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STATE OF
OFFICE OF
SECURITIES
121 STATE
HOUSE STATION
AUGUSTA,
ME 04333
In the Matter of THOMAS WEISEL PARTNERS, LLC, Respondent. |
) ) ) ) ) ) |
CONSENT ORDER No. 05-046-CON |
WHEREAS,
Thomas Weisel Partners, LLC (“TWP”) is a broker-dealer licensed in the State of
WHEREAS, coordinated
investigations (the “Investigations”) into TWP’s activities in connection with
certain conflicts of interest that research analysts were subject to during the
period of approximately July 1999 through 2001 have been conducted by a
multi-state task force and a joint task force of the U.S. Securities and
Exchange Commission (“SEC”), the New York Stock Exchange (“Exchange”), and the
National Association of Securities Dealers (“NASD”) (collectively, the
“regulators”); and
WHEREAS,
TWP has cooperated with regulators conducting the investigation by responding
to inquiries, providing documentary evidence and other materials, and providing
regulators with access to facts relating to the investigations; and
WHEREAS, TWP has
advised regulators of its agreement to resolve the issues raised in the
investigations relating to its research practices; and
WHEREAS,
TWP agrees to implement certain changes with respect to its research practices
to achieve compliance with all regulations and any undertakings set forth or
incorporated herein governing research analysts, and to make certain payments;
and
WHEREAS,
TWP, through its execution of this Consent
Order, elects to permanently waive any right to a hearing and appeal
under the Revised Maine Securities Act (the “Act”), 32 M.R.S.A. §§ 10101-10713,
with respect to this Consent Order (the “Order”);
NOW,
THEREFORE, the Securities Administrator,
as administrator of the Act, hereby enters this Order:
I. JURISDICTION/CONSENT
TWP admits the jurisdiction of the Office, neither admits nor denies the
Findings of Fact and Conclusions of Law contained in this Order, and consents
to the entry of this Order by the Securities Administrator.
II. FINDINGS OF FACT
1. Thomas Weisel Partners, LLC is a
2. TWP is registered
with the SEC, is a member of the Exchange and the NASD, and is licensed to
conduct securities business on a nationwide basis.
3.
TWP describes itself as a “merchant bank providing
investment banking, institutional brokerage, private client services, private
equity and asset management exclusively focused on the growth sectors of the
economy.” TWP provides a comprehensive
range of advisory, financial, securities research, and investment services to
corporate and private clients. TWP also
provides investment banking services to corporate clients.
4. TWP is currently licensed with the
Office as a broker-dealer, and has been so licensed since approximately
February 23, 1999.
5. This action concerns the time period of
July 1999 through 2001 (the "relevant period"). During that time, TWP engaged in both
research and investment banking ("IB") activities.
6.
During the relevant period, TWP employed research
analysts who provided research coverage of the issuers of publicly traded
securities. TWP’s equity research analysts
collected financial and other information about a company and its industry,
analyzed that information, and developed recommendations and ratings regarding
a company’s securities. TWP distributed
its research product directly to its own client base. TWP’s research was also distributed through
subscription services such as Thomson Financial/First
Call, Multex.com, Inc., and Zacks Investment Research (collectively referred to
as “Public Services”).
7.
From February 1999 to June 1999, TWP maintained a 4-tiered
ratings system: Strong Buy, Buy, Watch List, and Sell. In June of 1999, TWP renamed the Sell rating
to Underperform. In August 1999, TWP
renamed the Watch List rating to Market Perform so that its 4-tiered ratings
system was: Strong Buy, Buy, Market Perform, and Underperform. That rating system remained intact until
November 2001.
8.
TWP ratings were
heavily skewed towards “Buy” and “Strong Buy.”
For example, as of April 13, 2000, TWP covered approximately 230 stocks
with 89% being rated either “Buy” or “Strong Buy” (42% were rated “Strong Buy”
and 47% were rated “Buy”). In contrast,
there was only 1 stock rated “Underperform.”
As of January 18, 2001, TWP covered approximately 268 stocks, with 80%
being rated either “Buy” or “Strong Buy” (31% were rated “Strong Buy” and 49%
were rated “Buy”), but none rated “Underperform.”
9.
As set forth below, written
presentations prepared in connection with pitches for initial public offerings
(“IPOs”) often touted TWP’s favorable coverage of other issuers and included
research coverage as one of a number of services that TWP would provide in
“aftermarket” support of an issuer’s stock.
10.
Research analysts participated in
the pitch process for IPOs, secondary offerings and merger and acquisition work
that TWP sought to perform on behalf of publicly-traded clients and potential
clients. The analysts involved in the
pitch process sometimes included the same analysts who were providing or had
provided research coverage of the client or potential clients from whom TWP was
seeking investment banking business. In
written presentations prepared in connection with these pitches, TWP touted the
past research “support” it had provided to its client or potential client, and
included charts that tracked its coverage and ratings, and the issuer’s stock
price.
11.
TWP analysts considered prospective
investment banking business in determining whether to initiate or to continue
to provide research coverage for issuers.
TWP’s investment bankers participated in the evaluation of TWP research
analysts, and a portion of the TWP analysts’ compensation was tied to the
analysts’ success in helping TWP generate investment-banking business. TWP failed to disclose any of these facts to
its brokerage clients or to the general public.
12. TWP received at
least one payment from another broker-dealer as consideration for TWP’s
research coverage of a security. TWP failed
to disclose the payment or the amount thereof to its brokerage clients or to
the general public.
13.
On occasion, TWP paid other
broker-dealers to initiate or to maintain research coverage with respect to
issuers for which TWP acted as an underwriter.
The broker-dealers that TWP paid to initiate or to maintain research
coverage did not disclose that they had received consideration for their
research coverage of the securities.
C. TWP’S RESEARCH STRUCTURE CREATED
CONFLICTS OF INTEREST FOR RESEARCH
ANALYSTS
Research Analyst
Compensation Tied to Investment Banking Revenue
14.
TWP tracked investment banking
revenue attributable to research analysts.
TWP also tracked to research analysts the brokerage revenue generated
from stocks that the analysts covered.
During the relevant period, the amount of fees TWP generated from
investment banking deals attributed to an analyst accounted for at least five
percent of that analyst’s overall compensation.
Additionally, TWP used the brokerage commission revenue generated in the
stocks covered by TWP analysts as a factor in determining analysts’ total
compensation.
