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Robert W Pearce
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Mr. Pearce has tried, arbitrated and mediated numerous disputes involving complex securities, commodities, administrative, contract, commercial, business tort and employment law issues for over 35 years. He has represented hundreds of clients in Federal and state courts (trial and appellate) as... More
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The Investor's Rights Law Blog
    Feb 28, 2013 2:39 PM

    Research analysts offering a buy rating in exchange for investment banking business has suddenly resurrected after a long dormant period dating back to the dot-com boom. According to FINRA, Rodman and Renshaw LLC analyst Lewis Boreas Fan offered to initiate research coverage in exchange for investment banking business after Mr. Fan was assigned to cover Chinese companies. Contrary to FINRA's allegations, email evidence suggests that Mr. Fan was not seeking investment banking business, but was only seeking to be loved by a Chinese manufacturer of mineral based, heat resistant products. However, FINRA quotes emails that Mr. Fan sent to Rodman's CEO, which includes one that allegedly contains code words to conceal the improper conduct.

    According to NASD Rule 2711, it is unlawful for a research analyst to initiate efforts to solicit investment banking business. Rule 2711 is one of the new prohibitions issued after the dot-com crash, which was partially due to the failure to regulate research analysts. The regulatory problem addressed by Rule 2711 is as follows: broker-dealers employ research analysts who cover companies. These analysts study a company's financial statements and issue reports that typically include a buy, sell, or hold recommendation - sometimes market outperform, market perform, or neutral. At the same time, broker-dealers offer investment banking services, which include lucrative engagements to assist companies with IPOs and other securities offerings to investors. Broker-dealers then use their research departments to help generate banking business. An example would be a broker-dealer offering to initiate research coverage of a new company that was not currently covered in exchange for the company's investment banking business, or the broker-dealer agreeing to maintain a buy-rating on the stock.

    One notable instance is the Global Analyst Research Settlements of 2003, in which ten large broker-dealers agreed to pay penalties and disgorgement totaling $875 million. Also caught up were Jack Grubman and Henry Blodget, who were barred from the industry and paid $15 million and $4 million respectively for issuing positive reports that were inconsistent with their negative internal views just to keep the companies and investment bankers happy. As a result of this form conduct, broker-dealers were encumbered with Rule 2711 in order to prevent research analysts from being chosen by investment bankers. The rule also contains sections that prohibit investment bankers from strong-arming research analysts. This section prevents investment bankers from retaliating or threatening to retaliate against any research analyst because of an adverse, negative, or otherwise unfavorable research report or public statement.

    As for Mr. Fan, the following is the email message about a Chinese company he sent to Rodman's CEO:

    "I have just reached out to the management. Here is where things stand. As of right now, they want to divide their love into two: 10 dollars of popcorn for us and 10 dollars of soda for the other guy, on two separate movie dates. But the other guy is providing much better accommodation to them than we are. The management is particularly upset that we are imposing much stricter criteria to them than we did to [another company], such as a divorce settlement. They feel it's discriminatory and they feel insulted. In fact, our love was so tough that their CEO was leaning towards giving his whole love to the other guy. But the other members of the management have persuaded him to share his love. But their opinion is: if we want to even have 50 percent of the love, we've got to sweeten the pot, as the other guy is really showing them a lot of love."

    Whether or not the email contains codes referring to investment banking is for you to decide. However, keep in mind that after this email, Mr. Fan initiated coverage of the Chinese company with a market outperform rating. Thereafter, the company announced a $10 million registered direct offering for which Rodman was the exclusive placement agent. To settle the case, Mr. Fan agreed to pay a $10,000.00 fine and serve a 30-day suspension, while Rodman agreed to pay a $315,000.00 fine and hire an independent consultant to straighten up its analyst compliance.

    Unfortunately, the Rodman episode is not the only analyst incident to recently occur. Alka Singh, another research analyst, found herself disappointed when a company she initiated coverage on filed to reciprocate with investment banking business. Bound and determined to get paid, Ms. Singh sent the covered company's CEO an email requesting a direct payment for having covered the company. In the email, Ms. Singh advised the company that in such situations, companies have concealed the fees as a consulting fee or banking fee so that the analyst can get something for their effort.

    Have you suffered losses resulting from bogus research conducted by an analyst? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.

    The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website,, post a comment, call (800) 732-2889, or email Mr. Pearce at for answers to any of your questions about this blog post and/or any related matter.

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