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JP Morgan Enjoying FINRA's Recently Amended Conflict-Enhancing Quiet Period In Upgrading MB Financial

Tyler Durden's picture


There was a time when FINRA did some good things. It did mostly useless things, and was glaringly incompetent in even those, but on occasion it would do something proper, at least when moderating analyst conflicts of interest. Then the crash came, and all bets were off. Interestingly, in October 2008, a month after the bottom came off the market, and when the kitchen sink was being thrown at stocks in order to prevent further collapse, FINRA lost the last shred of interventionist integrity it had when it decided to abolish the so-called quiet period for research actions subsequent to a follow-on offering.

Let's recall what the system used to look like in those old days when not every Wall Street firm was allowed to game its analyst ratings purely for its own advantage. Traditionally the "quiet period" (defined as a time in "which a member firm participating in an offering cannot publish or distribute research reports about the issuer, and the firm's research analyst cannot make public appearances relating to the issuer") was:

  • 40 days following the date of the initial public offering for managers or co-managers and 25 days
    after the offering for other underwriters or dealers;
  • 10 days following a follow-on offering; and
  • 15 days before and after expiration, waiver or termination of a lock-up agreement.

Then in October everything changed, and Finra threw out the follow-on offering Quiet Period requirement out of the window. Who benefited: initially REITs, with banks unable to wait and issue stock for those REITs in which they had secured debt exposure so they could use the new capital to repay themselves, all the while their research analysts pumped the stocks into the stratosphere, on occasion the same day as the pricing of the follow on.

Now, it is the financials' turn.

On Friday, MB Financial announced that, with the taxpayers' generous donation in the form of FDIC backing, it would acquire failed Corus. So far so good. Yet where the story gets ugly is that yesterday, MB also announced it would issue a total of $175 million in new stock. Note the sole bookrunning manager on the deal: JP Morgan.

Now where it gets really ugly is that on the very same day, JP Morgan analyst Steven Alexopoulos, CFA (good thing there are ethical CFA guidelines), proceeds to not only upgrade the stock from Neutral to Overweight, and raise the price target from $16 to $21, but, in the very first sentence of his report, to announce that one of the main reasons for the upgrade is the company's "common equity raise, which raised $175 million in gross proceeds." Yet nowhere in this sentence does Steven announce that significant potential conflict of interest resulting from JP Morgan also being the lead underwriter on this very same equity offering, on the very same day.

The blatant abuse of conflicts of interest here is beyond question. What is dumbfounding, is that this process, according to FINRA, is now a perfectly acceptable and encouraged phenomenon. Conflicts of interest be damned - there are pension fund portfolios that need to go up at all costs. Did nobody get the memo damnit? Yet this kind of complacency between both FINRA and the SEC (which, as always, benefits only Wall Street) is precisely the wrong path that the regulatory wannabes stumbled down in their multi decade long failed attempt to even consider for a moment that Madoff may have been a little bit guilty.

In the absence of any even veiled attempt at regulation, one wonders what the purpose of having any one regulator is, let alone two. As the SEC has repeatedly pointed out, it is woefully underfunded at just under $1 billion a year. A modest Swiftian proposal, would be to do away with the SEC and FINRA entirely, if policing of such conflicts of interest has to fall into the hands of the general public, and have the "regulators" budget funnelled into something much more productive. Like the most recent porkulus bill to come out of Congress. But at least it would be accompanied by the tendered resignations of such failed "guardians" of investor interest as Mary Schapiro. That, alone, would make any Porkulus much more palatable and even welcome.

h/t PJ


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Tue, 09/15/2009 - 12:31 | Link to Comment Sqworl
Sqworl's picture

No doubt, next stop on the money train for President of Finra, Rick Can't Ketchum is JPM.

This guy is cruises into Citi from SEC, then to NYSE and now Finra..major career theft lotto!

Tue, 09/15/2009 - 12:40 | Link to Comment MinnesotaNice
MinnesotaNice's picture

Wall Street, the SEC, and FINRA are really just one big messy orgy... there is no way to keep track of where are the hands and legs are at from one moment to the next... or who is benefiting who... and it all takes place behind closed doors... I hope they all wake up 'the next morning' feeling like the trash that they really are. 

(and as a matter of disclosure I have no personal experience in this area)

Tue, 09/15/2009 - 16:03 | Link to Comment calltoaccount
calltoaccount's picture

Don't forget the counterfeiters at DTCC in that mix of malevolent miscreants.  

Tue, 09/15/2009 - 12:40 | Link to Comment TumblingDice
TumblingDice's picture

Wow, great investigative reporting Tyler. Sadly, they are conducting their fraud more openly everyday knowing that while you and other honest jounalists that are out there will catch it either way, the MSM will NEVER report on this. Indeed its very unlikely J6P will care even if he did hear Erin Burnett report on this and even less likely that the regulators will do anything other than provide a mirage of enforcement. So the question remains: how do we get one of those two to care? If the foreclosure of their house not enough? If the continuos debt servitude not dire enough for them to look at the source?

