FINRA Rules on Love
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What's Love Got to Do With It--ask FINRA.
Written: April 22, 2009
By Bill Singer
The Financial Industry Regulatory Authority, Wall Street's self-regulatory organization, recently settled a disciplinary case against former Cowen & Company senior research analyst Dhulsini Hermani De Zoysa, who primarily covered companies that produce cardiovascular, orthopedic and wound care devices. FINRA alleged that in two research reportsin 2006 and 2007, De Zoysa cited both a 2005 and a 2006 survey of 8,000 wound care centers; and in 2007 that referenced a non-existent Q1 2007 survey of 155 electrophysiology labs.
Unfortunately, the 2006 wound care survey and the electrophysiology survey never took place. As such, the four reports that De Zoysa published between July 2006 and May 2007 not only misrepresented the existence of the two surveys but also contained conclusions that she apparently based upon those fictitious events,
On August 2, 2007, Cowen's General Counsel informed De Zoysa that the firm was investigating the accuracy and content of her research, and she was instructed to retain and not alter any relevant documents or information, including such materials on computer discs, her laptop, or other electronic format. Nonetheless, De Zoysa created on her laptop a 2006 wound care survey questionnaire, and then deleted six documents. Cowen terminated her on August 27.
FINRA Steps In
FINRA charged De Zoysa with three counts.
First, that her discussions in four research reports of non-existent surveys resulted in false, exaggerated, unwarranted or misleading statements. Okay, that much seems a fair charge based upon what we know.
Second, FINRA charged De Zoysa with altering and deleting documents on her laptops in contravention of the General Counsel’s explicit instructions. Again, doesn't seem like she has much of defense based upon the allegations.
As part of the FINRA disciplinary process, De Zoysa settled the charges without admitting or denying the findings, and consented to the imposition of a$10,000 fine; A Bar from association with any FINRA member in any capacity requiring Series 86 and/or Series 87 (Research Analyst) registration, and A Suspension from association with any member firm in any capacity for 12 months.
You may have noticed that I only set forth above two of FINRA’s three counts against De Zoysa. I left out that third charge just to make things a bit more interesting.
Third, FINRA alleged that from September 2005 through December 2005, De Zoysa had a romantic relationship with the Chairman and Chief Executive Officer of a company that she covered as a research analyst. FINRA charged De Zoysa with failing to disclose in 19 published research reports her romantic relationship with an executive of a company in her coverage area/ The regulator concluded that the romantic relationship was an actual, material conflict of interest.
What's Love Got To Do With It?
This is the type of dilemma that only a lawyer could...well . . .could love. Ah, I guess romance is indeed in the air. You see, I have little problem with FINRA's case against De Zoysa. Assuming the allegations are true (and let's remember that De Zoysa never really admits or denies the facts here but merely agrees to the entry of the sanctions against her), FINRA's first two counts seem fair enough. However, it's that third count that troubles me. Of the 19 research reports that FINRA claims required the disclosure of De Zoysa "romantic relationship," only four were published during the relevant September through December 2005 period when that relationship was ongoing -- fifteen of the reports were published after the romantic relationship ended. Nonetheless, FINRA also charged De Zoysa with failing to disclose the romance in those 15 after-the-fact reports. Even assuming that you agree with FINRA that a romantic relationship is a material conflict that should be disclosed in a research report, what exactly did FINRA want De Zoysa to state in those 15 reports that ran two months to 19 months after she ended the relationship? I mean, seriously, how would this footnote strike you:
I had a three-month romantic relationship with the CEO/Chairman of XYZ company, which is covered in this report. The relationship ended in December 2005.
Of course, there is still the larger issue of how one defines a "romantic" relationship, and whether such is always a source of conflict. Further, assuming that you believe that the state of romance imposes a disclosable conflict for the purpose of research reports, then what other relationships also result in that impediment? Since the adjective “romantic” apparently makes all the difference in De Zoysa, FINRA should have explained where this relationship line is and when it crossed into something constituting a material conflict of interest.Do one-night flings qualify? Are married couples in a romantic relationship? How about two folks chatting away on a social networking site? Does the same allegations apply to a gay couple? Are male analysts who have romantic relationships with female CEOs of covered companies also routinely held to this standard?
Then there is a nagging concern. We seem to always snicker about boys being boys when we learn of young males being treated by Wall Street firms or public companies to nights at strip clubs, all-expense-paid trips to Las Vegas, weekends at the Super Bowl, or god knows what else. I just don’t sense the same light hearted frat boy thing with De Zoysa. Moreover, I'm truly perplexed as to why FINRA seemed to load for bear here and tacked on the extra allegations about the 15 post-romantic-relationship reports. FINRA had three solid counts of violations with the four reports during the relationship -- why the need to take that one extra shot? I'm not suggesting that De Zoysa was a paragon of virtue -- clearly, the bulk of FINRA's case raised serious questions about the fabricated surveys and the disobedience towards the General Counsel's instruction. By itself, those shortcomings are serious violations. As to the disclosure of the romance--okay, sure, I can see how that could have (or did) pose a conflict for the four reports published during that three-month timeframe. But afterwards? That just strikes me as somewhat bizarre over-regulation.
Just do me a favor. Before you fix your opinion, consider this poser:
Do you know of a more intimate relationship than four guys sharing the private details of their home and professional life every Saturday on the links and then afterwards over drinks and lunch at the clubhouse? Would you expect to see this disclosure in a research report:
In 2005, I was part of a regular foursome for three months at the Local Valley Golf Club that included the CEO/Chairman of XYZ company, which is covered in this report. I left the foursome in December 2005.
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