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In its investigation, NASD found that Sanford Bernstein, a subsidiary of Alliance Capital Management L.P., had favorable ratings on Morgan Stanley and Lehman Brothers securities that remained in effect while its research analyst, Hintz, was selling his own shares in the two companies, a violation of NASD Rules prohibiting trading contrary to an analyst's recommendation. Hintz also engaged in transactions in six securities held in a discretionary personal account that were contrary to his then-current recommendations.
The fines represent the largest NASD has imposed to date for violations of its new research analyst conflict of interest rules, which were first approved by the SEC on May 10, 2002 and went into effect beginning July 9, 2002.
"NASD's research analyst conflict of interest rules are designed to give customers confidence that analysts' stock recommendations are not biased due to any financial self-interest of the analyst," said James S. Shorris, Acting head of Enforcement. "Inconvenience or expense does not excuse non-compliance with NASD's rules against analysts trading contrary to their research recommendations."
NASD found that Hintz, a high profile analyst covering financial services companies, held a substantial amount of stock in Lehman Brothers and options to purchase stock in Morgan Stanley that he received as compensation when he served as the Chief Financial Officer and Treasurer, respectively, at those firms. Hintz's Morgan Stanley options were set to expire in January 2005. NASD found that Hintz wanted to sell his holdings in both companies to realize the substantial gain in the value of the securities and to diversify his portfolio. NASD rules, however, prohibit an analyst from effecting stock transactions contrary to the analyst's current recommendations; Hintz had favorable ratings on both companies at the time.
In 2004, Sanford Bernstein - at Hintz's request - unsuccessfully sought an exemption from the rule prohibiting the sales, arguing that Hintz's circumstances constituted a "hardship" and that he should be allowed to sell his holdings. Thereafter, Sanford Bernstein developed a plan - approved by the firm's legal and compliance department and senior management - that it believed would allow Hintz to sell his holdings in Morgan Stanley and Lehman Brothers without violating NASD rules. Under this plan, Hintz issued what were purported to be his "final" reports on Morgan Stanley and Lehman on Dec. 23, 2004. Those reports rated the two companies "outperform" (the firm's highest rating) and "market-perform," respectively, and purportedly "terminated" coverage, while indicating that Hintz intended to resume coverage in February 2005 after selling all of his holdings in both companies. The reports further stated that the only "alternative" open to Hintz to allow him to sell his stock was to "terminate" coverage. One of the reports emphasized Hintz's purported dilemma by quoting Joseph Heller's Catch-22: "That's some catch, that Catch-22." To the contrary, Hintz did not have to sell his holdings and could have continued to hold his Morgan Stanley and Lehman Brothers securities, using other funds to pay for the costs of exercising his Morgan Stanley options.
Sanford Bernstein's plan did not comply with NASD rules. There was no bona fide termination of coverage because the firm intended to resume coverage of both stocks shortly after Hintz's stock sales were complete. The investment recommendations on both companies therefore remained in force, despite the purported "termination," and the stock sales in January 2005 violated NASD rules.
NASD also found that Hintz violated NASD rules as a result of numerous stock transactions in a discretionary brokerage account maintained at a domestic trust company. Sanford Bernstein, which received copies of the account statements, failed to supervise the activity in the discretionary account with a view towards preventing the violations. The account held securities in six companies that Hintz covered. Between August 2002 and January 2004, Hintz's discretionary account engaged in 27 transactions in those securities that were contrary to his ratings. Also, 39 transactions were executed in the account either 30 days before or five days after Hintz published a research report on the company, thus violating NASD rules prohibiting transactions during a proscribed blackout period. In addition, between August 2002 and December 2003, Sanford Bernstein and Hintz did not disclose his holdings in these six securities in 60 research reports, as required by NASD rules.
In connection with these settlements, Sanford Bernstein and Hintz neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2005, members of the public used this service to conduct more than 4.3 million searches for existing brokers or firms and requested more than 194,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.
("Copyright 2005 National Association of Securities Dealers, Inc.")
