provided to RSI's head of research in September 1999, was Siara Systems, Inc.
In early 1999, the Research Analyst invested $50,000 in Siara Systems, Inc., then a privately-held communications technology company. On November 29, 1999, Redback Networks, Inc., a publicly-traded company that the Research Analyst covered, announced that it was acquiring Siara. Later on the same day, the Research Analyst made several favorable public statements in the mass media and RSI issued a research report that the Research Analyst had prepared regarding Redback. In the report, the Research Analyst reiterated his buy rating on Redback and praised the deal as an "excellent strategic fit" that would be "highly effective." Although the research report contained RSI's standard disclaimer, neither the Research Analyst nor RSI disclosed in either the Research Analyst's public statements or in the research report that the Research Analyst in fact owned 26,595 shares of Siara stock and, as a result, stood to profit substantially if the merger between Siara and Redback was consummated. Under the terms of the proposed merger, the Research Analyst's illiquid $50,000 investment in Siara stock would be exchanged for publicly-traded Redback stock that, at the then-current market price, would be worth close to $4.8 million.
Although the Research Analyst had listed Siara in the September 1999 memoranda as one of his personal investments, he did not disclose his ownership of Siara stock to the supervisory analyst who reviewed the report or to the other research personnel who assisted in preparing the report.
Less than two months later, the Research Analyst again commented publicly in the press, and RSI issued a research report that the Research Analyst had prepared, concerning a pending merger in which he had a substantial undisclosed financial interest.
In January 2000, the Research Analyst invested $75,000 in the preferred stock of Sirocco Networks, Inc., a privately-held telecommunications technology company. The Research Analyst again failed to comply with RSI's policy that required prior written notification to RSI of private investments. On June 6, 2000, Sycamore Networks, Inc., a publicly-traded company that the Research Analyst covered, announced that it would acquire Sirocco. On the same day, the Research Analyst issued a research report reiterating his pre-existing buy rating on Sycamore. In the report, the Research Analyst described the combination as a "smart move on Sycamore's part" that "should prove to be very successful. " Also on June 6, the Research Analyst was quoted in a business news service describing the proposed merger as a "very smart combination." The Research Analyst also appeared on a cable television network's business program, during which he described the proposed acquisition of Sirocco as a "bargain."
Although the research report included the same disclaimer as the Redback report, it failed to disclose B as the Research Analyst failed to disclose in his public media statements B that he in fact owned 23,235 shares of Sirocco stock and, as a result, stood to profit substantially if the merger between Sirocco and Sycamore was consummated. Under the terms of the proposed merger, the Research Analyst's illiquid $75,000 investment in Sirocco stock would be exchanged for publicly-traded Sycamore stock that, at the then current price, would be worth approximately $1.9 million.
In December 1999, Bayview 99 I and II and Bayview Corvis purchased approximately $5 million worth of stock in Corvis Corporation, a privately-held company. The Research Analyst personally invested in two of the three partnerships. Prior to the initial public offering of Corvis stock in June 2000, the Corvis stock owned by the Bayview partnerships became subject to lockup agreements that prohibited the partnerships from selling the stock until January 24, 2001.
In August 2000, when Corvis stock was trading at $90 per share, the Research Analyst initiated research coverage on the company with a "buy" rating. The Research Analyst reiterated his buy rating in October 2000, when Corvis was trading at $59.61 per share. On January 16, 2001, with Corvis trading at $23 per share, the Research Analyst issued an industry report that discussed several companies and included a buy recommendation on Corvis.
One week later, January 23, 2001, the Bayview investment committee met to discuss the Corvis stock holdings. The Corvis lockup period was due to expire on January 24, 2001. During the meeting, the Research Analyst spoke to the investment committee, by telephone, regarding Corvis. The Research Analyst spoke enthusiastically about the company to the investment committee. However, when a committee member asked the Research Analyst whether he would buy Corvis "at this price," the Research Analyst replied, "I wouldn=t buy at this price." Corvis had closed the previous day at $24.50 per share. The Research Analyst told the committee that he "would buy it at 12 to 14." Although Bayview/RSI policy permitted the investment committee to consult RSI research analysts for due diligence purposes, research analysts were prohibited from giving a recommendation to the investment committee as to whether to sell a particular security.
