FINRA Fines 10 Brokerage Firms $43.5 Million For Conflicts of Interests in Toys “R” Us IPO

shutterstock_27786601The merry go-round of Wall Street fraud continues. After the housing crisis where Wall Street sold terrible home loans to investors we’ve arrived back to era frauds of selling favorable research. Enter the recent fine imposed by The Financial Industry Regulatory Authority (FINRA) that 10 of the largest brokerage firms were fined a total of $43.5 million for allowing their equity research analysts to solicit investment banking business by offering favorable research coverage in connection with the 2010 planned initial public offering of Toys “R” Us.

FINRA fines are as follows:

Barclays Capital Inc. – $5 million

Citigroup Global Markets Inc. – $ 5million

Credit Suisse Securities (USA), LLC – $5 million

Goldman, Sachs & Co. – $5 million

JP Morgan Securities LLC – $5 million

Deutsche Bank Securities Inc. – $4 million

Merrill Lynch, Pierce, Fenner & Smith Inc. – $4 million

Morgan Stanley & Co., LLC – $4 million

Wells Fargo Securities, LLC – $4 million

Needham & Company LLC – $2.5 million

Susan Axelrod, FINRA’s Executive Vice President, Regulatory Operations, said in a press release announcing the fine that “FINRA’s research analyst conflict of interest rules make clear that firms may not use research analysts or the promise of offering favorable research to win investment banking business. Each of these firms used their analyst to solicit investment banking business from Toys “R” Us and offered favorable research. This settlement affirms our commitment to policing the boundaries between research and investment banking to ensure that research is not improperly influenced.”

According to FINRA, in April 2010, Toys “R” Us and its private equity owners invited these 10 brokerage firms to compete for the Toys “R” Us IPO.  FINRA found that each of the 10 firms used its equity research analyst as part of its solicitation for the purposes of ensuring that the analysts’ views on key issues, such as valuation, were aligned with the views expressed by the firms’ investment bankers. FINRA found that the analysts’ presentations would be a key factor in determining whether the firm received an underwriting role in the IPO.

FINRA found that each firm implicitly or explicitly offered favorable research coverage in return for a role in the IPO. One Citigroup analyst wrote to a supervisor before meeting with Toys “R” Us that “I so want the bank to get this deal!” Another analyst at Needham & Co. was far more colorful in his enthusiasm for closing the Toys “R” Us deal writing: “I would crawl on broken glass dragging my exposed junk to get this deal.” In another email he described his “whole life” as nothing more than “posturing for the Toys R Us IPO.” Basically, the research coverage needed by Toys “R” Us to win the IPO was up for grabs at the expense of honesty and integrity.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “The firms’ rush to assure the issuer and its sponsors that research was in synch with the pitch being made by their investment bankers caused them to overstep the prohibitions against analyst solicitation and the promise of favorable research. Today’s actions reaffirm the importance of these prohibitions to maintaining the integrity of the research function against whatever pressures may exist to monetize the reputation and work product of the analysts.”

Investors who have suffered investment losses may be able recover their losses through arbitration. The attorneys at Gana Weinstein LLP are experienced in representing investors in cases of conflicts of interests in the sales of investments. Our consultations are free of charge and the firm is only compensated if you recover.

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