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IN THE MATTER OF: WACHOVIA CAPITAL MARKETS, LLC * * * * * * * * * * * * * * * * * * * * |
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CONSENT ORDER DOCKET NO. CO-2006-6932-S |
WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
WHEREAS, Wachovia Capital Markets, LLC is a broker-dealer registered in the state of Connecticut;
WHEREAS, the Commissioner, through the Securities and Business Investments Division of the Department of Banking, conducted an investigation pursuant to Sections 36b-26(a) and 36b-31(c) of the 2006 Supplement to the General Statutes into certain research practices at Wachovia Capital Markets, LLC and its predecessors (“WCM”);
WHEREAS, a coordinated investigation into the activities of WCM in connection with certain potential conflicts of interest that research analysts were subject to during the period of January 1, 1999 through December 31, 2002, have been conducted by a multi-state task force (collectively, “State Regulators”);
WHEREAS, Wachovia Capital Markets, LLC has advised the State Regulators of its agreement to resolve the investigations relating to WCM’s research practices;
WHEREAS, Wachovia Capital Markets, LLC has adopted policies and procedures designed to ensure compliance with all legal and regulatory requirements regarding research analyst independence, including applicable securities laws, regulations and rules of the Securities and Exchange Commission, National Association of Securities Dealers, Inc. and New York Stock Exchange;
WHEREAS, Wachovia Capital Markets, LLC has demonstrated that its organizational structure and some of its policies were already consistent with many of the new structural reforms outlined in the December 2002 Research Analyst Global Settlement agreement-in-principle, and Wachovia Capital Markets, LLC voluntarily began implementing additional policies and procedures in January 2003 consistent with those structural reforms and completed the implementation by November 2003;
WHEREAS, in November 2002, Wachovia Corporation, the parent of Wachovia Capital Markets, LLC, contracted to upgrade the e-mail retention technology, including content filtering and internal archiving platforms, of its subsidiaries and business units, including WCM, which upgrade is in the process of being implemented;
WHEREAS, Wachovia Capital Markets, LLC specifically assures the Commissioner that none of the violations alleged herein shall occur in the future;
WHEREAS, Section 4-177(c) of the Connecticut General Statutes provides, in relevant part, that “[u]nless precluded by law, a contested case may be resolved by . . . consent order”;
WHEREAS, Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provides, in relevant part, that “[p]ursuant to subsection (c) of Section 4-177 of the Connecticut General Statutes, unless precluded by law, any contested case may be resolved by . . . consent order;
WHEREAS, Section 36b-31(a) of the 2006 Supplement to the General Statutes provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
AND WHEREAS, Wachovia Capital Markets, LLC, through its execution of this Consent Order (“Consent Order”), voluntarily waives the following rights:
(a) | To be afforded an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the Connecticut General Statutes; |
(b) | To present evidence and argument and to otherwise avail itself of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the Connecticut General Statutes; |
(c) | To present its position in a hearing in which it is represented by counsel; |
(d) | To have a written record of the hearing made and a written decision issued by a hearing officer; and |
(e) | To seek judicial review of or otherwise challenge or contest the matters described herein, including the validity of this Consent Order. |
NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.
