The Securities and Exchange Commission today charged a former Deutsche Bank research analyst with certifying a rating on a stock that was inconsistent with his personal view.
An SEC investigation found that Charles P. Grom certified that his March 29, 2012 research report about discount retailer Big Lots accurately reflected his own beliefs about the company and its securities. But in private communications with Deutsche Bank research and sales personnel, Grom indicated that he didn’t downgrade Big Lots from a “BUY” recommendation in his report because he wanted to maintain his relationship with Big Lots management.
Grom agreed to settle the charges by paying a $100,000 penalty, and he will be suspended from the securities industry for a year.
“When research analysts tell clients to buy or sell a particular security, the rules require them to actually mean what they say. Analysts simply cannot express one view publicly and the opposite view privately,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.
According to the SEC’s order instituting a settled administrative proceeding:
- Grom violated the analyst certification requirement of Regulation AC, which requires research analysts to include a certification that the views expressed in a research report accurately reflect their own beliefs about the company and its securities.
- Grom and Deutsche Bank hosted Big Lots executives at a non-deal roadshow on March 28, 2012. Grom became concerned by what he believed to be cautious comments by the Big Lots executives.
- After the roadshow concluded, Grom communicated with a number of hedge fund clients about Big Lots. Four of the hedge funds subsequently sold their entire positions in Big Lots stock.
- The next day, Grom issued a research report on Big Lots in which he reiterated his BUY rating. As required by Regulation AC, Grom signed an analyst certification included at the end of the report stating, “The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer.”
- During an internal conference call with Deutsche Bank’s research and sales personnel within hours after the publication of his report, Grom said, among other things, that he had maintained a BUY rating on Big Lots because “we just had them in town so it’s not kosher to downgrade on the heels of something like that.”
- On April 24, 2012, during another conference call with Deutsche Bank research and sales personnel, Grom discussed disappointing first quarter sales figures at Big Lots and stated, “I think the writing was on the wall [that] we were getting concerned about it, but I was trying to maintain, you know, my relationship with them. So, that’s why we didn't downgrade it a couple of weeks back.”
Antonia Chion, Associate Director in the SEC Enforcement Division, said, “When research analysts employed by broker-dealers violate their legal duty to issue research reports that accurately reflect their personally-held views, they undermine public confidence in the integrity of the research and must be held accountable.”
Grom consented to the entry of the SEC’s order finding that he willfully violated the analyst certification requirement of Regulation AC of the Securities Exchange Act of 1934. Grom neither admitted nor denied the SEC’s findings.
The SEC’s continuing investigation is being conducted by Drew M. Dorman, Robert B. Hanson, Jason Litow, and Kevin Gershfeld. The case is supervised by Yuri B. Zelinsky and Antonia Chion. Kevin Lombardi and Cheryl Crumpton have assisted with the investigation. The Enforcement Division has been assisted by Eugene Canjels, Samantha Grunberg, and Stuart Jackson in the Division of Economic and Risk Analysis.