The Financial Industry Regulatory Authority (FINRA) announced its decision to impose a total of $43.5 million penalty against ten firms in connection with the planned initial public offering of Toys “R” Us in 2010.
According to FINRA, the firms were penalized for allowing their equity research analysts to solicit investment banking business and offering favorable research coverage related to the planned Toys “R” Us IPO.
Firms penalized by FINRA
- Barclays Capital Inc. – $5 million
- Citigroup Global Markets Inc. – $ 5million
- Credit Suisse Securities (USA), LLC – $5 million
- Goldman, Sachs & Co. – $5 million
- JP Morgan Securities LLC – $5 million
- Deutsche Bank Securities Inc. – $4 million
- Merrill Lynch, Pierce, Fenner & Smith Inc. – $4 million
- Morgan Stanley & Co., LLC – $4 million
- Wells Fargo Securities, LLC – $4 million
- Needham & Company LLC – $2.5 million
FINRA found that Toys “R” Us and its private equity owners invited the firms to compete for an underwriting role in its planned IPO in 2010. Each of the firms used its equity research analysts to provide presentations on key issues during the company’s solicitation period in May 5.
Each of the firms implicitly or explicitly offered favorable research coverage during the meetings or follow-up communications with Toys “R” Us, according to FINRA. The company eventually abandoned its planned IPO.
The regulator added that Barclays, Citigroup, Credit Suisse, Goldman Sachs, JP Morgan and Needham’s supervisory procedures were inadequate in connection with the participation of the research analyst in the investment banking pitches.
Susan Axelrod, executive vice president, regulatory operation at FINRA said the research analyst conflict of interest rules clearly states that firms “may not use research analysts or the promise of offering favorable research to win investment banking business.”
Axelrod added that the settlement affirms FINRA’s commitment to policing the boundaries between research and investment banking to ensure that research is not improperly influenced.”
On the other hand, Brad Bennett, executive vice president and chief enforcement at FINRA emphasized that the firms overstep the prohibition against analysts’ solicitation and the promise of favorable research. He said the action of the regulator maintains the integrity of the research function against any pressures that may exist to monetize the reputation and work product of the analysts.
FINRA said the firms agreed to settle the case without admitting or denying the allegations, but consented to the entry of its finding.