15.
During the relevant period, TWP compensated its
research analysts both directly and indirectly on the amount of investment
banking revenue they helped to generate.
Research analysts thus faced a conflict of interest between the
incentive to help win investment banking deals for TWP while being under an
obligation to conduct and publish objective research regarding those companies.
TWP’s Investment Bankers Evaluated TWP’s
Research Analysts and Helped Determine the Compensation They Received
16.
During the relevant period, TWP
organized research analysts and investment bankers into “Tiger Teams” along
industry groups such as telecommunications and software. Tiger Teams coordinated the efforts of
research and investment banking to identify new business opportunities.
17.
TWP investment bankers who worked
with a TWP research analyst on investment banking deals evaluated the research
analyst’s performance as part of an annual performance evaluation. That evaluation was considered in setting the
analyst’s compensation. This input from
investment bankers further indicated to research analysts the importance of
satisfying the needs of investment bankers and their clients and significantly
hampered the independence of research reports that the analysts issued.
TWP
Research Analysts Played Important Roles in “Pitches” To Win Investment Banking
Business, Promised Research Coverage for IPO
Clients, and Provided Coverage Immediately
Following the Quiet Periods
18.
During the relevant period, research
analysts played a pivotal role in winning investment banking business for
TWP. Once TWP’s investment banking
department decided to compete for a company’s investment banking business,
particularly for an IPO, research analysts played a critical role in obtaining
that business.
19.
One of a research analyst’s
significant responsibilities was to assist in TWP’s sales “pitch” where TWP
explained to a company or an issuer why it should select TWP to be the lead managing
underwriter for the offering or to be a member of an underwriting
syndicate. According to TWP’s October
2000 equity research job descriptions, vice president-level analysts’ duties
and responsibilities included “developing the ability to pitch and win
corporate finance mandates.” The job
description summary further stated that vice presidents “are building
industry-wide relationships that the Firm will monetize via a variety of
brokerage and capital market products.”
20.
The summary of TWP principal-level
analysts’ job description stated that they “have built industry-wide
relationships that the Firm can monetize via a variety of capital markets
products.” TWP principal-level analysts’
duties and responsibilities included:
Develop[ing]
a Research Franchise that generates $10-$15 MM+ of average annual revenues from
multiple revenue streams (Brokerage, CF, M&A, Private Equity) . . . [and]
position[ing] the Firm to pitch and win corporate finance mandates.
21.
The summary of TWP partner-level
analysts’ job description stated as well that they “have built industry-wide
relationships that the Firm can monetize via a variety of capital markets
products.” TWP partner-level analysts’
duties and responsibilities included:
Continually
develop[ing] and maintain[ing] a Research Franchise that generates $20-$30 MM
of average annual revenues from multiple revenue streams (Brokerage, Corporate
Finance, M&A, Private Equity) . . . [and] position[ing] the Firm to pitch
and win corporate finance mandates including lead managed transactions.
22.
In advocating retention of TWP,
research analysts provided material regarding their research to be included in
the pitch books presented to the company or issuer. They also routinely appeared with investment
bankers at the pitches to help sell TWP services to the potential client. TWP pitch books to potential clients included
representations about the role the research analyst would play if TWP obtained
the business. In describing the “Role of
Research,” the pitch book also provided a roadmap for the amount and type of
coverage that the research department would provide. Examples of analysts’
participation in the “pitch” process are described below.
Loudcloud
23.
Loudcloud, Inc., now known as
Opsware, is a company that provides business internet infrastructure
services. TWP participated as a member
of the underwriting syndicate in Loudcloud’s March 9, 2001 IPO. Loudcloud’s stock was quoted on the NASDAQ
National Market under the ticker symbol LDCL until August 2002, when the
company changed its name to Opsware.
Since the name change, the company’s stock has been quoted under the
ticker symbol OPSW.
24.
TWP’s relationship with Loudcloud
began in February 2000 when the then chairman and founder of Loudcloud
contacted a TWP partner and senior research analyst (“Loudcloud Senior
Analyst”). Thereafter, the Loudcloud
Senior Analyst and TWP investment bankers met with Loudcloud to discuss
potential financing for the company.
25.
Prior to Loudcloud’s IPO, the
Loudcloud Senior Analyst mentioned Loudcloud in a periodic industry report
dated June 19, 2000. TWP also invited
Loudcloud to attend its annual “Growth Forum” held in late June 2000. Thereafter, TWP solicited underwriting work
for Loudcloud’s IPO in a presentation made on or about August 16, 2000. During the presentation, TWP touted its
ability to provide “aftermarket support,” which included, in part, research
coverage. The presentation provided case
studies on two companies that TWP had covered.
The case studies highlighted the amount and types of research, i.e.,
reports specific to the particular company, periodic industry reports, and
white papers that TWP provided for these two companies, suggesting that TWP
would do the same for Loudcloud. TWP
also highlighted the fact that it mentioned Loudcloud in a June 19, 2000 TWP
report and that Loudcloud had attended TWP’s annual “Growth Forum” conference.
26.
The presentation included
biographical and professional information about the two TWP analysts who would
be covering the company along with a list of companies that they previously and
currently covered. The presentation also
touted TWP’s ability to communicate Loudcloud’s “story” through, in part, TWP’s
“all-star ranked research coverage.” In
a November 4, 2000, e-mail, the Loudcloud Senior Analyst boasted that
“Loudcloud is a deal that I won, I lead [sic] this pitch with [a TWP vice
president and junior research analyst].”
27.
On September 22, 2000 and February
9, 2001, TWP investment bankers and the research analysts who worked on the
Loudcloud IPO sent a memorandum to TWP’s Commitment Committee in support of
TWP’s participating in the Loudcloud IPO.
28.
On April 3, 2001, after TWP
participated as an underwriter in the Loudcloud IPO, the Loudcloud Senior
Analyst e-mailed senior Loudcloud management stating: “Gentlemen: this e-mail is to inform you that, as
promised during the Thomas Weisel Partners [sic] IPO pitch, I initiated written
research coverage on Loudcloud this morning – 25 days (to the hour) following
the pricing of the offering on March 8th. Our First Call note we will be posted shortly
and our +20 page written research report, that you reviewed this weekend and we
discussed changes to yesterday, is being sent to editorial and printing today.” TWP also provided research coverage of
Loudcloud in other periodic industry reports or notes during 2001. TWP’s Loudcloud research reports, notes, and
other industry publications discussing Loudcloud were distributed through
Public Services.