FINDINGS OF FACT
I. JURISDICTION
1. | Wachovia Capital Markets, LLC is currently and, at all times relevant to this Consent Order, registered in Connecticut as a broker-dealer. |
2. | Wachovia Capital Markets, LLC admits the jurisdiction of the Commissioner, neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Consent Order, and consents to the entry of this Consent Order by the Commissioner. |
3. | This action concerns the period of January 1, 1999, to December 31, 2002 (“Relevant Period”). During the Relevant Period, WCM engaged in both research and investment banking activities as described below. |
II. BACKGROUND
4. | Wachovia Corporation, formerly known as First Union Corporation (“First Union”), is a diversified financial services company that provides banking, asset management, wealth management and corporate and investment banking products and services. |
5. | First Union formed First Union Capital Markets Corp. in 1994. Following the formation of First Union Capital Markets Corp., First Union determined to expand its capital markets business through a series of acquisitions, including Wheat First Butcher Singer in January 1998, Bowles Hollowell Connor & Co. in April 1998, EVEREN Capital Corporation in October 1999 and Forum Capital Markets, LLC, in June 2000. In conjunction with the acquisition of EVEREN Securities, Inc., First Union Capital Markets Corp. merged with and into EVEREN Securities, Inc., EVEREN’s broker-dealer subsidiary, and changed its name to First Union Securities, Inc. In September 2001, First Union merged with the former Wachovia Corporation. First Union was the surviving entity in the merger. Following completion of the merger, First Union changed its name to Wachovia Corporation and, thereafter, the former Wachovia Securities, Inc. merged with First Union Securities, Inc., and First Union Securities, Inc., the survivor of that merger, changed its name to Wachovia Securities, Inc. Wachovia Capital Markets, LLC was formed in connection with Wachovia Corporation’s July 2003 joint venture with Prudential Financial, Inc. in which the retail brokerage operations of Wachovia Securities, Inc. and Prudential Securities Inc. were combined. Wachovia Capital Markets, LLC is the entity that was created at that time to operate Wachovia Corporation’s institutional brokerage and capital markets businesses. |
6. | Wachovia Corporation consists of four business divisions, including Corporate Investment Banking (“CIB”). CIB provides lending, capital markets, treasury and financial advisory services for corporate and institutional customers. CIB’s business activities are conducted through several Wachovia Corporation subsidiaries including, but not limited to, WCM. |
7. | Several divisions of CIB including, but not limited to, Investment Banking, Fixed Income and Equity Capital Markets operate, in whole or in part, through WCM. Equity Research, Equity Trading, Institutional Sales and the Equity Capital Markets Desk are the four departments within Equity Capital Markets. The Equity Capital Markets Division, in its present form, was started in 2000. |
8. | From July through December 1999, the head of Equity Research directly reported to one of the managers of Investment Banking. At all other times during the Relevant Period, the management of the Equity Research Department reported to the head of the Equity Capital Markets Division, who in turn reported to the managers of CIB. In 1999, Investment Banking was the term used to describe the business unit engaged in Investment Banking activity, as well as sales, trading, principal investing and other non-investment banking activities. |
A. The Investment Banking Function at WCM
9. | The Investment Banking Division of CIB at WCM provides financial advice and transactional services to corporate clients regarding, among other things, equity and debt offerings, business combinations and other financing transactions. |
10. | During the Relevant Period, the Equity New Business Committee and the Equity Commitment Committee approved WCM’s participation as an underwriter or as a member of a selling syndicate in IPOs or secondary offerings. Prior to the approval, the committees received written presentations from the group working on the proposed transaction, setting forth the pertinent information regarding the issuer and the level of WCM’s participation in the transaction. |
B. The Role of Research Analysts at WCM
11. | During the Relevant Period, WCM’s Equity Research Department employed approximately 40 Research Analysts to provide research coverage on a broad range of industry sectors and to publish periodic reports on selected companies within those sectors. Equity Research Analysts at WCM (“Research Analysts”) were responsible for reviewing the performance of the selected companies, evaluating their business prospects, and providing analyses and projections concerning the investment opportunity presented by the company, commonly referred to as providing research coverage. |
C. Research Ratings at WCM
12. |
During the Relevant Period, WCM used several systems to rate the investment opportunity of the companies on which research was published (“Covered Company”):
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13. | WCM’s Research Analysts virtually never used the lowest rating in WCM’s stock rating system. During the Relevant Period, WCM publicly stated its rating system had either four or five categories. However, WCM Research Analysts rarely used the “4” or “5” rating. Of 2,038 ratings between January 1, 1999 and July 2, 2002, analyzed during the investigation, only 16 (.79%) were “4” rated and only 2 (.10%) were “5” rated. | ||||||||
