UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION,
- against -
BEAR, STEARNS & CO. INC.,
Civil Action No.
Plaintiff Securities and Exchange Commission (the "Commission" or "SEC") alleges:
2. From July 1, 1999 to June 30, 2001 (the "relevant period") certain research analysts at Bear Stearns were subjected to investment banking influences and conflicts of interest between supporting investment banking business and publishing objective research. In addition, research analysts at Bear Stearns were encouraged to participate in investment banking activities, and that was a factor considered in the analysts' compensation system. Bear Stearns also made a payment to another securities firm primarily for research coverage for an investment banking client.
3. Bear Stearns failed to establish and maintain adequate policies and procedures reasonably designed to manage these conflicts of interest.
4. By its conduct, Bear Stearns violated NASD Rules 2110, 2210(d)(1), 2210(d)(2), and 3010, and NYSE Rules 342, 401, 472, and 476(a)(6).
5. This Court has jurisdiction over this matter pursuant to Sections 21(d)(1), 21(e), 21(f), and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d)(1), 78u(e), 78u(f), and 78aa].
6. Bear Stearns, directly or indirectly, used the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, in connection with the acts, practices, and courses of business alleged herein.
7. Venue is appropriate in this District pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa], because Bear Stearns is found, and transacts business in this District.
8. Bear, Stearns & Co. Inc. is engaged in the business of global investment banking and securities. It also provides services on a worldwide basis, including investment banking, securities trading and principal investments, and asset management. The principal office of Bear Stearns is located at 245 Park Avenue, in New York, New York.
9. Bear Stearns is registered with the Securities and Exchange Commission, the NASD, the NYSE, and with all 50 states, the District of Columbia and Puerto Rico.
10. This action concerns the time period of July 1, 1999 to June 30, 2001 (the "relevant period"). During that time, Bear Stearns engaged in both research and investment banking ("IB") activities.
11. During the relevant period, Bear Stearns sought and did IB business with many companies covered by its research. Research analysts were encouraged to participate in IB activities and that was a factor considered in the analysts' compensation system. In addition, the decision to initiate and maintain research coverage of certain companies was in some cases coordinated with the IB Department and influenced by IB interests.
12. As a result of the foregoing, certain research analysts at Bear Stearns were subjected to IB influences and conflicts of interest between supporting the IB business at Bear Stearns and publishing objective research.
13. Bear Stearns had knowledge of these IB influences and conflicts of interest yet failed to establish and maintain adequate policies, systems and procedures reasonably designed to detect and prevent the influences and manage the conflicts.
14. Research analysts were responsible for providing analyses of the financial outlook of particular companies in the context of the business sectors in which those companies operated and the securities market as a whole.
15. Research analysts evaluated companies by, among other things, examining financial information contained in public filings, questioning company management, investigating customer and supplier relationships, evaluating companies' business plans and the products or services offered, building financial models and analyzing competitive trends.
16. After synthesizing and analyzing this information, analysts produced research in the form of full reports and more abbreviated formats that typically contained a recommendation, a price target, and a summary and analysis of the factors relied upon by the analyst.
17. Bear Stearns distributed its analysts' research internally to various departments at Bear Stearns and externally to its retail and institutional investing clients. In addition, Bear Stearns sold some of its research directly to non-clients, disseminated it through distribution agreements with other broker dealers, made it available to third party subscription services such as First Call, and offered it for sale via market websites such as MultexInvestor.
18. In addition to performing research functions, certain research analysts participated or assisted in IB activities. These IB activities included identifying companies as prospects for IB services, participating in "pitches" of IB services to companies, attending "road shows" associated with underwriting transactions, and speaking to investors to generate interest in underwriting transactions. (A "pitch" is a presentation made by bankers and research analysts to a potential IB client in order to obtain the mandate for an upcoming IB transaction. A "road show" is a series of presentations made to potential investors in conjunction with the marketing of an upcoming underwriting.) In competing for an IB mandate, Bear Stearns typically sent bankers and the analyst to meet with company management to persuade the company to select Bear Stearns as one of the investment bankers in a contemplated transaction. At these "pitch" meetings Firm bankers would present their level of expertise in the company's sector and discuss their previous experience with other such companies, as well as their view of the company's merits and likelihood of success.
