By Svea Herbst-Bayliss and Alistair Barr
BOSTON/SAN FRANCISCO, Oct 26 (Reuters) - Citigroup fired its
top Internet analyst, Mark Mahaney, and paid a $2 million fine
to a Massachusetts regulator to settle charges that the bank
improperly disclosed research on Facebook IPO and information on
other tech companies.
It was the first formal charge involving an underwriter's
disclosure of sensitive financial information ahead of the
social media company's $16 billion initial public offering in
May. Lead underwriter Morgan Stanley has come under criticism
for revealing revised Facebook Inc earnings and revenue
forecasts to select clients on conference calls ahead of the
IPO, leaving the rest of the investing public in the dark.
In the Citi case, a junior analyst working for Mahaney
emailed some research to journalists at the Techcrunch news
website, who published some of the information in a blog post,
according to the Massachusetts complaint released on Friday.
The state's top securities regulator, William Galvin,
charged Citigroup Global Markets Inc with breaking Massachusetts
securities laws that prohibit analysts at underwriting firms
from sending "written research or other written content" until
40 days after Facebook's IPO.
He would not say how close his office might be to charging
any other firms, or what kind of evidence they may have. Gavin
said the Citi case was completed first because his office was
able to obtain emails showing how the analysts broke the rules.
Some market participants questioned whether the Citi
analysts' actions were that bad. They noted that Mahaney has
consistently received high marks in surveys of institutional
Citi fired Mahaney and the junior analyst, and said it was
pleased that the matter with Massachusetts has been resolved.
Galvin told Reuters he is still probing the other
underwriters involved in Facebook's IPO, including Morgan
Stanley, Goldman Sachs and JPMorgan Chase.
"Unfortunately, the message from this is that analysts
should give less information to cover their behinds. But the
smooth functioning of markets requires the exact opposite of
this," said Max Wolff, chief economist and senior analyst at
research firm GreenCrest Capital.
"This is a move in the wrong direction," he added.
Legal experts say it is unclear whether industry rules
specifically prohibit brokerages from giving information to
select groups of clients in a phone call, as Morgan Stanley did.
So far, there has been no regulatory action against Morgan
Stanley or any of its analysts.
STAR ANALYST MISCONDUCT
According to the Massachusetts complaint, an unidentified
junior analyst sent some of Citi's confidential views on
investment risks and revenue estimates for Facebook to two
employees at TechCrunch.com, which is owned by AOL Inc,
three weeks before Facebook went public on May 18.
Mahaney failed to supervise this junior analyst, according
to the Massachusetts complaint.
One of the most respected Internet analysts on Wall Street,
Mahaney had already been in trouble with his bosses for sharing
information with journalists.
On April 11, Citi's director of research for the Americas
sent Mahaney a "letter of education," noting that he had broken
the bank's rules when he spoke to journalists at Bloomberg and
the New York Times without first obtaining legal approval,
according to the complaint.
Only weeks after receiving that letter, Mahaney again broke
Citi's rules when he passed unpublished views about Google Inc's
YouTube revenue estimates and profitability to a
reporter at Capital Magazine, a French publication, the civil
Mahaney came to Citi in 2005 from Galleon Group, the hedge
fund led by Raj Rajaratnam, who was later convicted in one of
the biggest insider trading crack-downs in U.S. history.
After Facebook's debut, smaller investors were outraged to
learn about the Morgan Stanley's conference calls that they felt
gave an edge to its big clients.
The head of the Financial Industry Regulatory Authority
(FINRA), Wall Street's self-regulator, said not long after the
May 18 Facebook debut that allegations surrounding Morgan
Stanley's conference calls were a matter of "regulatory
concern." FINRA declined to comment further on Friday.
U.S. Securities and Exchange Commission Chairwoman Mary
Schapiro also said at the time that there are "issues we need to
look at specifically with respect to Facebook." An SEC spokesman
said there has been no public action since.
"The knives have been out looking for someone to blame for
Facebook's IPO and it looks like this analyst has been caught in
the middle," said Jill Fisch, a professor at the University of
Pennsylvania Law School who focuses on securities regulation and
"All these rules are designed to stop misuse of information
for trading. This does not raise market regulation issues."
With various regulators looking at the Facebook listing,
Galvin is the first to come out with a fine, albeit a small one.
Gavin has long had a reputation of being an aggressive
regulator who has filed suit against Wall Street's top banks for
securities law violations. But some have criticized him because
he often settling high-profile cases for small sums.
"This is a recurring theme," Gavin said on Friday. "The
banks promise there is a firewall between research and
marketing, that they will observe the quiet period, but that is
clearly not the case."
He added, "This is about not having two sets of rules one
for preferred clients and one for everyone else," Galvin said.
(Additional reporting by Suzanne Barlyn and David Henry)
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