The Commission's complaint alleges that Robertson Stephens violated NASD Conduct Rules that prohibit profit sharing in customer accounts and unjust or inequitable conduct, as well as books and records requirements of the federal securities laws. In settlement of this matter, and without admitting or denying the allegations in the complaint, Robertson Stephens has agreed to pay a total of $28 million to resolve the Commission's action and a related action brought by the NASD. The firm also has agreed to be enjoined from future violations of the NASD rules and books and records provisions described above. The $28 million payment is composed of $23 million in disgorgement of improper gains and $5 million in civil penalties.
In a separate case, the Commission filed a civil action against Paul Johnson, 42, a former managing director and senior research analyst at Robertson Stephens for issuing fraudulent research reports. The Commission alleges that Johnson issued research reports and made public statements regarding mergers proposed by two public companies in which he failed to disclose that he had conflicts of interest because he owned stock that, upon completion of each of the mergers, would yield enormous financial windfalls for Johnson. The Commission further alleges that, in 2001, Johnson issued false and misleading "buy" recommendations on another public company that were inconsistent with his privately held belief. In connection with the research reports, the Commission instituted and simultaneously settled administrative proceedings against Robertson Stephens. The Commission found that Robertson Stephens published materially misleading research reports in violation of Section 15(c) of the Securities Exchange Act of 1934 and Exchange Act Rule 15c1-2(b), and Robertson Stephens failed reasonably to supervise a research analyst with a view toward preventing violations of the antifraud provisions of the federal securities laws arising from undisclosed conflicts of interest caused by the analyst's personal investments. The order also found that Robertson Stephens failed to preserve e-mails for the required three-year period and/or failed to preserve its e-mails in an accessible place for two years and failed promptly to furnish e-mails to the Commission. The Commission censured Robertson Stephens and ordered the firm to pay disgorgement, including prejudgment interest, of $885,000 and a penalty of $4,115,000, for a total of $5 million. Robertson Stephens consented to the entry of the order against it without admitting or denying the findings contained in the order.
Profit Sharing in 'Hot' IPOs
In the IPO matter, the Commission filed a civil action against Robertson Stephens in U.S. District Court for the District of Columbia, alleging:
In 1999 and 2000, Robertson Stephens allocated IPO shares to certain institutional accounts that shared their IPO profits with the firm by paying unusually large commissions on secondary trades in highly liquid, exchange-traded securities. In some instances, these accounts paid back commissions to Robertson Stephens that were over 4,000% higher than the commissions customarily paid by institutions. For example, instead of a typical commission of $.06 per share on secondary trades, these institutional accounts paid Robertson Stephens commissions ranging up to $2.50, with a small number of trades over $2.50.There was no economic purpose for these commission-generating secondary trades, which were typically executed the day before the IPO, the day of the IPO, and shortly after the IPO. Indeed, some of the accounts engaged in offsetting trades, where they purchased or sold securities through Robertson Stephens and at the same time executed the other side of the trade through another brokerage firm. Although the purchase and sale often were executed at a similar price, payment of the significant commission to Robertson Stephens resulted in a net loss to the account.
Robertson Stephens' wrongful conduct mainly involved certain hedge funds and other small institutional accounts that did not generate enough ordinary commission business under Robertson Stephens allocation practices to warrant the IPO allocations they wanted or received. Taking advantage of the high demand for IPO shares during this period, certain Robertson Stephens personnel pressured these institutional accounts to increase their business in secondary trades with Robertson Stephens in order to raise their "rank" to get IPO allocations. These accounts increased their rank and shared profits through the payment of the unusually large commissions on their secondary trades with Robertson Stephens.
Robertson Stephens also improperly shared in the profits of some of its large retail accounts serviced by its Financial Services Department (FSD). Some FSD brokers, who had discretion in allocating IPO shares to their customers, reminded their customer accounts about IPO profits and also asked them to engage in trades in return. These retail accounts shared profits by paying unusually high commissions on other secondary trades or high markdowns when they sold their IPO shares back to Robertson Stephens.
Certain Robertson Stephens management and syndicate personnel were informed that Robertson Stephens was sharing in IPO profits. This is reflected in e-mail messages and other communications cited in the complaint.
Robertson Stephens consented, without admitting or denying the allegations of the complaint, to the entry of a final judgment that: (1) permanently enjoins Robertson Stephens from violating NASD Conduct Rules 2110 (just and equitable principles of trade) and 2330 (prohibition against profit-sharing), and Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3(a)(6); (2) orders Robertson Stephens to pay disgorgement of $23 million, which would be reduced to $11.5 million in recognition of the firm's payment of $11.5 million in the related NASD proceeding; and (3) orders Robertson Stephens to pay a civil penalty of $5 million, which would be reduced to $2.5 million in recognition of Robertson Stephens' payment of a $2.5 million penalty to NASD in its related proceeding.
The Commission acknowledges the assistance of NASD in the investigation of this matter.
Misleading Research Reports
In a civil action filed in U.S. District Court for the Southern District of New York, the Commission charged that former Robertson Stephens research analyst Paul Johnson provided positive research coverage in 1999 and 2000 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 that his supposedly objective advice was infected by serious conflicts of interest.
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 acquiring his holdings in the private companies that were the subjects of the merger proposals, Johnson violated Robertson Stephens internal policy that required employees to obtain prior written approval from the firm for all private investments. Moreover, at the time that Johnson issued his reports and statements concerning the proposed mergers, he did not disclose to Robertson Stephens his personal holdings in the affected companies or the magnitude of his financial interest in the outcome of the mergers.
The Complaint further alleges that in January 2001, Johnson spoke privately about Corvis Corp., another company that he covered, to a committee that was responsible for making investment decisions for a group of partnerships that had been formed by Robertson Stephens and senior Robertson Stephens executives in which Johnson and other senior Robertson Stephens executives were investors. In response to a question, Johnson told the committee that he would not buy Corvis stock at the prevailing market price, but would buy at a price that was approximately half of the current price.
Johnson's statements to the committee directly contradicted his existing "buy" recommendation on Corvis. After Johnson spoke, the committee voted to sell all the Corvis stock held by two partnerships. 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.
The complaint charges Johnson with violations of Section 10(b) of the Securities Exchange Act of 1934 and Exhange Act Rule 10b-5, which prohibit the making of false or misleading statements in connection with the purchase or sale of securities. The Complaint also charges Johnson with violations of Section 17(a) of the Securities Act of 1933, which prohibits the making of material false or misleading statements and failing to disclose material facts in the offer or sale of securities. The Commission seeks a permanent injunction against Johnson, disgorgement, prejudgment interest, and civil money penalties.
