Litigation Release No. 18118 / April 28, 2003
Securities and Exchange Commission v. U.S. Bancorp Piper Jaffray Inc., 03 CV 2942 (WHP) (S.D.N.Y.)
SEC SUES U.S. BANCORP PIPER JAFFRAY FOR RESEARCH ANALYST CONFLICTS OF INTEREST FIRM TO SETTLE WITH SEC, NASD, NYSE, NY ATTORNEY GENERAL, AND STATE REGULATORS
The Securities and Exchange Commission announced today that it has settled charges against U.S. Bancorp Piper Jaffray Inc., a Minneapolis, Minnesota-based brokerage firm and investment bank, arising from an investigation of research analyst conflicts of interest. This settlement, and settlements with nine other brokerage firms, are part of the global settlement the firms have reached with the Commission, NASD, Inc., the New York Stock Exchange, Inc. ("NYSE"), the New York Attorney General, and other state regulators. As part of the settlement, Piper Jaffray has agreed to pay $12.5 million as disgorgement and an additional $12.5 million in penalties. One-half of the total of these payments - $12.5 million - will be paid in connection with the SEC action and related proceedings by the NASD and NYSE and will be placed into a distribution fund for the benefit of customers of the firm. The remainder will be paid to resolve related proceedings by state regulators. In the SEC action, Piper Jaffray has agreed to a federal court order that will enjoin the firm from future violations of the federal securities laws and NASD and NYSE rules and require the firm to make changes in the operations of its equity research and investment banking departments. In addition, Piper Jaffray will pay, over five years, $7.5 million to provide the firm's clients with independent research.
In connection with this matter, the Commission today filed a Complaint against Piper Jaffray in the U.S. District Court for the Southern District of New York, alleging violations of the federal securities laws and NASD and NYSE rules. According to the Commission's Complaint, from June 1999 through 2001, research analysts at Piper Jaffray were subject to inappropriate influence by investment banking at the firm. The Complaint also alleges that Piper Jaffray made payments to other firms for those firms to publish research on Piper Jaffray's underwriting clients without ensuring that such payments were disclosed, and failed to maintain appropriate supervision over its research and investment banking operations.
Specifically, the Commission's Complaint alleges that:
- Piper Jaffray engaged in acts and practices that created and maintained inappropriate influence by investment banking over research analysts. Piper Jaffray analysts worked as a team with the firm's investment bankers. Investment bankers evaluated analysts, and analysts' bonuses, which comprised the majority of their compensation, were in some cases directly tied to revenues from investment banking transactions.
- As to two companies, Esperion Therapeutics, Inc. and Triton Network Systems, Piper Jaffray issued research reports that violated NASD and NYSE advertising rules because the reports contained research that lacked a reasonable basis and/or was imbalanced.
- Piper Jaffray received more than $1.8 million from proceeds of certain underwritings in part for providing research coverage of those issuers, including Just For Feet, JDS Uniphase Corporation, and Comverse Technology Inc. Despite having an obligation to do so, Piper Jaffray failed to disclose in research reports, or elsewhere, that it received the payments, in part, as compensation for issuing research reports.
- Piper Jaffray, at the direction of certain issuer clients, paid portions of underwriting proceeds to other brokerage firms to initiate or continue research coverage on issuers for which Piper Jaffray served as lead or co-manager, including offerings for Buca Inc. and Onyx Pharmaceuticals. Piper Jaffray did not ensure that these payments were disclosed.
- Piper Jaffray's management failed to adequately monitor the activities of the firm's research and investment banking professionals to ensure compliance with NASD and NYSE rules and the federal securities laws.
Piper Jaffray has agreed to settle the Commission's action and has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that, if approved by the court, permanently enjoins Piper Jaffray from violations of Section 17(b) of the Securities Act of 1933 and NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342). The final judgment also orders the firm to make the payments described above, and provides for the appointment of a fund administrator who, subject to court approval, will formulate and administer a plan of distribution for those monies placed into a distribution fund.
In addition, the final judgment orders Piper Jaffray to implement structural reforms and provide enhanced disclosure to investors, including a broad range of changes relating to the operations of its equity research and investment banking operations. Piper Jaffray has agreed to sever the links between research and investment banking, such that: research and investment banking are physically separated with completely separate reporting lines; analysts' compensation cannot be based directly or indirectly upon investment banking revenues; investment bankers may no longer evaluate analysts; investment bankers will have no role in determining what companies are covered by the analysts; and research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. In addition, Piper Jaffray must disclose on the first page of each research report whether the firm does or seeks to do investment banking business with that issuer, and when Piper Jaffray decides to terminate coverage of an issuer, Piper Jaffray must issue a final research report discussing the reasons for the termination. Each quarter, Piper Jaffray also will publish on its website a chart showing its analysts' performance, including each analyst's name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm's rating system.
Piper Jaffray also has agreed as part of this settlement to retain, at its own expense, an Independent Monitor to conduct a review to provide reasonable assurance that the firm is complying with the structural reforms. This review will be conducted eighteen months after the date of the entry of the Final Judgment and the Independent Monitor will submit a written report of his or her findings to the SEC, NASD, and NYSE within six months after the review begins. Five years after the entry of the final judgment, Piper Jaffray must certify to the SEC and other regulators that it has complied in all material respects with the requirements and prohibitions of the structural reforms.
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The Commission acknowledges the assistance of NASD, NYSE, the Washington Department of Financial Institutions, and other state regulators in the investigation of this matter.
SEC Complaint in this matterSEC Final Judgment in this matterFinal Judgment Appendix AFinal Judgment Appendix BConsent