19. In preparation for each "pitch" the bankers, with the analyst's input, prepared a "pitch book" which was distributed at the meeting and contained a summary of Bear Stearns' presentation.
20. The pitch books, in some instances, identified the covering analyst by name, provided information about that analyst's background and reputation, sometimes characterizing the analyst as the "ax" in his or her coverage sector, and highlighted the success of Bear Stearns' underwritten IPOs covered by the analyst. The pitch books also highlighted such factors as the number of lead and co-managed IPOs that Bear Stearns currently had under research coverage. This information was intended to convey to the issuer that such treatment would be accorded to it if Bear Stearns received the mandate for the IB transaction.
21. The analyst's reputation played a role in pitching Bear Stearns' IB services to potential clients. Issuers often chose an investment bank because of the reputation of the analyst that would cover the company's stock.
22. The pitch to an issuer by the research analyst contributed to Bear Stearns' ability to win investment banking deals and receive investment banking fees from that and subsequent investment banking relationships.
23. The investment banking division at Bear Stearns advised corporate clients and helped them execute various financial transactions, including the issuance of stock and other securities. Bear Stearns frequently served as the lead or as a co-lead underwriter in initial public offerings ("IPOs") the first public issuance of stock of a company that has not previously been publicly traded and follow-on offering of securities.
24. During the relevant period, investment banking was an important source of revenues and profits for Bear Stearns. In 2000, investment banking generated more than $965 million in net revenues, or approximately eighteen percent of Bear Stearns' total net revenues.
25. The IB activities in which analysts participated also included participating in commitment committee and due diligence activities in connection with underwriting transactions and from time to time assisting the IB Department in providing merger and acquisition ("M&A") and other advisory services to companies. The "commitment committee" was responsible for, among other things, evaluating and determining Bear Stearns' participation in IPOs and other IB transactions.
26. Bear Stearns encouraged research analysts to support the IB and other businesses of Bear Stearns. With regard to IB, research analysts were encouraged to work in partnership with the IB Department by participating in the foregoing IB activities, and the level of certain research analysts' participation in these IB activities was sometimes significant. On September 23, 1999, the Head of Research provided research analysts with guidelines to follow in drafting their business plans. The guidelines stated they were "designed to help [the research analysts] focus on executing and delivering [their] goals, improving [their] overall contribution to the firm and enhancing [their] relationships with [their] partners throughout the firm." These guidelines requested the research analysts to describe their contributions to nine separate areas of Bear Stearns' business. With respect to the area identified as "Banking," the guidelines stated:
After your business plan meeting with your bankers please discuss any ideas you have generated for deal origination and timing of coverage for existing or proposed corporate relationships. Include or attach to your business plan a list of stocks you and your corporate finance team have agreed upon as priorities. Include plans to help market transactions or to introduce M&A activity. Discuss any plans to drop coverage where there is no longer a strategic fit.
In her 1997/1998 business plan, an analyst stated, "If I were any more aggressive in the banking area, my office would be on the third floor [location of IB offices of Bear Stearns]."
27. In connection with their participation in IB activities, certain research analysts and investment bankers ("bankers") communicated, in various frequency and extent, through meetings and via telephone and electronic mail ("e-mail").
28. The IB department at Bear Stearns was organized into industry groups that corresponded to certain research sectors. Research analysts were aware that, in certain circumstances, their positive and continued coverage of particular companies was an important factor for the generation of investment banking business. Thus, some research analysts and investment bankers coordinated the initiation and maintenance of research coverage, based upon, among other things, investment banking considerations. On February 9, 2000, two bankers and an analyst submitted a joint business plan to the co-heads of the IB technology group. The stated purpose of the memorandum was to "describe a strategy for investment banking and research coverage and coordination of companies which provide Internet enabling technologies. The near-term goal is to establish an organized and prioritized calling effort with an emphasis on cultivating fewer and deeper, lead managed relationships." [Emphasis in original.]