29.
Another example of analyst
participation in the pitch process is with respect to Gemplus International,
30.
TWP solicited underwriting work for
the Gemplus U.S. IPO in a presentation to company management on or about
September 15, 2000. In the presentation,
TWP touted its ability to provide research coverage from “multiple angles”
through reports specifically related to the company as well as regularly
published industry reports highlighting several companies. TWP also presented a case study of research
coverage it provided on another company, Verisign, Inc. On a chart depicting Verisign’s trade volume
and increasing stock price, TWP highlighted dates upon which TWP published
recommendations of Verisign’s stock. In
one instance, the presentation states, “12/21/99 TWP upgrades [Verisign] to a
strong buy. Stock jumps $35 in one day,”
suggesting that TWP could provide the same sort of coverage and results for
Gemplus.
31.
A TWP partner and senior research
analyst (“Gemplus Senior Analyst”) had previously developed a relationship with
Gemplus management and was largely responsible for TWP being selected as an
underwriter for Gemplus’ U.S. IPO. A TWP
vice-president and junior research analyst (“Gemplus Junior Analyst”) assisted
the Gemplus Senior Analyst in his research of the company. According to the lead TWP investment banker
on the Gemplus U.S. IPO, Gemplus, in selecting TWP as an underwriter, wanted
“to make sure that [the Gemplus Senior Analyst] will be the lead [analyst],
with [the Gemplus Junior Analyst] on the deal. . . .”
32.
A venture capital firm with whom TWP
had a business relationship also played a role in Gemplus awarding TWP with an
underwriting slot on the IPO. The
venture capital firm, Gemplus’ controlling shareholder, guaranteed TWP a
“minimum total fee of $3 million for being a member of the Gemplus underwriting
syndicate.”
33.
On November 21, 2000, the TWP
investment bankers, as well as the TWP research analysts who worked on the
Gemplus U.S. IPO, sent a memorandum to TWP’s Commitment Committee in support of
TWP’s participation in the Gemplus U.S. IPO.
According to this memorandum, the TWP analysts prepared financial models
after spending “extensive time with [the lead underwriter] and the company.”
34.
On January 3, 2001, the TWP analysts
visited the venture capital firm’s
35. On January 5, 2001, the
Gemplus Senior Analyst e-mailed Gemplus’ senior management, as well as partners
at the venture capital firm, stating: “Gentlemen: As promised, I am pleased to
send you this research note that was transmitted to First Call this
morning. This is our launch of research
coverage on Gemplus, 25 days to the hour, following the successful company
public offering in the
36. The Gemplus Senior
Analyst provided research coverage of the company until August 1, 2001. TWP’s Gemplus research reports, notes, and
other industry publications were distributed through Public Services.
Research Department Made Coverage Decisions Based Upon Investment
Banking Concerns
37.
TWP’s
equity research department also made coverage decisions based, in part, on
investment banking concerns. TWP
prepared research “Drop Lists” that detailed the institutional commissions
generated by the covered companies, the trading profit and loss, the names of
the institutional investors and venture capitalist firms who held stock in the
covered companies, and the banker feedback concerning whether to drop research
coverage. Explaining a January 2001
version of the research Drop List, TWP’s Chief Operating Officer of Investment
Banking (“COO of Investment Banking”), e-mailed TWP’s Head of Corporate
Finance, and TWP’s Director of Sales:
I’ve made
an attempt to get banking’s feedback on potential banking business for each of
these clients. We should also assess the
potential impact on affiliated venture capitalists for those companies we
decide to drop. . . I will be in touch to schedule a meeting for us to review
the list in more detail and provide specific recommendations to [TWP’s Chief
Operating Officer] and [TWP’s then acting Director of Research].
38.
With regards to the banker
feedback section of a February 2001 Drop List, reasons to “keep” research
coverage included: “recent IPO,” “M&A engagement,” “good banking client,”
“M&A prospects,” “multiple fee opportunity,” and “potential M&A” Reasons to “hold” coverage included: “waiting
for M&A fee (Jan 01),” and a named investor is “considering
investing.”
Stamps.com
39.
An example of TWP’s decision to drop
or effectively to cease research coverage is the case of Stamps.com, Inc., a
company that provided Internet postage services. Stamps.com conducted its IPO on June 24,
1999, and its stock has since been quoted on the NASDAQ National Market under
the ticker symbol STMP. TWP participated
as a member of the underwriting syndicate for the IPO.
40.
On July 21, 1999, a TWP partner and
senior research analyst (“Stamps.com Senior Analyst”) initiated research
coverage on Stamps.com with a “Buy” rating.
TWP continued its research coverage of Stamps.com in reports it issued
during 1999 and 2000. TWP also issued
other periodic industry reports or notes mentioning Stamps.com during the
relevant period. TWP’s Stamps.com
research reports, notes, and other industry publications discussing Stamps.com
were distributed through Public Services.
41.
The Stamps.com Senior Analyst
maintained a “Buy” rating on Stamps.com until October 29, 1999, the last date
on which he issued a research note on the company. On December 6, 1999, Stamps.com conducted a
secondary offering. TWP was again a
member of the underwriting syndicate for that offering.
42.
In late 1999, TWP transitioned
research coverage on the company from the Stamps.com Senior Analyst to a TWP
vice president and junior research analyst (“Stamps.com Junior Analyst”). On January 29, 2000, the Stamps.com Junior
Analyst initiated research coverage with a “Buy” rating. On February 7, 2000, Stamps.com acquired
another company and TWP provided Stamps.com with a fairness opinion regarding
the acquisition.
43.
The Stamps.com Junior Analyst
maintained his “Buy” rating on Stamps.com until September 19, 2000 when he
ceased publishing any additional research on the company. During the time period that he actively
covered the company, the Stamps.com Junior Analyst maintained a “Buy” rating on
Stamps.com despite the steady decline of the company’s stock price from $35.12
on January 27, 2000 to $6.00 on September 19, 2000.
44.
