U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19468 / November 17, 2005
Securities And Exchange Commission V. Paul E. Johnson, Civil Action No. 03 Civ. 0177 (JFK) (S.D.N.Y.)
Federal Court Jury Finds Paul E. Johnson, Former Research Analyst for Robertson Stephens Inc., Liable for Issuing Fraudulent Research Reports
On November 11, 2005, a federal jury in Manhattan found Paul E. Johnson, formerly a senior research analyst and managing director of Robertson Stephens Inc., a now-defunct broker-dealer, liable on four counts of securities fraud. The Commission had charged Johnson with failing to disclose in research reports that he wrote and in media statements that he made regarding two public companies that he a substantial financial interest in impending mergers that the companies had announced. The Commission also had charged Johnson with having issued false and misleading "Buy" recommendations in 2001 for another public company that were inconsistent with his privately-held belief.
The Commission presented evidence that 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 his serious conflicts of interest. Specifically, 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 issuing his research reports and making public statements concerning the proposed mergers, Johnson never disclosed his personal holdings in the private companies or the magnitude of his financial interest in the outcome of the mergers.
The Commission also presented evidence that, in January 2001, Johnson spoke privately about Corvis Corporation, another company that he covered, to a Robertson Stephens committee that was responsible for making investment decisions for a group of partnerships in which Johnson and other senior Robertson Stephens executives were investors. The Commission presented evidence that, in response to a question, Johnson told the committee that he would not buy Corvis stock at the prevailing market price, but would buy it at approximately half of that price. Johnson's statements to the committee directly contradicted his existing "Buy" recommendation on Corvis. 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. Three days after he issued that report. Johnson sold his remaining shares of Corvis stock.
After a two week trial, presided over by U.S. District Judge John F. Keenan, the jury found that Johnson had violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, which are general antifraud provisions of the federal securities laws. At a later date, the Commission will ask the court to determine the appropriate relief, and will request a permanent injunction, disgorgement of illicit profits and prejudgment interest, and a civil penalty. For further information, please see Litigation Release No. 17922 (January 9, 2003).