29. The compensation system at Bear Stearns provided an incentive for research analysts to contribute to all areas of Bear Stearns' business, including participating in IB activities and assisting in generating IB business for Bear Stearns. Research analysts' participation in IB activities was one of several factors considered in determining their compensation. Notes of staff meetings reflect the following statements by the Head of Research to analysts:
I'd like to remind everyone how you get paid at Bear Stearns. It is based on your contribution to your team and your contribution to the firm . . . Notice that being a partner with banking is part of the analyst job description. You are not compared or matrixed or in any way paid on a formula. Working on transactions is not incremental to your compensation, it is an expected part of it.
I need to remind you that investment banking revenues are not incremental to your bonus. Being a partner to banking is part of your job. You are paid on performance and based on your contribution to the firm.
30. The performance of research analysts was evaluated through an annual review process. Where not set by contract, the research analyst's salary and annual bonus were also determined through this process.
31. Information on the analyst's job performance was gathered through annual self-evaluations, analyst's business plans, surveys of management, and trading and institutional sales department personnel, e-mail and oral feedback from employees in the IB and other departments at Bear Stearns, and Bear Stearns' institutional clients.
32. The research analysts' annual business plans contained, among other things, their contributions to various areas of Bear Stearns, including IB, for the past year, and their plans for improving their contribution to these areas of Bear Stearns, including IB, in the coming year.
33. In their self-evaluations, which were used to communicate their accomplishments to and petition management for increased compensation analysts discussed such areas as their rankings in independent research polls, the scope of their research coverage, their participation in industry conferences, and Bear Stearns' Autex rankings in stocks they covered. Certain research analysts provided extensive information regarding their assistance to IB, including accomplishments, goals, and participation in lead- and co-managed underwritings, and sometimes also including the revenues to Bear Stearns associated with the IB transactions on which the analyst worked. In addition, analysts were occasionally requested to inform research management of fees generated by the IB transactions on which they worked.
34. In an October 24, 2000 e-mail to the Head of Research, a senior analyst summarized his 9 key accomplishments during fiscal year 2000. The first and largest point, which dealt with his contributions to IB, stated as follows:
*Corporate finance: generated over $23 million in fees to the firm in nine separate transactions: *Storage networking: identified a new financial opportunity for the firm, which resulted in six transactions... I should be designated as a finder for Ancor [Ancor Communications], JNI [JNI Corp.] and Vixel [Vixel Corp.]. *iApplinces: identified a new industry category ... which was a source of two IPOs... *Agilent [Agilent Technologies]: I should be designated as a finder -- or at least a save for Agilent. BS pitched the business and lost. I went in and re-won the business, generated fees of around $2.5 million to the firm.
The e-mail to the Head of Research included a spreadsheet listing the IB transactions on which he had worked and the associated revenues to Bear Stearns. The Head of Research praised the format of the summary and suggested she might have all research analysts submit theirs in the same form.
35. In a June 21, 2001 e-mail from a member of the research management staff, the research analysts were requested to submit information regarding all banking transactions that had closed or that were pending in their sectors during the prior 6 month period.
36. Certain research analysts perceived that the amount of their bonus would be influenced by their contribution to and impact on Bear Stearns' IB business, and the fees generated by IB transactions on which they worked.
37. Research analysts were encouraged to support and assist all areas of Bear Stearns and to participate in IB activities and activities that enhanced the reputation of Bear Stearns' IB business. Based upon statements by research management indicating that partnership with banking was part of their job as research analysts, the inclusion of a "Banking" section in their annual business plans, information regarding IB transactions in their self-evaluations, and requests from research management for specific information regarding IB transactions in their coverage sectors, certain research analysts believed that the revenues generated by their participation in IB activities was an important factor in their evaluations and compensation. Accordingly, some research analysts were encouraged to participate in IB activities, increase IB revenues, and enhance the reputation of Bear Stearns, including its IB business.
38. Research analysts' salaries and bonuses were determined by a multiple factor-based approach. Among other things, analysts were judged for compensation purposes based on the performance of their stock picks, their impact on the buy-side accounts as measured by votes, Bear Stearns' market share in trading volume in the stocks they covered, their participation in IB activities, and the fees and secondary trading commissions generated from those activities were considered.
