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