After hearing from the Research Analyst, the investment committee voted unanimously to sell all of the Corvis shares held by Bayview 99 I and II. Bayview Corvis investors, including the Research Analyst, were offered the option of receiving a pro rata distribution of their Corvis shares or having the Corvis stock sold for them. As the analyst for Corvis, the Research Analyst was offered the choice of selling the stock or placing it in a blind trust. On the following day, January 24, 2001, prior to the opening of the market, Bayview 99 I and II sold 59,604 shares, for a net profit of $1,164,662. Many of the partners in Bayview Corvis, including the Research Analyst, chose to sell their Corvis stock. RSI executed the stock sales for Bayview 99 I and II and for the partners of Bayview Corvis who chose to sell their holdings. RSI sold the stock in several transactions at an average sale price of $25.609 per share.
After the close of the market on January 25, 2001, Corvis reported a fourth quarter loss of $89.7 million. On January 26, 2001, Corvis stock opened at $20 per share, a decrease of $3 per share from the previous day's closing price. On the same day, RSI published a research report prepared by the Research Analyst that reiterated the buy rating on Corvis. In the report, the Research Analyst noted that while the company's loss had been greater than forecast, its sales had exceeded expectations. The Research Analyst also stated in the report that he was not changing his forecasted earnings per share for the 2001 year because any additional revenues earned by Corvis would be offset by higher expenses. The report included RSI's standard disclosure, but failed to disclose the sales and distributions of Corvis stock by the Bayview partnerships just two days earlier. The report also failed to mention the Research Analyst's sale of Corvis stock.
RSI never corrected the January 16 report, in which the Research Analyst had stated a buy recommendation when Corvis stock was trading at approximately $23 per share, to accurately reflect the Research Analyst's belief that he would not buy the stock unless it was trading at $12 to $14 per share.
Employees of RSI received and sent to one another electronic mail communications ("e-mail") in part to conduct RSI's business as a broker-dealer. Prior to December 2000, RSI's e-mail retention policy provided for retention of internal e-mails, even those concerning RSI's business as such, only for one year. Internal e-mails were copied daily onto back-up tapes, which were stored for one year. After one year, RSI reused the back-up tapes to back up new e-mails and, in the process, wrote over old e-mails. As a result, most of RSI's back-up tapes containing 1999 e-mails were overwritten.
In December 2000, Commission staff sent a subpoena to RSI for documents, including e-mails, relating to RSI's allocation of initial public offering ("IPO") shares during the period 1999-2000. In the cover letter to the subpoena, RSI was specifically told to retain all communications, including electronic communications, relating to certain conduct during 1999 and 2000. RSI also was reminded that Exchange Act Release No. 38245 (February 5, 1997) states that electronic mail communications relating to a broker-dealer's "business as such" must be retained pursuant to Exchange Act Rule 17a-4(b)(4). Also in December 2000, RSI changed its e-mail retention policy to require that all e-mails be kept for three years. E-mail backup tapes made from December 2000 forward were coded to prevent reuse prior to three years, but e-mail backup tapes made between January and November 2000, which had been coded with a one-year expiration date, were not recoded to conform with the new three year retention policy.
RSI provided the Commission staff with some but not all documents responsive to the December 2000 subpoena. In 2001, Commission staff made several requests and sent a subpoena to RSI for production of additional documents, including e-mail. Despite prior instructions, in 2001, RSI wrote over back-up tapes containing January to August 2000 e-mails, because these backup tapes had not been recoded to be retained for more than one year.
From May 2001 to July 2002, the staff made several document requests to RSI pertaining to this investigation, including several requests that called for the production of e-mails from the firm's New York office. In June 2002, RSI could not produce any internal e-mail backup tapes for its New York office computer servers for the period from November 2, 1999 to September 3, 2000.
RSI also failed to promptly produce to the Commission those e-mails it did retain. Because of its system of retention, RSI took substantial time to produce relevant documents.
Section 15(b)(4)(E) of the Exchange Act provides for the imposition of a sanction against a broker or dealer who "has failed reasonably to supervise, with a view to preventing violations of the securities laws, another person who commits such a violation, if such other person is subject to his supervision." See Matter of Smith Barney, Harris Upham & Co., Inc., Exchange Act Release No. 21813, 32 SEC Docket 999, 1004 (March 5, 1985).
