SECURITIES ACT OF 1933
Release No. 8461 / August 25, 2004
SECURITIES EXCHANGE ACT OF 1934
Release No. 50243 / August 25, 2004
ADMINISTRATIVE PROCEEDING
File No. 3-11599
In the Matter of FRIEDMAN, BILLINGS, RAMSEY & CO., INC., Respondent. |
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CORRECTED ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 15(b)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 15(b)(4) of the Securities Exchange Act of 1934 ("Exchange Act") against Friedman, Billings, Ramsey & Co., Inc. ("FBR" or "Respondent").
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "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 the Commission's jurisdiction over Respondent and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 15(b)(4) of the Securities Exchange Act of 1934, as set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
A. RESPONDENT
Friedman, Billings, Ramsey & Co., Inc. is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act and is a member of NASD, Inc. FBR's principal place of business is in Arlington, Virginia.
B. SUMMARY
In 2001, FBR received a payment in consideration for research coverage on a public company. FBR did not disclose that payment in its research report. The firm's failure to disclose the payment was in violation of Section 17(b) of the Securities Act.
C. FACTS
1. Background
During the period 1999 through at least 2003, broker-dealers that were underwriting public offerings sometimes paid other broker-dealers to issue research on or "cover" their issuer clients. These arrangements were made with regard to both initial public offerings ("IPOs") and secondary offerings. In some situations, the issuers directed the lead underwriters to make the payments, and in others, the lead underwriters selected the firms that received the payments. Some firms issuing the research actively solicited the payment.
In certain instances, the payments were made to firms that were not participating in the underwriting, and therefore not earning investment banking fees from the issuer on the particular offering. In other instances, firms that were underwriting small portions of the offering received additional payments in consideration for publishing research. These payments often were significantly larger than the underwriting fee the firm received.
Section 17(b) of the Securities Act requires that any person who receives consideration, directly or indirectly, from an issuer, underwriter, or dealer for issuing research must fully disclose the receipt of the payment (whether past or prospective) and the amount. However, the broker-dealers that received these payments failed to disclose in their research reports that they received payment for publishing research.
2. FBR Did Not Disclose Its Receipt of a Payment In Consideration for Publishing Research
In September 2001, FBR was paid $100,000 by the lead underwriter in consideration for publishing research on Arena Pharmaceuticals, Inc. ("Arena") in connection with a June 21, 2001 secondary offering. FBR had initiated research coverage on Arena on May 16, 2001, just one month prior to the offering. Following the publication of the May 16 report, a FBR analyst covering the issuer learned of the offering and unsuccessfully attempted to get FBR involved as an underwriter or member of the syndicate group. On September 21, 2001, FBR received a check for $100,000 by the lead underwriter. After the check was received, an internal e-mail stated, "We received a $100k research fee," and that the check was for the analyst's "research services." FBR issued research reports on Arena on July 24, 2001 and September 6, 2001. Although FBR was aware at the time that it issued the reports that it would be paid for issuing the research, FBR did not disclose the $100,000 payment.
By failing to disclose in these research reports that it would receive payment for issuing that research, FBR violated Section 17(b) of the Securities Act.
D. LEGAL DISCUSSION
1. FBR Violated Section 17(b) of the Securities Act
Section 17(b) of the Securities Act provides:
It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.
15 U.S.C. § 77q(b).
In order to violate Section 17(b), a person must "(1) publish or otherwise circulate (using a means of interstate commerce), (2) a notice or type of communication (which describes a security), (3) for consideration received (past, currently, or prospectively, directly or indirectly), (4) without full disclosure of the consideration received and the amount." SEC v. Gorsek, 222 F. Supp. 2d 1099, 1105 (C.D. Ill. 2001). Courts have held that Section 17(b) does not require a showing of scienter. SEC v. Liberty Capital Group, Inc., 75 F. Supp. 2d 1160, 1163 (W.D. Wash. 1999); SEC v. Huttoe, 1998 WL 34078092 (D.D.C. Sept. 14, 1998).
FBR published and circulated communications in the form of research reports that described a security for consideration to be received, but did not disclose the prospective receipt or the amount of this payment. As a result, investors did not receive information relating to the objectivity of the research.
E. CONCLUSIONS
Based on the foregoing and FBR's Offer of Settlement, the Commission finds that FBR willfully violated Section 17(b) of the Securities Act by publishing a communication that described a security for consideration to be received, directly from an underwriter, without disclosing the prospective receipt of such consideration and the amount thereof.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent's Offer of Settlement.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 8A of the Securities Act, that Respondent cease and desist from committing or causing any violations and any future violations of Section 17(b) of the Securities Act.
B. Respondent is censured pursuant to Section 15(b)(4) of the Exchange Act.
C. It is further ordered that Respondent shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $125,000 to the United States Treasury. 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 Friedman, Billings, Ramsey & Co., Inc. 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.
By the Commission.
Jonathan G. Katz
Secretary