14. | Some Research Analysts discussed the timing of ratings changes. For example, under areas of development in his 2000 performance evaluation, one Research Analyst stated “In the past, we’ve been first with meaningful news and ‘talked down’ stocks without formally changing ratings”. | ||||||||
15. | Although institutional clients were the primary target audience, research reports authored by the Research Analysts and disseminated by WCM were accessible by certain clients through internal websites for clients and to non-clients through First Call, Bloomberg and subscription services. |
III. THE RELATIONSHIP BETWEEN THE INVESTMENT BANKING DIVISION
AND EQUITY RESEARCH DEPARTMENT OF WCM CREATED
POTENTIAL CONFLICTS OF INTEREST FOR RESEARCH ANALYSTS
16. | During the Relevant Period, certain practices at WCM created potential conflicts of interest for the firm’s Research Analysts which arose from the inherent tension between the Research Analyst’s obligation to provide independent research regarding covered companies and the involvement of the Research Analysts in various aspects of its investment banking business. Periodically, some Research Analysts at WCM identified potential investment banking opportunities in their respective industry sectors, including initial public offerings (“IPOs”). |
A. Research Analysts Participated in Investment Banking Activities
17. | Certain Research Analysts supported the efforts of investment bankers at WCM. On occasion, the Investment Banking Division promoted WCM’s research coverage to issuers for whom WCM was seeking to act as an underwriter for investment banking transactions. | ||||||||||||||||||||||||
18. |
A number of performance evaluations for WCM Research Analysts, and their Associates,1 assessed the subject’s involvement in investment banking activities for the evaluation year. Some performance evaluations established goals for assistance to investment banking in the following year. Examples include, but are not limited to:
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19. |
Some Research Analysts at WCM organized or participated in meetings where investment banking business was solicited. For example:
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20. | Investment banks, including WCM, competed to be selected by issuers as underwriters for investment banking transactions. Issuers selected underwriters based on presentations by the competing investment banks, during which the investment banks described their qualifications, outlined a selling strategy, and offered investment banking and other services to the issuer. As part of these presentations, investment banks, including WCM, often provided issuers with a “pitchbook” describing the credentials of their investment bankers and services that the investment bankers could provide. | ||||||||||||||||||||||||
21. |
The pitchbooks prepared and used by WCM’s Investment Banking Division to solicit investment banking business frequently referenced the Research Department of WCM and the WCM Research Analyst who covered the issuer’s industry sector. One or more of the following was found in a number of pitchbooks:
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22. | Memoranda on prospective investment banking deals submitted to the Equity Commitment Committee and Equity New Business Committee for approval were put together by the investment bankers responsible for soliciting the business. On some memoranda, the Research Analyst for the issuer’s industry sector was listed as a member of the transaction team and/or as a submitter of the memoranda. | ||||||||||||||||||||||||
23. |
Some pitchbooks implied that, if WCM was selected as an underwriter on the investment banking transaction, the issuer would receive research coverage from WCM. Examples include, but are not limited to:
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24. |
Specific instances where the pitchbook for an investment banking solicitation emphasized that WCM’s equity research was related to its investment banking activities include, but are not limited to:
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25. |
Certain communications between WCM’s Research Analysts and supervisors in Investment Banking demonstrate that some Research Analysts attempted to promote WCM’s investment banking and suggest that the Research Analysts believed that they would benefit if WCM received investment banking mandates. For example:
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26. |
Supervisors at WCM expected Research Analysts to be supportive of investment banking. For example:
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B. Some WCM Pitchbooks Prepared by WCM’s Investment
Banking Division Referenced Past Research in the
Context of Seeking Future Business
27. |
In a pitch to one company in October 2000, WCM listed the services that it had provided to the company as:
Significant capital commitment since the Company’s IPO #1 Trader of [the company’s] Stock Strong Buy equity coverage4 Institutional and retail distribution capabilities equal to that of Wall Street firms[.]
WCM contrasted these services with the benefit WCM had received from the company saying: but . . .
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28. |
In an October 2000 pitch to another company, WCM again contrasted services provided to the company and the benefits WCM received from the company. According to the pitch, WCM delivered:
$200 million of total capital commitment #1 trader of [the company’s] Stock Strong Buy equity coverage5 Institutional and retail distribution capabilities equal to that of Wall Street firms Willingness to provide access to retail brokers as mezzanine loan origination source Open to potential bought deal in 2001[.]