On November 27, 2000, the Stamps.com
Junior Analyst e-mailed a TWP partner and Director of East Coast Research (in
December 2000, this TWP partner became the acting Director of Research)
explaining reasons why TWP should “kill,” or discontinue, research coverage on
Stamps.com. The Stamps.com Junior
Analyst explained that: (1) Stamps.com was not “core” to the companies he was
then covering; (2) there was “no more [investment] banking [business] to be
done”; and (3) that there was “limited commission opportunity” as a market
maker in Stamps.com’s stock.
45.
With regard to the lack of
additional investment banking business, the Stamps.com Junior Analyst
explained in more detail that: (1) TWP had been paid for the
Stamps.com IPO, a follow-on offering, and a fairness opinion for a merger; (2)
Stamps.com had retained another investment banking firm to review the company’s
strategic options; and (3) contrary to his earlier belief, a Stamps.com
wholly-owned subsidiary was unlikely to do a 2001 IPO.
46.
The Stamps.com Junior Analyst also
explained the “sensitivities” associated with dropping coverage. Those “sensitivities” included the fact that
certain venture capitalists, who were also TWP clients, had investments in
Stamps.com. He advised his supervisor
that one venture capital firm “is a big [institutional] client and has owned
all the way down.” Despite these
“sensitivities,” the Stamps.com Junior Analyst pointed out to his supervisor
that the venture capitalists “hired [another investment banking firm] not us
for potential M&A trade” and that there would be “limited downside on
[Stamps.com] stock from cutting research
sponsorship.”
47.
On January 8, 2001, the acting
Director of Research, responded to the Stamps.com Junior Analyst’s November 27,
2000 e-mail with a number of edits and instructions to send the e-mail to other
senior managers of TWP’s Sales and Trading Department, Private Client
Department, and Corporate Finance for their “reactions” to the Stamps.com
Junior Analyst’s recommendation. Senior
TWP management did not object to dropping research coverage on Stamps.com and,
in response to the Stamps.com Junior Analyst’s e-mail, the head of TWP
Corporate Finance advised the Stamps.com Junior Analyst to “drop” coverage on
Stamps.com. However, on January 12,
2001, TWP’s COO of Investment Banking e-mailed the Stamps.com Junior Analyst
advising him that the head of the firm wanted him to “hold on to this stock for
now” but that he “shouldn’t feel that [he had] to do any work on it, just don’t
drop it.” The COO of Investment Banking
further explained that TWP had a number of venture capitalist backed stocks in
the Stamps.com sector and that the head of the firm “wants to manage this
relationship carefully.”
48.
The Stamps.com Junior Analyst did
not publish any research on Stamps.com after its last note on September 19,
2000. However, TWP never issued a note
that it was dropping coverage on Stamps.com.
Verisign
49.
Verisign, Inc. is a provider of
digital trust services that enable businesses and consumers to engage in
commerce and communications. Verisign’s
IPO was on January 29, 1998, and its stock has since been quoted on the NASDAQ
National Market under the ticker symbol VRSN.
TWP did not participate in the underwriting of this IPO.
50.
On June 25, 1999, TWP, through a
research report issued by a TWP partner and senior research analyst (“Verisign
Senior Analyst”), initiated research coverage on Verisign with a “Buy”
rating. TWP continued research coverage
of Verisign in reports issued during the relevant period. TWP also featured Verisign in other periodic
industry reports or notes during the relevant period. TWP’s Verisign research reports, notes, and
other industry publications discussing Verisign were distributed through Public
Services.
51.
In November 1999, TWP transitioned
coverage of Verisign from the Verisign Senior Analyst to a TWP vice president
and junior research analyst (“Verisign Junior Analyst”). The Verisign Junior Analyst maintained the
“Buy” rating on Verisign until December 21, 1999, when he upgraded his rating
to a “Strong Buy.” He maintained that
rating until January 25, 2001, when he downgraded Verisign’s rating to a
“Buy.” After the Verisign Junior Analyst
advised Verisign’s CEO that he was downgrading the stock, the Verisign CEO
called a TWP partner and demanded that TWP fire the Verisign Junior Analyst. On February 2, 2001, TWP terminated the
Verisign Junior Analyst, along with a number of other research analysts, and
transitioned Verisign coverage.
52.
On April 16, 2001, the Verisign
Senior Analyst re-initiated research coverage on Verisign with a “Buy”
rating. The Verisign Senior Analyst also
e-mailed a number of TWP investment bankers a copy of his research report and
advised them that he had “spoken at length with [Verisign’s CFO and CEO] re:
possible TWP banking at Verisign, they will make available last week of May for
us to pull together a presentation they have asked me to co-ordinate. Please advise who wants to be involved.” On April 27, 2001, the Verisign Senior
Analyst upgraded Verisign’s rating to a “Strong Buy.”
53.
The Verisign Senior Analyst and TWP
investment bankers prepared a pitch presentation for Verisign management. On May 29, 2001, the Verisign Senior Analyst
and TWP investment bankers drove to Verisign’s offices in
54.
The Verisign Senior Analyst
continuously covered Verisign from April 16, 2001 to September 10, 2001,
despite his participation in TWP’s pitch to Verisign for investment banking
business. TWP transitioned research
coverage of Verisign on October 26, 2001, from the Verisign Senior Analyst to another
analyst who then initiated coverage with a “Buy” rating.
D. TWP
ISSUED RESEARCH REPORTS ON THREE COMPANIES THAT WERE NOT BASED ON PRINCIPLES OF
FAIR DEALING AND GOOD FAITH AND DID NOT PROVIDE A SOUND BASIS FOR EVALUATING
FACTS, CONTAINED EXAGGERATED OR UNWARRANTED CLAIMS ABOUT THESE ISSUERS, AND/OR
CONTAINED OPINIONS FOR WHICH THERE WAS NO REASONABLE BASIS
InfoSpace
55.
InfoSpace, Inc., is a diversified technology and
services company. TWP was an underwriter
for InfoSpace’s March 30, 1999 secondary offering. On April 1, 1999, a TWP partner initiated
coverage of InfoSpace with a “Buy” rating.
TWP maintained its “Buy” rating on InfoSpace through December 7,
1999. Shortly thereafter, TWP
transitioned coverage of InfoSpace from a TWP partner to a vice president and
junior research analyst (“InfoSpace Research Analyst”). InfoSpace’s stock trades on the NASDAQ National Market under the
ticker symbol INSP.
56.