RSI failed reasonably to supervise the Research Analyst with a view to preventing his violations of the antifraud provisions of the federal securities laws. In particular, RSI was aware of, but failed to adequately act upon, information that the Research Analyst had potential or actual conflicts of interest as a result of his personal investments. RSI's procedures were inadequate to monitor the Research Analyst's private investments for potential or actual conflicts of interest with his role as an analyst. By September 1999, members of senior RSI management were aware that the Research Analyst had made numerous investments in private companies without providing written notice to RSI as required by company policy. Despite this, RSI did not adopt any additional procedures to require the Research Analyst to comply with RSI's policy or to monitor the Research Analyst's private investments. As a result of RSI's failure to adequately supervise the Research Analyst, the Research Analyst wrote, and RSI issued, research reports that, while extolling the virtues of the pending mergers between Siara/Redback and Sirocco/Sycamore, failed to disclose specifically that the Research Analyst, due to his private investments, stood to benefit substantially if the mergers were completed.
RSI failed to establish and enforce adequate procedures for avoiding and, as necessary and appropriate, disclosing conflicts of interest confronting RSI research analysts and, in particular, the Research Analyst. As a result, the Research Analyst published research and made public statements concerning both the Redback/Siara and Sycamore/Sirocco mergers that omitted to state material facts concerning his personal financial interests in the completion of each of the mergers.
The Research Analyst's conduct violated the antifraud provisions of the federal securities laws and RSI failed reasonably to supervise the Research Analyst with a view to preventing such violations.
Section 15(c)(1) prohibits brokers and dealers from effecting securities transactions or inducing the purchase or sale of any security by means of "any manipulative, deceptive, or other fraudulent device or contrivance." Rule 15c1-2(b) defines the term "manipulative, deceptive, or other fraudulent device or contrivance," as used in Section 15(c)(1), to include any untrue statement of a material fact and any omission to state a material fact necessary to make the statements made, in the light of the circumstances under which they are made, not misleading, which statement or omission is made with knowledge or reasonable grounds to believe that it is untrue or misleading.
RSI willfully violated Section 15(c)(1) and Rule 15c1-2(b) thereunder by issuing the materially misleading "buy" ratings on Corvis in research reports published on January 16, 2001 and on January 26, 2001. Although statements of opinions or belief are generally not actionable under the federal securities laws, they may be if they are worded as guarantees or supported by specific statements of fact, or if the speaker does not genuinely believe them. See In re International Business Machines Sec. Litig., 163 F.3d 102, 107 (2d Cir. 1998) (citations and quotations omitted); In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1993).
The Research Analyst's statements regarding Corvis during the January 23, 2001 investment committee meeting B that he would not buy Corvis stock at the market price, but would buy it if it was trading at $12 to $14 per share B were inconsistent with the buy rating on Corvis included in the January 16, 2001 research report, issued when Corvis stock was trading at about $23 per share. In addition, the sales of Corvis stock on January 24, 2001 by the two Bayview partnerships, the Research Analyst, and all but one of the senior RSI executives who attended the investment committee meeting, were inconsistent with the Corvis rating included in RSI's January 16, 2001 research report. Despite this, RSI never corrected its January 16 report to accurately reflect the Research Analyst's actual views regarding the price at which Corvis stock should be bought.
RSI's January 26, 2001 research report on Corvis also was materially misleading because the report included a buy recommendation on Corvis that directly contradicted the Research Analyst's statements to the investment committee made just three days earlier. Although Corvis had released fourth quarter earnings on the day before RSI issued the January 26 report, the Research Analyst did not change his 2001 year-end earnings estimates on the company in the research report. In addition, according to the report, although Corvis had revenues that were higher than expected, its fourth quarter loss was also greater than estimated.
Although the January 26, 2001 report included RSI's standard disclosure, the report failed to disclose specifically the sales of Corvis stock by the Bayview partnerships and the sale of Corvis stock by the Senior Analyst. RSI disseminated its research to institutional investors and other clients, as well as to non-clients of the firm, by making its research reports available for publication by research reporting services such as Multex and First Call, and posting the reports on RSI's web-site, for the use of RSI's institutional and private services (high net worth) clients. RSI also publicized certain of its research and stock ratings through press releases and by allowing its analysts to discuss their evaluations and ratings in news interviews and public appearances. Having chosen to make statements concerning securities, RSI had a duty to speak truthfully and to disclose material information necessary to prevent the statements made from being misleading. See Credit Suisse First Boston Corp. Sec. Litig., 1998 WL 734365 at *6 (S.D.N.Y. Oct. 20, 1998); see also< U.S. v. Cannistraro, 734 F. Supp. 1110, 1125 (D.N.J. 1990); cf. In re Fidelity / Micron Sec. Litig., 964 F. Supp. 539, 545 (D. Mass. 1997).