These services were contrasted with the benefits WCM had received from the company, which were listed as:
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C. On Occasion, Investment Banking Concerns Were
Considered in WCM’s Decisions Whether to
Initiate or Continue Research Coverage
29. | The decision to initiate or continue research coverage of certain companies was influenced, at least in part, by whether those companies were actual or prospective investment banking clients of WCM. For example, in evaluating the performance of one Research Analyst, a member of Research Management noted that the Research Analyst was “very flexible in adding coverage where investment banking has had a sense of urgency”. | ||||||||||||||||||
30. | In the article referenced in paragraph 26(a), a WCM Research Analyst discussed her “Strong Buy” rating of Ask Jeeves during a time of significant price decline. The Research Analyst remained bullish on the company’s prospects and was quoted as saying that “[i]t’s ‘positioned to be the most profitable business model in our group.’” Further, according to the Research Analyst, early in the freefall in the price of Ask Jeeves stock, its CFO told her that the company was unhappy with its investment bank and was “looking to create new relationships”. However, WCM was not included as an underwriter on the Ask Jeeves secondary offering. According to the article, the Research Analyst said “I’ve done a lot of marketing of this stock and invested a lot of time. Ask Jeeves choosing to go elsewhere with the deal has definitely been the biggest disappointment”. | ||||||||||||||||||
31. | Each Research Analyst at WCM was required to prepare an annual Business Plan, for internal use. These Business Plans were sometimes discussed during the annual performance evaluation. In the Business Plan, each Research Analyst was required to: (a) give an account of the approach that the Research Analyst had to the industry sector they covered, (b) identify significant trends within that sector, and (c) set forth coverage plans for the upcoming year. According to a member of Research Management, the function of the Business Plan was to require each Research Analyst to identify those stocks under consideration for coverage over the next twelve months, to compel the Research Analyst to set forth and commit to specific actions to take in order to procure additional business from institutional investors, and to inform WCM what the Research Analyst thought “the level of activity of investment banking is going to be in that space” for the next year. | ||||||||||||||||||
32. |
During the Relevant Period, the Business Plan included a section entitled Coverage Plans, which asked the Research Analyst to provide a rationale for issuing research coverage for companies. Some Research Analysts completed the Coverage Plan section by citing the investment banking potential of the companies as a reason for research coverage. The following are some examples of comments by Research Analysts in their Coverage Plans:
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33. |
In some instances, investment bankers participated in discussions about adding or dropping coverage on companies covered by WCM’s Research Analysts. For example:
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34. |
The annual Business Plan prepared by Research Analysts included a section “New Equity Business” where Research Analysts were asked “What stocks that you are recommending are the most likely to raise equity in the next 12 months? What are your plans to insure that we are involved in these deals (i.e., fresh company reports, non-deal roadshow with senior management, sponsored investor visits, etc.)”. [emphasis in original] Examples of responses from Research Analysts in this section include, but are not limited to:
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35. |
In an informal business plan for the second half of 2000 and first half of 2001, a Research Analyst commented:
Like most research analysts, I would like to have an equal amount of ‘banking related’ names and pure research/institutional ideas on my coverage list. By doing this, I believe it will allow me to establish credibility with the buy side and institutional sales force while, at the same time, generate corporate finance fees for the firm. |
D. Investment Banking Input was a Factor in Decisions
Regarding Participation at Certain WCM’s Research Conferences
36. | In an e-mail to Equity Research and the industry group heads in investment banking regarding a conference in 2000, a member of Research Management stated, “[w]e would now like each industry group (banking and research together) to take the names they submitted and complete one final review to ensure that the top 5 names reflect the companies you would like to invite”. [emphasis in original] |
37. | One Research Analyst identified 12 companies as possible presenters at a Research conference. His e-mail forwarding the list to the member of Research Management responsible for determining the final list of presenters identified 11 of the 12 companies as Investment Banking’s clients. |
38. | In commenting about a specialty conference planned by a Research Analyst during 1999, a member of Research Management told a member of Investment Banking Management: “I think this is a great idea. So do the corporate finance bankers, who also believe it would pay for itself quickly”. |
39. | In his 2000 performance evaluation, one Research Analyst stated he planned on hosting a specialty conference for his sector during the first quarter of 2001, noting he would “need support from banking and Equity Capital Markets to produce a successful conference”. |
E. Investment Banking Was a Factor in Determining
Some Research Analysts’ Compensation
40. | During the Relevant Period, participation in investment banking activities was a factor in determining the total compensation awarded to some WCM Research Analysts. | ||||||||||
41. |
Research Analysts at WCM received set salaries plus annual bonuses; the bonuses accounted for the majority of their total compensation. The compensation of some Research Analysts was set by the terms of individual employment contracts, which generally included a guaranteed minimum incentive. When the bonus amount was not set by contract, the amount of each Research Analyst’s bonus was determined by Research Management.