39. In general, Bear Stearns determined whether to initiate and maintain research coverage based upon institutional investors' interest in the company, and the company's importance to the sector or IB considerations, such as attracting companies to Bear Stearns to generate IB business or maintaining a positive relationship with existing IB clients.
40. The nature and duration of research coverage were important criteria for a company's choice of a broker dealer for IB services. The pitch books typically contained information stating, among other things, that: "an important element to successfully executing an IPO is having an assurance that the Firm will provide research coverage to the IPO candidate in the offering and in the aftermarket."
41. Bear Stearns generally initiated coverage on companies that engaged Bear Stearns in an IB transaction. In pitching for IB business, Bear Stearns sometimes represented to the company the frequency with which reports would be issued.
42. Bear Stearns' ratings system, which was intended to reflect the long-term prospects of a rated stock, allowed research analysts to assign one of five ratings to a stock: (1) "Buy" Expected to outperform the local market by 20% in the next 12 months. Strong conviction and typically accompanied by an identifiable catalyst; (2) "Attractive" Expected to outperform the local market by 10% or more, it is usually more difficult to identify the catalyst; (3) "Neutral" Expected to perform in line with the local market; (4) "Unattractive" Expected to underperform the local market; and (5) "Sell" Avoid the stock.
43. During the relevant period, there was a sharp downturn in the stock market and stocks in selected sectors performed poorly. During this period, Bear Stearns did not issue ratings of "Unattractive" or "Sell" in connection with any covered companies in the selected sectors.
44. Research management communicated with IB management to ensure that research opportunities were appropriately aligned with identified IB opportunities.
45. The Stock Selection Committee was ultimately responsible for making the determination to initiate coverage of a given company. The Head of Research was ultimately responsible for making the determination to maintain research coverage. Nonetheless, IB considerations sometimes influenced the decision to initiate and maintain coverage.
46. Some research analysts and bankers actively coordinated the initiation and maintenance of research coverage based upon, among other things, IB considerations. This coordination consisted of meetings and communications by telephone and e-mail.
47. In some circumstances, research coverage was initiated based on IB considerations.
48. In an April 19, 2000 e-mail from a member of his staff, the head of the IB Technology Group communicated the following to the Heads of Research and IB as well as numerous analysts and bankers: "[Analyst A] and [Analyst B] agree that [Analyst B] will be the analyst covering CacheFlo [Cacheflow]. [Banker] and [Analyst B] will discuss with CacheFlo what the planned timing of their offering will be so as to insure that if we initiate coverage in advance of the transaction we will not be prohibited from being an underwriter. [Analyst B] and [Banker] will also stress to the company that if we initiate coverage we expect our position in the company's future financing and strategy actions to be materially improved."
49. Given that research analysts participated in determining in which IB transactions in their sectors Bear Stearns would participate, if Bear Stearns determined to participate in an equity offering for a company, it was expected the company would qualify for an initial "Buy" rating.
50. An analyst who anticipated initiating coverage of such a company with less than a "Buy" rating informed IB in advance as follows. In a February 8, 2000 e-mail to bankers and the Head of Research, this analyst stated: "Just wanted to be sure that everyone knows that we will be using an Attractive rating on go.com. If anyone has any comments or issues, please let me know."
51. In a March 17, 2000 e-mail to research analysts, an associate analyst stated: "I talked to [the liaison between research and IB] and we have the go ahead to initiate on IPET [Pets.com] with an Attractive rating. According to [the liaison] we should explain somewhere in the text, why our opinion about the company's prospects have changed from the time we initiated coverage." (In fact, Bear Stearns had not yet initiated coverage on IPET at the time this e-mail was sent.) In his annual evaluation, this analyst was criticized as follows: "Has been working poorly w/bankers in changing opinions after Bear Stearns has committed to co. mgmts." The analyst testified that he believed the statement related to his communicating his opinions regarding companies to bankers in a timely manner, and that if his opinion regarding a company changed from a more positive opinion to a more negative opinion about a company after a banker had already made some sort of commitment to a company, it made life difficult for the banker and was not ideal from his standpoint. He went on to testify that, particularly in his highly volatile sector, companies often changed a lot between the time of the first organizational meeting and the date of the IPO.
