The Securities and Exchange Commission (“SEC”) monitors communications from research analysts and other interested parties to ensure compliance with a complex set of regulations surrounding the trading and purchase and sale of securities in companies that have publicly traded securities.
Analysts are paid, generally, from trading activities in names that they recommend (buy, sell or otherwise). Way back in the late ’90s, analysts at investment banking firms were encouraged to recommend shares in companies that investment bankers wished to conduct a transaction with; the recommendations were inducement to conduct business with that particular bank. The SEC issued new regulations preventing such activities and disclosures that now accompany reports. I cite this as an example of the scrutiny that analysts and “touts” are now subject to for conflicts of interest. The conflict in this example is the provision of a positive research report in exchange for highly profitable investment banking business.
The SEC has also taken to monitoring websites where professional and amateur post-ers are scrutinized to see if there are conflicts of interest in recommendations that are being made. Much has been made recently of the CEO of Whole Foods posting anonymously to the Whole Foods Yahoo finance stock website. Without disclosure of compensation being tendered to analysts, recommenders and touts, a reader of such a recommendation has no way of knowing whether or not the writer has a separate agenda, for example, owning below or even current market price stock and then selling them at a profit into the bids that might be created by the recommendation. Without such disclosure, a buying public could be at risk for buying or selling stocks without knowing what other agendas were on the writer’s mind.
In this particular case, the SEC release accused Armstrong of encouraging investors to keep trying to buy shares of stock in what one can discern as an illiquid issue (liquidity is a measure of how easy it is to buy or sell shares in a company without creating great swings in price) so he could sell into the market he was in part creating by his recommendation. Further, the complaint alleged that Armstrong was receiving shares in BluePoint and other companies at below current market prices and he then sold that stock at a profit, again without disclosure of this alleged conflict of interest.
There are several remedies the SEC has available to it. I’m assuming that Armstrong is not a licensed register representative of a member firm (NASD member), so he can’t be banned from working for his firm, although he could have been banned from working in the industry had he chosen to want to work in the business. What the final judgment does, though, is force him to disgorge his profit and pay what appears to be a very significant penalty, given the numbers involved. It is industry practice to enter into these judgments without an admission or denial as these things rarely go to trial.
I will say that, based on my assumption that Armstrong is not a licensee, he may not have known about the disclosure requirements. While it seems reasonably apparent to the casual reader that what he was alleged of doing was outside the scope of good behavior and, particularly, given his histrionic moral stands, outside the bounds of good common sense, it might have been very difficult to prove intent on his part. There would seem to be a significant amount of hypocrisy involved.