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42. | Prior to 2000, some Research Analysts at WCM expected to receive a portion of the management fee earned by WCM on each investment banking transaction in which the Research Analyst participated. According to a member of Research Management at the time, “[i]f an analyst was a finder on a deal, on an IPO, they [sic] would get 15 percent of the management fee. If they [sic] worked on the deal, they’d [sic] get 10 percent of the management fee”. This Research manager also testified that a similar formula existed to compensate Research Analysts on secondary offerings in which WCM participated. These amounts were paid to the Research Analysts as part of the year-end bonuses; year-end bonuses also included a share of commissions earned on both retail and institutional sales (1% and 5% of the commissions respectively). The manager testified that these amounts were not paid to Research Analysts while they were subject to guaranteed compensation agreements. | ||||||||||
43. | The bonuses paid in early 1999 to WCM Research Analysts that related to their work in 1998 were approved by the heads of what was then called Investment Banking. In 1999, Investment Banking was the term used to describe the business unit engaged in Investment Banking activity, as well as sales, trading, principal investing and other non-investment banking activities. | ||||||||||
44. |
The 1999 Incentive Compensation Program For Equity Capital Markets provided:
Subject to approval from the President/Head of Capital Markets, in consultation with the Co-Heads of Investment Banking, a subjectively determined Bonus pool will be established for utilization by all Equity Capital Markets organizations. The Co-heads of Investment Banking will allocate the resulting total incentive dollars to the appropriate groups within Equity Capital Markets, and work with the various equity group managers to determine the allocation of incentive award monies within the respective groups. This Incentive Compensation Program was not executed due to changes in the management structure of Equity Capital Markets at the end of 1999. |
F. Participation in Investment Banking was a Factor in Evaluating
the Performance of Some WCM Research Analysts
45. | During the Relevant Period, WCM’s process for annual performance evaluations of employees required the employees to perform a self-evaluation and the employee’s manager to evaluate the employee on the same criteria. Some performance evaluations of Research Analysts and their Associates, as well as Research Management, considered investment banking activity, among other things, as a criterion for assessing whether the employee had fulfilled the job requirements. |
Research Analysts
46. |
For the year 2000, 46 of 52 evaluations for Research Analysts contained comments by managers of Research. Twenty-three of the forty-six evaluations (50%) discussed investment banking. Comments by the managers include:
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47. |
Forty-two performance evaluations for 2000 included a self-evaluation by the Research Analyst. Thirty-four of the forty-two evaluations (80%) contained comments relating to the Research Analysts’ investment banking activities. Examples of comments from the Research Analysts’ self evaluations include, but are not limited to:
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48. |
For the year 2001, 36 of 42 performance evaluations for Research Analysts contained comments by Research Management. On 31 out of the 36 evaluations (86%), the manager discussed investment banking. In doing so, the manager used phrases such as:
• “Proven ability to win and execute quality business”;
• “Has shown ability to monetize research franchise through quality IB business”; and • “Deal performance has met/exceeded expectations.” In some instances, the manager commented that the Research Analyst was “Supportive of the broader CIB effort,” adding the caveat that “deal performance has been below expectations” or “capital raising in sector remains lackluster”. | ||||||||||
49. |
Forty of the forty-two evaluations for 2001 contained self-evaluations by the subject Research Analyst. In assessing their own performance in 2001, 32 of these 40 evaluations (80%) included comments regarding investment banking activities. Examples of comments by the Research Analysts include, but are not limited to:
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50. | Annual Business Plans were prepared by the Research Analysts. The Business Plan format included a section in which Research Analysts were asked to identify 2 to 3 things needed from a resource standpoint or things the Research Analyst would change that would noticeably improve their business. Research Analysts sometimes commented that they wanted or needed an investment banker or increased investment banking resources in their sector. One Research Analyst stated he wanted “Support from senior management on IPO pitches to demand business”. | ||||||||||