Oh well, the orgy porgy is on scheduled for one oclock and it gives release so I might as well pop some somas and forget about all this trifling babble.

Tue, 09/15/2009 - 12:44 | Link to Comment blackebitda
blackebitda's picture

CFAI code of ethics extend beyond silly FINRA idealogy. CFA code of ethics maintains that the higher standard applies regardless of legalise. ie if insider trading is legal in country X, the charter holder still cannot engage in insider trading. 

If there are violations in the CFA code of ethics, this charterholder will be accountable for their actions. 


Tue, 09/15/2009 - 12:58 | Link to Comment Assetman
Assetman's picture

Uhhh... not exactly.  It still goes through a "process", just like any other bureaucracy.

But that didn't stop me from sending this post to interested persons at the CFAI.

Perhaps if you have the ability, you should do the same.

Tue, 09/15/2009 - 12:49 | Link to Comment Mos
Mos's picture

I'm so glad I didn't pursue my CFA certification, what a joke it has become.  Unfortunately I still see many job postings requiring the "prestigious" title.

Wed, 09/16/2009 - 01:06 | Link to Comment Arm
Arm's picture

The charter is still good.  Just remember the limitations of the curriculum.  More importantly, remember that having a piece of paper does not actually make you more ethical.

Tue, 09/15/2009 - 12:50 | Link to Comment Anonymous
Tue, 09/15/2009 - 12:56 | Link to Comment lizzy36
lizzy36's picture

Employees of JPM are not allowed to short stocks, sell calls, buy puts, or participate in any IPO's (than can buy inverse etf's).  Further, once a name is purchased it must be held for a minimum of 30 days (no day trading). 

The house of Dimon seems very concernced with avoiding the apperance of a conflict of interest without actually avoiding the conflict.

Tyler, just once could a picture of jamie accompany an article on JPM (please).

Tue, 09/15/2009 - 13:01 | Link to Comment Sardonicus
Sardonicus's picture

But how many of them really trade that way?

how hard would it be to have someone else trade the information they are "not allowed" to trade?

methinks not very

Tue, 09/15/2009 - 14:53 | Link to Comment Strom
Strom's picture

They monitor accounts pretty closely. I knew a guy who got in a LOT of trouble at JPM because his wife traded a stock without approval. The stock was unrelated to his business (CRE finance), and he worked in an office that had no other lines of business (it was a stand-alone CMBS origination/underwriting office). He got a call the same day she made the trade, and he was under pretty tight scrutiny for a while.

Wed, 09/16/2009 - 01:10 | Link to Comment Arm
Arm's picture

Only the accounts of people directly living with you are actually monitored (after signed consent).  I know guys that have accounts in different jurisdictions and under distant relatives.  WAY, WAY too easy to game.  

The only compliance actually catches these guys is because they inevitably get greedy and trade with options...  Think of a grandmother in Croatia buying 200k of options in just 1 very specific stock 1 week before a merger

Tue, 09/15/2009 - 12:57 | Link to Comment Anonymous
Tue, 09/15/2009 - 13:45 | Link to Comment Anonymous
Wed, 09/16/2009 - 01:16 | Link to Comment Arm
Arm's picture

I don't know you, but I have definately met Wharton guys around my floor.  Some were good, but sorry, on average I will take the CFA.  Partially because they are a lot more humble (thnx for the example)

Personal favorites, love guys from Chicago, Dartmouth and my own alma mater.  Even then, if I needed a number cruncher, I would still get the CFA.


Tue, 09/15/2009 - 15:29 | Link to Comment Anonymous
Tue, 09/15/2009 - 15:36 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

If anyone is actually curious, this is what it looks like as a nation descends into banana republic status.

Tue, 09/15/2009 - 15:46 | Link to Comment Mediocritas
Mediocritas's picture

There's a simple way to fix all this BS. Pay investigative agents commission, a cut of the fine, and make the fines actually proportional to the crimes. If you earn 100mill through fraud and get busted, then the fine should be > 100mill and the investigators should get a big cut of that. Meritocracy. Let the 'agents' come from anywhere, if the info is good enough, it's a win.

Encourages them to go after the biggest offenders and the big money. Instead, they're out chasing a few hundred bucks from certain individuals and complaining about being underfunded.

Typical fucking bureaucracy. Inefficient and useless.

Tue, 09/15/2009 - 21:57 | Link to Comment Silver Bullet
Silver Bullet's picture

That's a good idea.

In addition, we (the govt) should poach the top talent away from wall street and pay them whatever they want (ask them to write a # down) and think up ways to prevent wall street from getting around any current or future regs are put in place.

Wed, 09/16/2009 - 00:03 | Link to Comment Anonymous
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