Analyst conflicts of interest remains one of the key regulatory issues. Neutrality of research reports is often undermined when the research analyst is under the pressure of investment banking unit. But the problem is more prominent if the analyst receives a direct benefit from the covered company.
NASD censured and fined Wells Fargo Securities US$250,000 and imposed a US$40,000 fine and 60-day supervisory suspension against its former Director of Research, Douglas van Dorsten - for failing to disclose in a research report that the lead analyst on the report had accepted a job at Cadence Design Systems, a San Jose, CA company that was the subject of the report.
NASD also announced that it filed a complaint against Jennifer Jordan, the former Wells Fargo research analyst, for failing to disclose in a series of three research reports that she was pursuing employment and then had accepted a job with Cadence, which was the subject of all three reports. As part of her compensation package with Cadence, Jordan was to receive 15,000 shares of Cadence stock, along with the option to purchase an additional 75,000 shares, once she started working at Cadence.
NASD's disciplinary actions concern three research reports issued by Wells Fargo in February, March, and April of 2005. The subject of the research reports, Cadence, designs semi-conductors for use in the global electronics market. In each report, Jordan was listed as the lead analyst.
From Jan to Apr 2005, Jordan applied for, interviewed for, and then accepted a job at Cadence. On 4 Feb 2005, after Jordan had applied for a job at Cadence, Wells Fargo issued a research report covering Cadence that increased the price target for the company from US$16 per share to US$18 per share. The report did not disclose that Jordan had applied for a job at Cadence. On 2 Mar 2005 - after Jordan had met with Cadence senior management twice to interview for a job with the company - Wells Fargo issued a research report reiterating the $18 per share price target. That report did not disclose that Jordan had applied for a job at Cadence or that she was in employment discussions with the company.
After Wells Fargo issued the 2 Mar 2005 report, Jordan was offered a position at Cadence as Corporate Vice President of Investor Relations. As part of the offer, Cadence agreed to pay Jordan over US$300,000 in salary and bonuses, provide her with 15,000 shares of Cadence stock and an option to purchase 75,000 additional shares, and provide her a US$1m interest-free loan. Shortly after she accepted the offer on 9 Apr 2005, Jordan told van Dorsten and others at Wells Fargo that she had accepted a job at Cadence.
On 28 Apr 2005, Wells Fargo published another research report concerning Cadence. That report raised revenue estimates for Cadence for the second quarter of fiscal year 2005 and increased both revenue and price-per-share estimates for the company for fiscal years 2005 and 2006. On the morning the report was issued, Jordan flew to Cadence's offices to attend a management meeting as a future employee of the company.
Although Wells Fargo and van Dorsten had learned nearly three weeks prior to the 28 Apr report that Jordan had accepted a position at Cadence as Vice President of Investor Relations, that information was not disclosed in the report. In his position as Director of Research, van Dorsten approved the 28 Apr report without requiring that the report disclose that Jordan had accepted a position with Cadence.
Having learnt the lesson from this case, shall analysts be subject to a cool-off period for changing job to a previously covered company?
No comments:
Post a Comment