51. | In March 2000, a member of Research Management wrote a memorandum to a Research Analyst regarding the Research Analyst’s possible promotion from Director to Managing Director (the highest title for a Research Analyst). In addressing the Research Analyst’s compliance with criteria for promotion, the Research manager stated “[I]f you were to deliver a co-lead or lead managed deal to the firm sometime this year (as you suggested you might) it would certainly solidify this view [that the Research Analyst met many of the criteria for promotion], assuming of course that you continued to function at your current high level”. |
Associates
52. |
Evaluations of certain Associates also made reference to investment banking. Examples of such references include, but are not limited to:
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Research Management
53. |
Performance evaluations of members of Research Management for 2001 mentioned investment banking. For example:
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IV. WCM FAILED REASONABLY TO SUPERVISE
ITS RESEARCH ANALYSTS
54. | During the Relevant Period, WCM’s management failed to maintain and enforce adequate policies, procedures and systems reasonably designed to manage the potential conflicts of interest outlined above. Among other things, this failure to supervise gave rise to and perpetuated the above-described violative conduct. |
V. WCM FAILED TO MAINTAIN AND PRODUCE, IN A
TIMELY MANNER, CERTAIN BOOKS AND
RECORDS REQUIRED BY THE ACT
A. WCM Did Not Have Adequate Systems or Procedures in
Place to Ensure that All Electronic Mail Communications
Were Maintained and Were Readily Accessible
55. | On October 16, 2002, WCM was required to produce, pursuant to a larger request for access to its books and records: “The electronic mail files, including incoming, outgoing, draft and deleted files, for [six specified Research Analysts], wherever stored, from January 1, 1999 through October 16, 2002, including all electronic files and attachments thereto”. The request was later modified to request the electronic mail files for the six Research Analysts for the following dates: January 1, 1999, April 10, 2002 and the last day of each quarter from January 1, 1999 through the date of production. WCM produced compact discs containing a total of 71 e-mail folders7 pursuant to the request. Of the 90 folders that should have been produced (taking into account dates for which the identified Research Analysts were not employed by WCM), 19 e-mail folders (20% of the requested folders) could not be produced. |
56. | On January 10, 2003, State Regulators requested the e-mail folders for the six identified Research Analysts for the 15th day of each month beginning January 1999 through June 2000. WCM produced compact discs containing e-mail folders for 42 days, some of which had been produced previously. Of the 87 folders which should have been produced (taking into account dates for which the identified Research Analysts were not employed by WCM) 37 e-mail folders (42% of the folders requested) were not produced initially.8< a=""> |
57. | WCM represented to the State Regulators that, if the e-mail folders for a particular day could not be restored, it attempted to restore the next closest date but, in many instances, the closest available date was a date for which the e-mail folder had already been provided. |
58. | On February 24, 2003, the State Regulators requested information, in the form of an affidavit, regarding the difficulties encountered by WCM during the production of the electronic mail files. The information provided by WCM in response to the affidavit request was not fully responsive. |
59. | Through the affidavit, WCM provided several explanations for its inability to produce the e-mail folders, including representations that some tapes were not readable by the tape drive, some tapes contained no data, some tapes could not be located by the outside storage facility, or computer catalogs of the back-up tapes could not be located on the server. The State Regulators attempted to obtain additional information from WCM’s affiant regarding the provided explanations for the production problems; however, the affiant did not have sufficient personal knowledge about the search procedures and document production of electronic mail folders to provide all of the specific information requested. WCM contends the information could have been obtained from other WCM employees. |
60. | As a result of these failures, WCM did not maintain readily accessible books and records as required by Section 36b-14(a)(2) of the Act and Section 36b-31-14a(a) of the Regulations. |
B. WCM Failed to Maintain an Organized System to Locate
and Retrieve Tapes which Purportedly Contained the
Back-up for the Electronic Mail System
61. | WCM did not maintain, and/or could not produce upon request, documents showing which tapes containing the daily back-ups of the electronic mail systems were transferred to its third party storage facility. |