In January 2000, the InfoSpace Research Analyst initiated his coverage
on InfoSpace with a “Buy” rating, which he maintained until he lowered it to
“Market Perform” in July 2001. During
that time, the price of InfoSpace’s stock declined from $43 to about $2. Despite his “Buy” rating, as early as January
2001 and continuing over the next four months, the InfoSpace Research Analyst
had serious doubts about InfoSpace’s business prospects and was privately
telling others that the stock was not a buy and to “get out of” InfoSpace.
57.
In January 2001, the TWP InfoSpace Research Analyst submitted a draft
InfoSpace research note to a TWP supervisory analyst for review prior to
publication. In the draft report, the
InfoSpace Research Analyst recommended that investors await certain information
from the company “before considering purchasing shares of INSP.” The supervisory analyst edited the report
suggesting that the InfoSpace Research Analyst remove the language above, and
advised him that “if the stock is BUY rated, we cannot tell investors not to
buy the stock.” Rather than adjust the
buy rating, the InfoSpace Research Analyst issued his report on January 11,
2001 with the edits the supervisory analyst suggested.
58.
The InfoSpace Research Analyst privately e-mailed others explaining that
he did not think the stock should be rated a “Buy.” For example, on January 22, 2001, the
InfoSpace Research Analyst explained to a TWP salesperson: “I can’t frickin believe that I still have
[InfoSpace] as a buy rating. I need a
drink.” In an e-mail later that same day
to a TWP research associate who was working with him, the InfoSpace Research
Analyst explained:
while I don’t want to piss off [InfoSpace’s CEO] I also
don’t care that much . . . I think INSP is dead $ and that upside catalysts are
limited. I don’t talk on the stock and
the buy rating only gives me access to mgmt for info on wireless.
59.
Within minutes of sending this e-mail to his assistant, the InfoSpace
Research Analyst e-mailed TWP’s Head of the Product Management Group, TWP’s
Director of Sales and TWP’s acting Director of the Research Department about
changes in InfoSpace’s management which indicated to the InfoSpace Research
Analyst that the company’s ability to execute a wireless plan was “probably
diminishing.” The InfoSpace Research
Analyst further explained that the:
heart of
the new mgmt team is out and we are left with the same mgmt team that was in
place back in April. I did not have
confidence in that previous mgmt team's ability to take the company to the next
level and I remain skeptical on the company's near term outlook now. I may be calling the bottom and [InfoSpace’s
CEO] will be pissed, but this stock is
not a buy.
60.
Later that same day, the InfoSpace
Research Analyst, responding to some of the acting Director of Research's
questions, stated:
I do not
think INSP falls much, but I cannot
comprehend recommending people buy this . . . would like to swap out of INSP
and into [Openwave Systems (“Openwave”), an InfoSpace competitor]. . . I have
been verbally saying to get out of INSP . . . basically can sit here
with a buy and never speak on stock or I can downgrade. I do not want to piss of [InfoSpace’s CEO],
but I should have downgraded stock long ago.
61.
On January 23, 2001, the InfoSpace Research Analyst sent a draft copy of
a new research note with a “Buy” rating on InfoSpace to a supervisory analyst
for review. The draft research note
stated, in part: “we recommend that investors remain cautious on the stock . .
. .” The supervisory analyst e-mailed
the InfoSpace Research Analyst, stating: “we cannot tell investors to ‘remain
cautious’ on a BUY-rated stock.” The
InfoSpace Research Analyst edited the note and deleted the “remain cautious”
language as the supervisory analyst suggested and TWP published the note that
day.
62.
Later in the morning on January 23, the InfoSpace Research Analyst sent
e-mails to a number of people explaining that he should have downgraded the
stock. He first e-mailed his assistant,
explaining: “I saw that some people downgraded
INSP this morning . . . I want the stock to increase before we downgrade.” The InfoSpace Research Analyst next explained
to TWP’s head of sales: “I never did the
downgrade. I missed it weeks ago. Wanted to speak with mgmt first . . . also
I’m hoping shares rebound over the next few weeks. . . then I’ll
downgrade.” The InfoSpace Research
Analyst also e-mailed a TWP investment banker:
“Yea. I should have downgraded INSP last night. I want to have a call
with [InfoSpace’s CEO] and tell him I'm going to do it before I do it.”
63.
From January 29 through February 13,
2001, the InfoSpace Research Analyst continued privately to tell the sales and
trading departments, and investors with whom he spoke, that he recommended
swapping out of InfoSpace and into Openwave.
For example, on January 29, the InfoSpace Research Analyst, in an e-mail
intended for TWP internal use only, wrote to the sales and trading departments
that InfoSpace’s “2001 guidance will be negative. Swap into Openwave.” That same morning, the InfoSpace Research
Analyst also e-mailed TWP’s head of product management, asking him to mention
during the morning call with the sales and trading departments that investors
should swap out of InfoSpace and into Openwave.
64.
While privately telling TWP sales
and trading personnel and investors with whom he spoke to swap out of
InfoSpace, the InfoSpace Research Analyst nonetheless published yet another
company research note on January 30, 2001 with a “Buy” rating. Later that morning, the TWP InfoSpace
Research Analyst responded as follows to an e-mail from an individual at
another broker-dealer that noted another broker-dealer was cutting its earnings
per share estimates on InfoSpace: “We
did the same. Although I still think
that ’01 numbers are complete bull-shit. . . .”
65.
On February 5, 7, and 11, 2001, the TWP InfoSpace Research Analyst again
sent e-mails to TWP’s sales and trading departments, stating in part: (1) “Swap from
INSP to [Openwave ]”; (2) “We believe accounts should wait on the sidelines
until the company gives greater clarity on its revised strategic plan”; and (3)
“we are still adopting a wait and see attitude until we gain greater confidence
that the company will successfully manage the transition from its consumer
services business.” Despite his private
comments to the contrary, on February 13, 2001, the InfoSpace Research Analyst issued
a research note in which he reiterated his “Buy” rating.
66.
From February 13, 2001 to April 25,
2001, the InfoSpace Research Analyst did not issue any new research reports or
notes on InfoSpace, and the stock price declined more than 20%, from $5.00 to
$3.91. On April 25, the InfoSpace Research
Analyst e-mailed the Deputy Director of Research (on April 16, 2001, a new
Director of Research began working at TWP and the acting Director of Research
became the Deputy Director of Research), explaining:
At some point we need to discuss this stock. They report today post-close. I have never bothered to downgrade the stock,
but made comments to swap into [an InfoSpace competitor]. I think that any [revenue opportunity] for
TWP (i.e. banking) has fallen apart so actions can be taken.