52. In some circumstances, the determination to maintain research was influenced by IB considerations.
53. Due to IB influences a supervisory analyst perceived and communicated to others that IB approval was required before coverage could be dropped. In response to an inquiry by an associate analyst regarding dropping coverage of 2 companies, a supervisory analyst stated in an April 19, 2002 e-mail: "[The Head of Research] says before dropping coverage, you need to get permission from both: 1. the market makers on the trading desk, 2. the bankers."
54. In an April 3, 2000 e-mail to the Heads of Research and IB as well as numerous members of both departments, a banker discussed a company's decision to exclude Bear Stearns from a follow-on offering. He stated: "I expressed significant disappointment with the fact that they neglected to discuss this issue with us prior to this time and that they left us no choice but to drop research coverage and trading, since they obviously did not value our support to date. [Analyst] As we discussed, feel free to drop at any time. I told the CFO that you would likely put out a note, but did not know when." In a follow-up e-mail the Head of Research stated that she agreed with the decision to drop coverage. The analyst ultimately determined not to drop coverage.
55. Issuers also considered investment banks' aftermarket trading support as a factor in selecting an investment bank. Bear Stearns' trading volume and trading rank were factors it promoted to IB clients in pitch presentations.
56. Bear Stearns distributed to sales and trading personnel and research analysts the "Trading Focus List," which contained stocks of companies from which Bear Stearns was seeking or with which Bear Stearns had IB business.
57. A research analyst actively marketed companies on the Trading Focus List in order to obtain IB business.
58. In a December 10, 1999 e-mail, an analyst wrote the following to Equity Trading copied to the Heads of Research and IB: "Subject: Pls make the trading of Packeteer a top priority. I spent two days with Packeteer (`PKTR') management this week visiting investors. Management are extremely happy with our research coverage and banking services. But they have repeatedly indicated to me that our trading stat. is not satisfactory...CEO hinted to me many times that we have a chance for the books for the secondary if we improve the trading...They are likely to do a secondary in Q1 mostly likely late January/early February; could be as much as $200 MM deal. Please help us in improving our trading immediately. We will do whatever it takes from the research side."
59. In a September 14, 2000 e-mail to Equity Trading the same analyst wrote the following regarding banking client SonicWall ("SNWL"): "We need help in boosting our trading stat for SNWL. Both management and their VC called me yesterday complaining about our trading #2 in August and #3 so far in September. More importantly, they argued that we are not supporting the stock when it is weak...I made a positive call on Monday but am not getting much support. Pls help us here since this important technology client indicated to me that if we do not improve, it will hurt our banking relationship with the company."
60. In a March 8, 2001 e-mail the same analyst again wrote to Equity Trading regarding two IB clients he covered: "Subject: MUSE [Micromuse] and ISSX [Internet Security Systems] autex both on focus list. On MUSE we dropped from #3 or 4 in 2000 to #10 in Feb and March to date. I just called the trader to see what we can do. I have been extremely active on the name- took management to Boston, Denver, Minneapolis and KC in February alone. Do not quite understand. Pls follow up. ISSX we dropped from #2 or #3...to #11 in March. I am very active on ISSX also. Thanks for your help on this." Equity Trading responded: "What do you want me to do? Get some orders on the stock yourself. Generate some order flow!!" The analyst replied: "I am trying...but are the traders on these two stocks good?"
61. In order to raise or maintain Bear Stearns' visibility on stocks with which Bear Stearns wanted to do IB business, certain research analysts nominated companies to participate at Bear Stearns sponsored conferences, took company managements on non-deal road shows, hosted field trips for institutional investors to companies' headquarters and arranged other meetings between institutional investor clients and companies.
62. Research analysts were visible on stocks of companies with which Bear Stearns wanted to do IB business in order to generate IB business.
63. Certain research analysts communicated regularly with employees of the companies that they covered, including executive and senior management of those companies. These communications occurred through telephone and e-mail exchanges, company-sponsored events, and analyst calls.
64. Research analysts were sometimes subject to pressure from companies they covered to issue better ratings and recommendations. Research analysts understood that negative ratings and recommendations could adversely affect Bear Stearns' ability to attract and retain IB business from those companies.
