U.S. Securities and Exchange Commission
Litigation Release No. 17922/ January 9, 2003
Securities and Exchange Commission v. Paul E. Johnson, Civil Action No. 03 CV 0177 (S.D.N.Y.)
SEC Sues Former Robertson Stephens Inc. Research Analyst Paul Johnson for Issuing Fraudulent Research Reports; Robertson Stephens Consents to Pay $5 Million to Settle Related Administrative Proceeding
The Securities and Exchange Commission today filed a civil action against Paul Johnson, 42, a former managing director and senior research analyst at the investment banking firm Robertson Stephens, Inc. ("Robertson Stephens"), for issuing fraudulent research reports. The Commission alleges that Johnson issued research reports and made public statements regarding mergers proposed by two public companies in which he failed to disclose that he had conflicts of interest because he owned stock that, upon completion of each of the mergers, would yield enormous financial windfalls for Johnson. The Commission further alleges that, in 2001, Johnson issued false and misleading "Buy" recommendations on another public company that were inconsistent with his privately-held belief.
According to the Commission's Complaint, in 1999 and 2000, Johnson provided positive research coverage on Redback Networks, Inc. and Sycamore Networks, Inc., after they had announced proposed mergers with private companies. Johnson praised both mergers in his research reports and media statements, but failed to disclose that his supposedly objective advice was infected by serious conflicts of interest. In both cases, he owned stock in the private companies that would be exchanged for public company shares if the mergers were completed, creating multimillion-dollar windfalls for Johnson. In acquiring his holdings in the private companies that were the subjects of the merger proposals, Johnson violated Robertson Stephens internal policy that required employees to obtain prior written approval from the firm for all private investments. Moreover, at the time that Johnson issued his reports and statements concerning the proposed mergers, he did not disclose his personal holdings in the affected companies or the magnitude of his financial interest in the outcome of the mergers.
The Complaint further alleges that in January 2001, Johnson spoke privately about Corvis Corporation, another company that he covered, to a committee that was responsible for making investment decisions for a group of partnerships that had been formed by Robertson Stephens and senior Robertson Stephens executives and in which Johnson and other senior Robertson Stephens executives were investors. In response to a question, Johnson told the committee that he would not buy Corvis stock at the prevailing market price, but would buy at a price that was approximately half of the current price. Johnson's statements to the committee directly contradicted his existing "Buy" recommendation on Corvis. After Johnson spoke, the committee voted to sell all the Corvis stock held by two partnerships. In addition, the day after he made his private recommendation to the committee, Johnson sold nearly all of his Corvis stock. Two days after his stock sale, Johnson issued another research report reiterating his buy recommendation on Corvis, but failed to disclose that he had sold his Corvis stock two days earlier.
The Complaint, filed in the United States District Court for the Southern District of New York, charges Johnson with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exhange Act Rule 10b-5, which prohibit the making of false or misleading statements in connection with the purchase or sale of securities. The Complaint also charges Johnson with violations of Section 17(a) of the Securities Act of 1933, which prohibits the making of material false or misleading statements and failing to disclose material facts in the offer or sale of securities.
The Commission seeks a permanent injunction against Johnson, disgorgement, prejudgment interest, and civil money penalties.
The Commission also instituted and simultaneously settled administrative proceedings against Robertson Stephens. The Commission found that Robertson Stephens published materially misleading research reports in violation of Section 15(c) of the Exchange Act and Exchange Act Rule 15c1-2(b), and Robertson Stephens failed reasonably to supervise a research analyst with a view toward preventing violations of the antifraud provisions of the federal securities laws arising from undisclosed conflicts of interest caused by the analyst's personal investments. The order also found that Robertson Stephens failed to preserve e-mails for the required three-year period and/or failed to preserve its e-mails in an accessible place for two years, and failed promptly to furnish e-mails to the Commission.
The Commission censured Robertson Stephens and ordered the firm to pay disgorgement, including prejudgment interest, of $885,000 and a penalty of $4,115,000, for a total of $5 million. Robertson Stephens consented to the entry of the order against it without admitting or denying the findings contained in the order.