The Research Analyst's actual views regarding the price at which he would buy Corvis stock, as well as the sales of Corvis stock by the Bayview partnerships and the Research Analyst, was material information with regard to both the January 16 and January 26 reports. In addressing whether information is material, the Supreme Court has held that there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). To a reasonable investor, knowing that the Research Analyst did not, in fact, believe that Corvis stock should be bought at $23 per share, as he had said in the January 16 report, and that the Bayview partnerships and the Research Analyst had sold Corvis stock, conduct that was inconsistent with the recommendations that RSI published in both the January 16 and January 26 reports, unquestionably would have changed the total mix of information about Corvis and, therefore, was material.
For the foregoing reasons, RSI willfully2 violated Exchange Act Section 15(c)(1) and Rule 15c1-2(b) thereunder in connection with its January 16, 2001 and January 26, 2001 research reports.
Section 17(a)(1) of the Exchange Act provides that each member of a national securities exchange, broker or dealer "shall make and keep for prescribed periods such records, furnish copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title."
Exchange Act Rule 17a-4(b)(4) requires each member, broker and dealer to "preserve for a period of not less than 3 years, the first 2 years in an accessible place [o]riginals of all communications received and copies of all communications sent by such member, broker, or dealer (including interoffice memoranda and communications) relating to his business as such." By its terms, Rule 17a-4 is not limited to physical documents. As noted above, the Commission has stated that internal e-mail communications relating to a broker or dealer's "business as such" fall within the purview of Rule 17a-4 and that, for the purposes of Rule 17a-4, "the content of the electronic communication is determinative" as to whether that communication is required to be retained and accessible. Reporting Requirements for Broker or Dealers under the Securities Exchange Act of 1934, Rel. No. 34-38245 (Feb. 5, 1997).
Exchange Act Rule 17a-4(j) requires exchange members, brokers and dealers to furnish promptly to a representative of the Commission copies of the records that are required to be preserved and are requested by the representative of the Commission.
The Commission has emphasized the importance of the records required by the rules as "the basic source documents" of a broker dealer. Statement Regarding the Maintenance of Current Books and Records by Brokers and Dealers, 4 SEC Docket 195 (April 6, 1974). The record keeping rules are "a keystone of the surveillance of broker and dealers by [Commission] staff and by the securities industry's self-regulatory bodies." Edward J. Mawod & Co., 46 S.E.C. 865, 873 n.39 (1977) (citation omitted), aff'd sub nom. Mawod & Co. v. SEC, 591 F.2d 588 (10th Cir. 1979).
RSI failed to preserve e-mails for three years, failed to preserve e-mails for the first two years in an accessible place, and failed to promptly furnish e-mails the Commission requested. By engaging in the foregoing conduct, RSI willfully violated Section 17(a) of the Exchange Act, and Rules 17a-4(b)(4) and 17a-4(j) thereunder.
As a result of the conduct described above, Robertson Stephens, Inc. willfully violated Sections 15(c) and 17(a) of the Exchange Act and Rules 15c1-2(b), 17a-4(b)(4), and 17a-4(j) thereunder, and failed reasonably to supervise a research analyst employed by RSI with a view to preventing violations of the antifraud provisions of the federal securities laws in connection with RSI's publication of certain research reports.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer submitted by RSI.
Accordingly, IT IS HEREBY ORDERED that:
A. RSI be and hereby is censured;
B. IT IS FURTHER ORDERED that RSI shall, within ten (10) days of the entry of this Order, pay disgorgement, including prejudgment interest, of $885,000 and civil penalties of $4,115,000 for a total of $5 million. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies RSI as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Antonia Chion, Division of Enforcement, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549-0801. The disposition of the funds paid shall be determined by the Commission under a plan of disgorgement pursuant to 17 C.F.R. 201.610 et seq, except that the Division of Enforcement may submit any proposed plan of disgorgement to the Commission within 180 days after the payment of the funds.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 "Willfully" as used in this Order means intentionally committing the act that constitutes the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the actor also be aware that he is violating one of the Rules or Acts.
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