65. On November 2, 2000, an analyst wrote in a section of his 2000 self-evaluation entitled "Areas to Improve":
We want our banking clients to know that our research is objective and independent but always sensitive to their best interests. There have been instances in my career where certain banking clients felt that our research and public comments weren't sensitive to their interests. This is a very important issue for us and we take it most seriously. We will continue to make every effort to be sensitive to our clients and our banking partners.
66. When research analysts downgraded or issued a negative comment on a banking client, they sometimes received direct feedback from high-ranking company officials.
67. In an August 24, 2000 e-mail, a banking client responding to a downgrade of his company wrote: "Your earnings estimates are on track, however, given the downgrade, I sure would have liked to see you give us a lower bar on revenue...[W]hile we affirmed the revenue estimate, they were definitely a stretch. Seems a shame to waste a downgrade by not buying the opportunity for us both to over-perform going forward..."
68. On several occasions, the conflicts of interest discussed above resulted in analysts publishing recommendations and/or ratings that were exaggerated or unwarranted, and/or contained opinions for which there was no reasonable basis. The following are examples of how these conflicts affected the research.
69. Bear Stearns lead managed the IPO and secondary offerings for SonicWall in November 1999 and March 2000 respectively. An analyst rated the stock a "Buy" from the IPO until April 2002. In January 25, 2001 while they were participating in a SonicWall conference call the analyst stated to his associate: "I am trying to make them look good...on the dso and the growth etc." A few minutes later he added: "we got paid for this...and I am going to Cancun tomorrow b/c of them!"
70. Bear Stearns initiated coverage of MUSE with an "Attractive" rating in September 1999, raised the rating to a "Buy" in January 2000 and maintained a "Buy" rating on the stock until July 2002. While listening to a MUSE analyst call on July 18, 2001, an analyst suggested to his associate that he was going to downgrade his rating on the stock to "Attractive". The associate disagreed with the suggestion and the analyst responded that the stock was "dead money!" However, the analyst did not downgrade his rating on the stock, instead issuing research the same day maintaining his "Buy" rating.
71. Bear Stearns lead managed the IPO for CAIS Internet, Inc. in May 1999. The analyst rated the stock a "Buy" from the IPO through his last report on the company in November 2000. On January 24, 2001, in response to an e-mail reporting extensive service failures at CAIS the analyst stated: "Any other scoop on this piece of shit?" A few days later, in response to an institutional client's request for his thoughts on CAIS' 4th quarter, the analyst stated: "It's up a lot year to date...don't overstay your welcome on this one."
72. Bear Stearns co-managed the IPO and secondary offerings for Digital River in August and December 1998 respectively. Bear Stearns, via three successive analysts, rated the stock a "Buy" from the IPO until April 2002. In an April 1, 2002 e-mail to his IB counterpart an analyst stated: "I have to tell you, I feel a bit compromised today. I have told every client on the phone that they should avoid or short the stock over the last few months. I have been fairly hands-off on DRIV [Digital River, a stock under his coverage], primarily because of the banking prospect that you and [Another Banker] have noted. Today, clearly the stock is down a lot. The artificial Buy rating on the stock, while artificial, still makes me look bad. In the future, I'd like to have more leeway with the ratings, even for companies like Digital River, where we have a relationship on the banking side. I trust it would benefit all of us."
73. In August 2000, as part of an offering that took place in May 2000, Bear Stearns made a payment of $102,750 to another broker-dealer in connection with research coverage it provided for Andrx Corp. ("ADRX"), a Bear Stearns' investment banking client in connection with an underwriting transaction for which Bear Stearns was a lead manager.
74. Bear Stearns did not take steps to ensure that this broker-dealer disclosed in its research reports that it had been paid to issue research on ADRX. Further, Bear Stearns did not disclose or cause to be disclosed the details of this payment.
75. While the role of the research analysts was to produce objective research, Bear Stearns also encouraged them to participate in IB activities. As a result of the foregoing, research analysts were subject to IB influences and conflicts of interest between supporting the IB business at Bear Stearns and publishing objective research.
76. Bear Stearns had knowledge of these IB influences and conflicts of interest yet failed to manage them adequately to protect the objectivity of its published research.