67.
The Deputy Director of Research
responded to the InfoSpace Research Analyst and asked in part, “What are our
commissions in INSP? What is it’s
[sic]current market cap?” The Deputy
Director of Research also told the InfoSpace Research Analyst that he would run
the potential drop in coverage by other TWP department directors to “build a
consensus course of action.” The
InfoSpace Research Analyst responded to the Deputy Director of Research
explaining that TWP’s commissions were:
$145k
to-date ($140 in jan/feb) when we told people to swap into [the InfoSpace
competitor]. We have very strong
relationships [a TWP partner and senior research analyst and InfoSpace’s CEO].
. . but I do not get the sense that the bankers care anymore. Maintaining coverage in [short term] is not a
big problem since I’ve got the quarterly report ‘automated’ . . . thanks.
68.
The Deputy Director of Research
e-mailed a number of TWP department directors and other research analysts to
ascertain if they had any problem with dropping research coverage or whether
other analysts wanted to pick up coverage of InfoSpace. The other TWP department directors did not
object to dropping coverage and none of the other TWP research analysts wanted
to pick up coverage of InfoSpace. On
April 26, 2001, the InfoSpace Research Analyst issued another research note on
InfoSpace and reiterated his “Buy” rating on the company.
69.
On May 2, 2001, the Deputy Director
of Research e-mailed the InfoSpace Research Analyst as follows:
Engineer
whatever your desired outcome is on this one.
If you want to drop [InfoSpace], I will support you. No interest in it
from the media guys or consumer guys [i.e., TWP research analysts], and [the
head of trading] doesn’t care. If you
like the insight and get some trading commissions and it helps your franchise,
then keep it. If it is a distraction
that doesn’t help your impact with accounts then . . . Thanks.
70.
On May 30, 2001, the InfoSpace
Research Analyst, apparently responding to an e-mail from another one of his
assistants, stated: “I agree re: INSP. I
hate having it as a buy, but nothing I can do now . . . .” The InfoSpace Research Analyst maintained his
“Buy” rating on InfoSpace until July 25, 2001 when he finally downgraded the
stock to a “Market Perform” rating. He
published his last research note on InfoSpace on November 26, 2001, again with
a “Market Perform” rating. In this
report, the InfoSpace Research Analyst also explained that he was discontinuing
his research coverage of InfoSpace.
Level 3
Communications
71.
Level 3 Communications,
Inc. is a telecommunications and information services company that operates an
advanced international facilities-based communications network based on
Internet Protocol technology. Level 3’s
stock trades on the NASDAQ National Market under the ticker symbol LVLT.
72.
TWP commenced
its research coverage of Level 3 with a “Buy” rating and a year-end $100 price
target on September 15, 2000, when the stock opened at $78.25 per share. TWP maintained its “Buy” rating on Level 3
even as the stock price declined from $78.25 per share to $5.97 per share on
June 18, 2001. Not until June 19, 2001
did TWP downgrade its rating of Level 3 to “Market Perform.” TWP continued to cover Level 3 until October
26, 2001, when it discontinued coverage.
TWP re-initiated coverage on Level 3 on January 20, 2004.
73.
On May 21, 2001,
when TWP rated Level 3 a “Buy” and its shares were trading at $13.06, another
firm covering Level 3 lowered its rating from “Strong Buy” to “Market
Underperform.” TWP’s Deputy Director of
Research, who was aware of the downgrade, e-mailed the TWP vice president and
research analyst covering the stock (“Level 3 Analyst”) about the “Buy” rating
stating: “doesn’t sound like a buy.” In
a series of e-mails that day, the Level 3 Analyst responded to the inquiries
concerning the “Buy” rating and explained that he wanted to delay the downgrade
to ensure that Level 3 executives attended a conference that TWP sponsored:
·
It isn’t [a buy].
I’m waiting until after the conference [TWP’s annual “Growth Forum” conference],
and before the next quarter to downgrade.
If we do it now it won’t look as aggressive as if we do it in front of
their quarter. So we’ll probably
downgrade around the beginning of July.
The stock isn’t going to make a significant move until then. We expect it will probably trade in the
mid-teens. We’re expecting the stock to
move down into single digits after another “average” quarter, and possible
downward revision in estimates.
·
There is also the issue of wanting to ensure that
they come to our conference and speak on our panel. If I downgrade right now they will assuredly
pull from our conference and we can’t afford that.
·
We have always maintained the stock is a speculative
buy. We’ve been very clear that there
were issues on this name, but that as long as you knew what you were getting
into it was a good stock to trade. Just
recently it has become very clear that the company [is] settling into a single
market company, and the issues haven’t gone away. In my commentary to the clients I am
positioning it as a name that they can still trade, but one that will probably
see a downward trend before a significant upward movement.
74.
On May 31, 2001, in response to an
e-mail from TWP’s Director of Communications Services Research advising that he
had just had a conversation with a firm that was “very negative on level3,” the
Level 3 Analyst stated:
we have
been negative on the name as well. I’ve
basically been telling our clients that it is a great short. They’re on the verge of laying off almost
1,000 people (not yet announced yet).
They are still trading at a premium valuation to Williams and 360. I haven’t lowered the rating mainly because I
need them to show up at our conference.
If I lower to a [Market Perform] I guarantee they won’t attend. We’ll lower the rating after the conference,
in front of the quarter.
75.
Despite the Level 3 Analyst’s view of the company
expressed in the May 21 and 31, 2001, e-mails, he maintained his “Buy” rating
in the stock for almost another month, until he finally downgraded the stock to
“Market Perform” on June 19, 2001.
Sprint FON
Group
76.
Sprint FON Group
is comprised of Sprint’s wireline telecommunications operations, including long
distance, local phone, product distribution and directory publishing. Sprint FON Group’s stock trades on the NYSE
under the ticker symbol FON.
77.
