FINRA Reminds World about Global Research Settlement

Remember the Global Research Settlement?  It has been somewhat in the news recently. You might recall that it involved ten huge banks and the, uh, symbiotic relationship between those banks’ research and investment banking arms. The pattern that had developed worked like this:  equity analysts published favorable coverage of a publicly traded company’s stock, and in return, companies steered corporate merger work and other considerations to those analysts’ investment bank employers. Even if you’d never heard of this issue before, you can see the problems that would follow and the value that ought to be assigned to “research” reports that were borne of such a system. A settlement involving the SEC, the NASD, and the NYSE determined that securities research analysts – at least at the ten banks at issue – had to be walled off from the investment bankers. Presumably such obvious conflicts of interest would not be a problem in the future.

Nobody told Alka Singh. Singh was a metals and mining-focused research analyst at Rodman & Renshaw, LLC from 2009 to 2011. Theoretically, Singh’s role was to prepare and write objective research reports on publicly traded companies in the metals and mining sector. In June 2010 she published a report initiating coverage on a Canadian mining company with a market outperform rating.  On June 15, she introduced the company and its CEO to certain Rodman investment bankers to establish a relationship that could ultimately lead to Rodman securing investment banking business with the company.

A month later, in July 2010, the company announced a $25 million private placement that was conducted by a syndicate of Canadian investment banks, but not Rodman & Renshaw. Ms. Singh was not happy, and let her boss know about it in this email exchange later that day:

Singh:  However hard I work I get screwed by companies left and right – today it was [Covered Company.]

Boss (encouraging in his own way):  How big was the deal? You may ask the CEO right up front how he plans to pay you for the research. Basically, you have nothing to lose by being direct with him and at least you’ll get a straight answer. . . .

Singh: Trust me I did that . . . . I promise I did.

Boss: I trust you. But ask him anyway what he plans to do to pay you for your research…This is the time to put your hand out and ask to get paid.

Singh: Some of these people think that research is for free.

Not to be deterred, Singh encouraged the CEO to think outside the box.  She wrote to the CEO a week later: “When companies like the analyst covering the stock but don’t have a strong relationship with the bankers or the firm – they have concealed the fees as a consulting fee or banking fee so that the analyst can get at least something for their effort.”

Really, the CEO had a lot of options. An illegal payment for Singh’s research could be paid just about any way. Unfortunately for Singh, her boss turned out not to be right when he said she had nothing to lose by being direct with the CEO.

FINRA held that Singh violated FINRA Rule 2010, which provides that “[a] member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.” Singh received a fine of $10,000 and a six-month suspension from association with any FINRA-regulated firm. FINRA also fined Rodman & Renshaw $315,000 for supervisory and other violations related to the interaction between the firm’s research and investment banking functions. Don’t try this at home.