77. Bear Stearns failed to establish and maintain adequate policies, systems and procedures reasonably designed to ensure the objectivity of its published research. Although Bear Stearns had some policies governing research analyst activities during the relevant period, these policies were inadequate and did not address the conflicts of interest that existed.
78. Paragraphs 1-77 are realleged and incorporated by reference.
79. NASD Conduct Rule 2110 requires members to observe high standards of commercial honor and just and equitable principles of trade.
80. NYSE Rule 401 states that "[e]very member, allied member and member organization shall at all times adhere to the principles of good business practice in the conduct of his or its business affairs."
81. NYSE Rule 476(a)(6) prohibits member organizations, among other things, from engaging in practices that constitute conduct inconsistent with just and equitable principles of trade.
82. During the relevant period, Bear Stearns engaged in the acts and practices described above that created and/or maintained inappropriate influence by investment banking over research analysts and therefore imposed conflicts of interest on its research analysts. Bear Stearns failed to manage these conflicts in an adequate or appropriate manner.
83. By reason of the foregoing, Bear Stearns violated NASD Conduct Rule 2110 and NYSE Rules 401 and 476(a)(6).
84. Paragraphs 1-77 and 79-81 are alleged and incorporated by reference herein.
85. NASD Rule 2210 and NYSE Rule 472 govern members' communications with the public, including requirements relating to research communications and research reports.
86. As alleged above, Bear Stearns failed to disclose or cause to be disclosed in offering documents or elsewhere a payment for research to another broker-dealer not involved in an underwriting transaction.
87. By reason of the foregoing, Bear Stearns violated NASD Conduct Rules 2110 and 2210(d)(1)(A) and NYSE Rules 401, 472 and 476(a)(6).
88. Paragraphs 1-77, 79-81, and 85 are alleged and incorporated by reference herein.
89. NASD Rule 2210 and NYSE Rule 472 require members' communications with the public to be based on principles of fair dealing and good faith, provide a sound basis for evaluating facts, be properly balanced, and/or not contain exaggerated or unwarranted claims and/or opinions for which there was not reasonable basis.
90. As alleged above, in several instances Bear Stearns issued certain research reports for companies that were not based on principles of fair dealing and good faith and did not provide a sound basis for evaluating facts, contained exaggerated or unwarranted claims about these companies, and/or contained opinions for which there was no reasonable basis.
91. By reason of the foregoing, Bear Stearns violated NASD Conduct Rules 2110, 2210(d)(1), and 2210(d)(2), and NYSE Rules 401, 472 and 476(a)(6).
92. Paragraphs 1-77 are alleged and incorporated by reference herein.
93. NASD Conduct Rule 3010(a) requires members, among other things, to "establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with" NASD's own Rules.
94. NYSE Rule 342 requires members, among other things, to maintain "appropriate supervisory control" over all business activities to ensure compliance with securities laws and regulations, including providing a "separate system of follow-up and review to determine that the delegated authority and responsibility is being properly exercised."
95. Bear Stearns failed to establish and maintain adequate procedures over research analysts to prevent or manage conflicts of interest.
96. By reason of the foregoing, Bear Stearns violated NASD Conduct Rule 3010 and NYSE Rule 342.
WHEREFORE, the Commission respectfully requests that this Court enter final judgment:
a. Permanently restraining and enjoining Bear Stearns from violating NASD Conduct Rules 2110, 2210(d)(1), 2210(d)(2), and 3010, and NYSE Rules 342, 401, 472 and 476(a)(6);
b. Ordering Bear Stearns to account for and disgorge all proceeds it has obtained as a result of its conduct, plus prejudgment interest thereon;
c. Ordering Bear Stearns to pay civil money penalties;
d. Ordering such other and further relief as this Court may deem just and appropriate.
Yuri B. Zelinsky
Douglas C. McAllister
Kara Novaco Brockmeyer
Date: April 28, 2003
Kenneth L. Miller (KM 5614)
Antonia Chion (AC 9522)
James A. Meyers (JM 5231)
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549-0911
(202) 942-4567 (Chion)
(202) 942-9636 (Chion fax)
Attorneys for Plaintiff
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