On June 13, 2001, before initiation
of coverage and the announcement of a rating, the TWP vice president and junior
research analyst assigned to cover the stock (“FON Research Analyst”) attended
a meeting at FON’s headquarters with members of the FON management. Following this meeting, the FON Research
Analyst e-mailed the Director of Communications Services Research, stating:
this is a
market perform company. No 2 ways about
it. However, I’m aware of the conflicrt
[sic] that is arising due to a better than average probability of our getting
on an FON convert deal. Need to speak to
you about the rating. We could go out
with a Buy based on our belief that they are going to accomplish a couple of
things, and then explain that failure to do so will cause us to downgrade. We’re protected in that case. Let’s talk tomorrow.
78.
On June 19, 2001, TWP initiated coverage of FON with
a “Buy” rating. In that report, TWP did
not disclose that one reason that it had made a “Buy” recommendation was the
fact that TWP hoped to obtain investment banking business from Sprint.
79.
Between
1999 and 2001, TWP received payment from the proceeds of
at least one underwriting to compensate the firm for services that included
publishing research on the issuer.
Despite having an obligation to do so, TWP failed to disclose in research
reports or elsewhere that it received the payment, in part, as compensation for
issuing the reports.
80.
In August 1999, Hotjobs.com, Ltd.,
conducted an IPO for which another broker-dealer acted as lead
underwriter. TWP was not included in the
syndicate for the Hotjobs IPO. Although
not a member of the original syndicate, TWP did act as an underwriter for a
Hotjobs.com secondary offering that took place on November 10, 1999.
81.
In connection with the Hotjobs IPO,
the lead underwriter for the Hotjobs IPO made a payment of $40,000 to TWP by a
check dated November 4, 1999. The lead
underwriter’s records concerning the IPO indicate that the lead underwriter
made the payment in settlement of a “guaranteed” selling concession to be paid
in either stock or cash. The lead
underwriter’s records indicate that it guaranteed the selling concession to TWP
in consideration of the fact that “[a TWP research partner] will pick up
research.” TWP did not disclose or cause
to be disclosed the fact of this payment.
82.
On September 9, 1999, TWP, through a
research report issued by the TWP research partner, initiated research coverage
on Hotjobs.com with a “Buy” rating. TWP
continued its research coverage concerning Hotjobs.com in reports it issued
during 1999 and 2000. TWP upgraded
Hotjobs.com to a “Strong Buy” on February 16, 2000.
83.
TWP also provided research coverage
to Hotjobs.com in other publications during 1999 and 2000. TWP’s Hotjobs.com research reports, notes,
and other publications were distributed through Public Services.
84.
TWP did not disclose that it had
received consideration, or the amount thereof, for its research or other
publications concerning Hotjobs.com in any of its publications concerning
Hotjobs.com.
F. TWP
FAILED TO ENSURE PUBLIC DISCLOSURE OF PAYMENTS IT MADE FROM THE PROCEEDS OF
UNDERWRITINGS TO BROKERAGE FIRMS TO ISSUE RESEARCH COVERAGE REGARDING ITS
INVESTMENT BANKING CLIENTS
85.
During the relevant period, TWP paid portions of
certain underwriting proceeds to other brokerage firms to initiate or continue
research coverage on issuers for whom TWP served as lead or co-manager.
TWP knew that these payments were, in part, for research. TWP did not take steps to ensure that the
brokerage firms it paid to initiate or continue coverage of its investment
banking clients disclosed that they had been paid to issue such research. Further, TWP did not disclose or cause to be
disclosed in offering documents or elsewhere the fact of or reason for such
payments.
Arena
Pharmaceuticals
86.
In June
2001, TWP acted as lead underwriter for a secondary offering of securities by
Arena Pharmaceuticals, Inc. In
connection with that underwriting, TWP made payments totaling $325,000 to three
broker-dealers in consideration of their providing research coverage of Arena
Pharmaceuticals stock. The check stub
for each of the payments described the payment as “Research Fees for Arena
Pharmac.” TWP did not ensure these
payments were disclosed to the public by the broker-dealers in their published
reports on Arena Pharmaceuticals.
Proxicom
87.
In
October 1999, TWP acted as lead underwriter for a secondary offering of
securities by Proxicom, Inc. In
connection with that underwriting, TWP made payments totaling $50,000 to two
firms in consideration of those firms providing research coverage concerning
Proxicom securities. The check stub for
each of those payments indicated that the check was in consideration of
“Research Proxicom.” TWP did not ensure
these payments were disclosed to the public by the broker-dealers in their
published reports on Proxicom. TWP included
another $25,000 for payment to a third firm in its expense budget for the
Proxicom underwriting syndicate.
However, TWP did not pay that firm.
TWP’s accounting records indicate the payment was “held” until that firm
“start[ed] research coverage.”
G. TWP FAILED TO SUPERVISE ADEQUATELY ITS RESEARCH ANALYSTS AND INVESTMENT BANKING PROFESSIONALS
88.
During the relevant period, TWP’s
management failed to monitor adequately the activities of the firm’s research
and investment banking professionals to ensure compliance with NASD and NYSE
rules and the federal securities laws.
Among other things, this failure to supervise gave rise to and
perpetuated the above-described violative conduct.
III.
CONCLUSIONS
OF LAW
1.
The Office has jurisdiction over this matter pursuant to the Act.
2.
The Securities
Administrator finds the following relief appropriate and in the public
interest.
3. The
Securities Administrator finds that the above conduct is in violation of
sections 10313(1)(G) and 10313(1)(J) of the Act.
On the basis of the Findings of Fact, Conclusions of Law, and TWP’s
consent to the entry of this Order, for the sole purpose of settling this
matter, prior to a hearing and without admitting or denying any of the Findings
of Fact or Conclusions of Law:
IT IS HEREBY ORDERED:
1.
This Order concludes the Investigations by the Office and any other action that the Office could commence under the Act on behalf of the State of Maine as
it relates to TWP, or its affiliates, or the current or former directors,
officers or employees of TWP or its affiliates arising from or relating to the
subject of the Investigations, provided however, that excluded from and not
covered by this paragraph 1 are any claims by the Office arising from or relating to enforcement of the “Order”
provisions contained herein.
2.
TWP will CEASE
AND DESIST from engaging in acts in violation of sections 10313(1)(G) and
10313(1)(J) of the Act and will comply with the Act
and will comply with the undertakings of Addendum A, incorporated herein by
reference.
3.
