By Chelsey Dulaney
The Financial Industry Regulatory Authority said it fined 10
firms a total of $43.5 million for offering favorable coverage of
Toys "R" Us's failed 2010 initial public offering in order to
secure positions as underwriters on the offering.
The securities divisions at five of the banks-- Barclays PLC,
Citigroup Inc., Credit Suisse, Goldman Sachs Group Inc. and J.P.
Morgan Chase & Co.-- received a $5 million fine.
Deutsche Bank, Bank of America Corp.'s Merrill Lynch, Morgan
Stanley, Wells Fargo & Co. and Needham & Co. received
smaller penalties.
The fine is the latest of several cases challenging whether Wall
Street fairly distributes research and, in aggregate, is among the
largest since Citigroup agreed to pay $30 million last year to
resolve a case tied to a leak of negative information about Apple
Inc.
Finra said Toys "R" Us invited the 10 firms in April 2010 to
compete for a role in its planned IPO, and the company disclosed
plans that May to raise up to $800 million. Finra said the firms
used their equity analysts to help secure a role in the IPO,
offering favorable coverage.
Toys "R" Us asked the analysts to make presentations to
management in an effort to ensure that the analysts' views on
issues such as valuation factors aligned with the firms' investment
bankers, Finra said. Some of the analysts voiced a positive outlook
on Toys "R" Us and the IPO during their presentations, Finra
said.
Toys "R" Us offered the 10 firms roles in the IPO, but didn't
end up proceeding with the offering.
Finra also said Barclays, Citigroup, Credit Suisse, Goldman
Sachs, J.P. Morgan and Needham didn't have adequate procedures in
place for research analyst participation in investment banking
pitches.
The firms didn't admit or deny the charges, but consented to the
entry of the findings, Finra said.
J.P. Morgan and Wells Fargo declined to comment, while a
representative of Citigroup said the bank is pleased to put matter
behind it.
"Each of these firms used their analyst to solicit investment
banking business from Toys "R" Us and offered favorable research,"
said Susan Axelrod, executive vice president of regulatory
operations at Finra. "This settlement affirms our commitment to
policing the boundaries between research and investment banking to
ensure that research is not improperly influenced."
Research has been a problem for Wall Street firms since the
dot-com boom of the 1990s, when firms sometimes encouraged analysts
to boost their stock ratings to win business with the companies. In
2003, New York Attorney General Eliot Spitzer, the Securities and
Exchange Commission and other regulators slammed 10 investment
banks with $1.4 billion in fines.
That deal forced banks to create a "Chinese wall" between banks'
research and investment banking divisions, in hopes of sheltering
analysts from pressure to provide upbeat reports on companies to
win business. But the practice has continued, with some of the
country's largest firms getting hit with fines in recent years.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com
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