By Telis Demos And Alexandra Scaggs
Citigroup Inc., Goldman Sachs Group Inc. and eight other
securities firms were fined a total of $43.5 million by regulators
who said the companies offered favorable stock research in hopes of
winning underwriting business in an initial public offering by Toys
"R" Us Inc.
The overall fines are believed to be among the biggest in a
single case since the 2003 research settlement that barred research
analysts from participating in IPO pitches because of potential
conflicts of interest. The Financial Industry Regulatory Authority
said analysts at the 10 firms became part of the sales pitch when
Toys "R" Us and its owners interviewed investment bankers in
2010.
"I so want the bank to get this deal!" one Citigroup analyst
wrote to a supervisor before meeting with Toys "R" Us and some of
its owners, which include private-equity firms Bain Capital, KKR
& Co., and Vornado Realty Trust, regulators said Thursday.
An analyst at Needham & Co. wrote in an email: "I would
crawl on broken glass dragging my exposed junk to get this deal."
He added in another email: "My whole life is about posturing for
the Toys R Us IPO."
Regulators didn't release the names of anyone tied to the
alleged wrongdoing. The Citigroup analyst was Kate McShane,
according to a person familiar with the matter. The New York
company declined to make her available for comment. The name of the
Needham analyst couldn't be determined.
The stock-underwriting process has long been vulnerable to
potential conflicts of interest. Underwriting initial public
offerings is lucrative for securities firms, but companies want
analysts at those firms to help push the shares higher by
recommending them after the IPO.
The pressure has grown even more intense as private-equity firms
look to cash out on their stakes in closely held companies.
Private-equity owners often seek to vet the opinions of investment
banks' analysts before picking underwriters, according to people
involved in the process.
At Toys "R" Us, the securities firms "all wanted to get this
deal, and you had fairly aggressive [private-equity owners]. And it
was during a tough deal market, when there weren't a lot of other
deals to be had," said Susan Axelrod, executive vice president for
regulatory operations at Finra.
Toys "R" Us didn't go through with its IPO. Finra officials
suggested that the alleged behavior during the retailer's planned
stock offering was extreme but said they would monitor future deals
for similar conflicts of interest.
"The rules are clear, and they apply to the banks," said J.
Bradley Bennett, executive vice president for enforcement at Finra.
"There's no doubt on whom the obligation falls." Under the current
rules, Finra officials said Thursday, securities firms can't allow
analysts to be part of the IPO pitching process, including the use
of "templates" with their views of a company's prospects, as the
banks did with Toys "R" Us.
Toys "R" Us told some investment banks that the purpose of the
template was to protect the retailer from being "burned" by an
analyst's decision to take a negative view on the stock later, the
regulator concluded.
Vornado and Toys "R" Us didn't respond to requests for comment.
KKR declined to comment. A Bain spokesman said the firm was looking
into the matter but didn't comment further.
Richard Truesdell, co-head of law firm Davis Polk & Wardwell
LLP's capital-markets group, said the fines will spark "a big
change in how things are going to be done." He tells clients that
are working on potential IPOs to "interview the analysts...and
that's not going to be able to continue."
Finra began looking at Toys "R" Us following a referral from the
Securities and Exchange Commission's enforcement division, Finra
officials said. The securities firms "neither admitted nor denied
the charges, but consented to the entry of Finra's findings." Seven
of the 10 firms fined Thursday together had paid more than $1
billion in combined fines as part of the 2003 research
settlement.
As part of Thursday's settlement, Barclays, Citigroup, Credit
Suisse Group AG, Goldman and J.P. Morgan Chase & Co. each
agreed to pay $5 million. Deutsche Bank AG, Bank of America Corp.,
Morgan Stanley and Wells Fargo & Co. each paid $4 million, and
Needham paid $2.5 million.
Finra said Needham didn't provide a valuation to Toys "R" Us
that reflected its analyst's views. Barclays, Citigroup, Credit
Suisse, Goldman, J.P. Morgan and Needham were also cited for
failing to supervise their analysts.
All 10 of the firms except for Barclays and Morgan Stanley were
chosen as underwriters by Toys "R" Us.
In one email cited by Finra, a Goldman analyst told Toys "R" Us
that he was "extremely excited" and "appreciate[d their] time,"
according to Finra. The analyst was Matt Fassler, people familiar
with the matter said. Goldman declined to make him available for
comment.
According to Finra, a Goldman investment banker emailed a
colleague that he wanted bankers to be "tightly coordinated" with
the analyst who was presenting to Toys "R" Us, and that the analyst
would be "an advantage for us."
Investment bankers at Citigroup told Toys "R" Us's owners in an
email that they could "count on Citi's firmwide support and
advocacy for the Toys story and valuation," regulators said. Credit
Suisse told the retailer: "Our firm has approached this process in
complete alignment, having pursued a vigorous vetting process
before our meeting...amongst banking, equity capital markets and
research."
Write to Telis Demos at telis.demos@wsj.com and Alexandra Scaggs
at alexandra.scaggs@wsj.com
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