If payment is not made by TWP or if TWP defaults in
any of its obligations set forth in this Order, the Securities Administrator may vacate this Order, at her sole
discretion, upon 10 days notice to TWP and without opportunity for administrative
hearing and TWP agrees that any statute of limitations applicable to the
subject of the Investigation and any claims arising from or relating thereto
are tolled from and after the date of this Order.
4.
This Order is not intended by the Securities Administrator to subject
any Covered Person to any disqualifications under the laws of any state, the
District of Columbia or Puerto Rico (collectively, “State”), including, without
limitation, any disqualifications from relying upon the State registration exemptions
or State safe harbor provisions.
"Covered Person" means TWP, or any of its officers, directors,
affiliates, current or former employees, or other persons that would otherwise
be disqualified as a result of the Orders (as defined below).
5.
The SEC Final Judgment, the NYSE Stipulation and
Consent, the NASD Letter of Acceptance, Waiver and Consent, this Order and the
order of any other State in related proceedings against TWP (collectively, the
“Orders”) shall not disqualify any Covered Person from any business that they
otherwise are qualified, licensed or permitted to perform under applicable law
of the State of Maine and any
disqualifications from relying upon this state’s registration exemptions or
safe harbor provisions that arise from the Orders are hereby waived.
6.
Nothing in this Order shall be construed as an
admission or finding of fraud.
7.
For any person or entity not a
party to this Order, this Order does not limit or create any private rights or
remedies against TWP including, without limitation, the use of any e-mails or
other documents of TWP or of others regarding research practices or limit or
create liability of TWP or limit or create defenses of TWP to any claims.
7. Nothing herein shall
preclude the State of Maine, its
departments, agencies, boards, commissions, authorities, political subdivisions
and corporations, other than the Office and
only to the extent set forth in paragraph 1 above, (collectively, “State
Entities”) and the officers, agents or employees of State Entities from asserting
any claims, causes of action, or applications for compensatory, nominal and/or
punitive damages, administrative, civil, criminal, or injunctive relief against
TWP in connection with certain research and/or banking practices at TWP.
8. TWP agrees not to take any action or to
make or permit to be made any public statement denying, directly or indirectly,
any finding in this Order or creating the impression that this Order is without
factual basis. Nothing in this paragraph
affects TWP’s (i) testimonial obligations or (ii) right to take factual or
legal positions in defense of litigation or in defense of other legal
proceedings in which the Securities Administrator is not a party.
9. This Order shall be binding upon TWP
and its successors and assigns. Further,
with respect to all conduct subject to Paragraph 2 above and all future
obligations, responsibilities, undertakings, commitments, limitations,
restrictions, events, and conditions, the terms “TWP” and “TWP’s” as used
herein shall include TWP’s successors and assigns (which, for these purposes,
shall include a successor or assign to TWP’s investment banking and research
operations, and in the case of an affiliate of TWP, a successor or assign to
TWP’s investment banking or research operations).
V. MONETARY
SANCTIONS
IT IS FURTHER ORDERED, that:
As a result of the Findings of Fact and Conclusions
of Law contained in this Order, TWP shall pay a total amount of twelve million five
hundred thousand dollars ($12,500,000).
This total amount shall be paid as specified in the SEC Final Judgment
as follows:
1. Five million dollars ($5,000,000) to
the states (50 states, plus the
2. Five million dollars ($5,000,000) as
disgorgement of commissions and other monies as specified in the SEC Final Judgment;
3. Two million dollars five hundred
thousand dollars ($2,500,000) to be used for the procurement of independent
research, as described in the SEC Final Judgment;
TWP agrees that it shall not seek or accept, directly or indirectly,
reimbursement or indemnification, including, but not limited to payment made
pursuant to any insurance policy, with regard to all penalty amounts that TWP
shall pay pursuant to this Order or Section II of the SEC Final Judgment,
regardless of whether such penalty amounts or any part thereof are added to the
Distribution Fund Account referred to in the SEC Final Judgment or otherwise
used for the benefit of investors.
TWP further agrees that it shall not claim, assert, or apply for a tax
deduction or tax credit with regard to any state, federal or local tax for any
penalty amounts that TWP shall pay pursuant to this Order or Section II of the
SEC Final Judgment, regardless of whether such penalty amounts or any part
thereof are added to the Distribution Fund Account referred to in the SEC Final
Judgment or otherwise used for the benefit of investors. TWP understands and acknowledges that these
provisions are not intended to imply that the Securities Administrator would agree that any other amounts TWP
shall pay pursuant to the SEC Final Judgment may be reimbursed or indemnified
(whether pursuant to an insurance policy or otherwise) under applicable law or
may be the basis for any tax deduction or tax credit with regard to any state,
federal or local tax.
VI. GENERAL PROVISIONS
This Order and any dispute related
thereto shall be construed and enforced in accordance with, and governed by,
the laws of the State of
TWP enters into this Consent Order
voluntarily and represents that no threats, offers, promises, or inducements of
any kind have been made by the Office or any member, officer, employee,
agent, or representative of the Office to induce TWP to enter into this Consent
Order.
This Consent Order shall become
final upon entry.
Dated
this 29th day of March, 2005
By: s/Christine A. Bruenn
Christine
A. Bruenn
Securities Administrator
State
of
CONSENT TO ENTRY OF
ADMINISTRATIVE ORDER BY TWP
1.
TWP hereby acknowledges that it
has been served with a copy of this Order, has read the foregoing Order, is
aware of its right to a hearing and appeal in this matter, and has waived the
same.
2.
TWP admits the jurisdiction of
the State of Maine Office of Securities (the “Office”), neither admits nor
denies the Findings of Fact and Conclusions of Law contained in this Order; and
consents to entry of this Order by the Securities Administrator as settlement
of the issues contained in this Order.
3.
TWP states that no promise of
any kind or nature whatsoever was made to it to induce it to enter into this
Order and that it has entered into this Order voluntarily.
4.
TWP understands that the Office may make such public announcement concerning this agreement and the
subject matter thereof as the Office may deem appropriate.
David Baylor
represents that he is Chief Administrative Officer of TWP and that, as such,
has been authorized by TWP to enter into this Order for and on behalf of TWP.
Dated this 17th day of March,
2005
Thomas Weisel Partners, LLC
By: [signature]
Title: Chief Administrative Officer
SUBSCRIBED AND SWORN TO before me this
17th day of March, 2005.
[signature]
Notary Public My
Commission expires: 9/30/07