62. | According to an affidavit provided by WCM, in some instances, the computer catalog for the software used to backup the electronic mail system contained no reference to a back-up having been done for a particular date. This catalog was used to identify back-up tapes to be retrieved for purposes of compliance with previously described requests throughout the course of the investigation. Based on the information provided, no reference in the catalog exists for more than 25% of the time period covered by the January 10, 2003 request. |
63. | The failure to maintain records regarding the transfer of tapes to the storage facility and the failure of the computer catalog to have a reference to all back-ups was a significant contributing factor in WCM’s inability to retrieve tapes necessary to fully respond to the requests. |
CONCLUSIONS OF LAW
1. | The Commissioner has jurisdiction over this matter pursuant to the Act. |
2. | WCM failed to reasonably supervise its agents or employees, in violation of Section 36b-31-6f of the Regulations. |
3. | WCM failed to preserve for a period of three years, and/or preserve in an accessible place for two years, all internal and external electronic communications relating to the business of WCM in violation of Section 36b-14(a)(2) of the Act and Section 36b-31-14a(a) of the Regulations. |
4. | This Consent Order is necessary and appropriate in the public interest and for the protection of investors, and is consistent with the purposes fairly intended by the policy and the provisions of the Act. |
CONSENT ORDER
On the basis of the Findings of Fact, Conclusions of Law, and Wachovia Capital Markets, LLC’s consent to the entry of this Consent Order, for the sole purpose of settling this matter, prior to a hearing and without admitting or denying any of the Findings of Fact or Conclusions of Law, IT IS HEREBY ORDERED THAT:
1. | This Consent Order concludes the Investigation by the Commissioner and any other action that the Commissioner could commence under the Act on behalf of Connecticut as it relates to WCM, or any of its affiliates, and their current or former officers, directors, and employees, arising from or relating to the subject of the Investigation, including certain research and investment banking practices at WCM and the failure by WCM to maintain all electronic communications during the Relevant Period, provided, however, that excluded from and not covered by this paragraph are any claims by the Commissioner arising from or relating to enforcement of the Consent Order provisions contained herein. | ||||||
2. | Wachovia Capital Markets, LLC, in connection with the research practices referenced in this Consent Order, will cease and desist from violating and will comply with Section 36b-31-6f of the Regulations. | ||||||
3. |
No later than the date this Consent Order is issued by the Commissioner, Wachovia Capital Markets, LLC shall remit to the Commissioner, by electronic funds transfer, the sum of Two Hundred Twenty-Seven Thousand Two Hundred Forty Dollars ($227,240) as an administrative fine (“Fine”), which represents an administrative fine of Two Hundred Nine Thousand Nine Hundred Twenty-Two Dollars ($209,922) for WCM’s failure to reasonably supervise its agents and employees in violation of Section 36b-31-6f of the Regulations and an administrative fine of Seventeen Thousand Three Hundred Eighteen Dollars ($17,318) for WCM’s failure to preserve certain books and records in violation of Section 36b-31-14a(a) of the Regulations and Section 36b-14(a)(2) of the Act. Payment shall be made to:
Bank of America, 1 Corporate Center, Hartford, Connecticut 06103 Account Name: State of Connecticut – Regular Account Account Type: Checking Account Number: 0001130477 Routing transit Number: 011900445 Reference: Department of Banking – Agency # DOB 370000 | ||||||
4. |
No later than the date this Consent Order is issued by the Commissioner, Wachovia Capital Markets, LLC shall remit to the Commissioner, by electronic funds transfer, the sum of Thirty One Thousand Four Hundred Eighty Eight Dollars ($31,488) for its Investor Education Fund. Payment shall be made to:
Bank of America, 1 Corporate Center, Hartford, Connecticut 06103 Account Name: State of Connecticut – Regular Account Account Type: Checking Account Number: 0001130477 Routing transit Number: 011900445 Reference: Department of Banking – Agency # DOB 370000 | ||||||
5. | The total amount to be paid by Wachovia Capital Markets, LLC to state securities regulators and the Investor Education Fund of the Investor Protection Trust may be reduced due to the decision of any state securities regulator not to accept the state settlement offer. In the event another state securities regulator determines not to accept Wachovia Capital Markets, LLC’s state settlement offer, the amount of the Connecticut payment and the portion of the payment to the Investor Education Fund of the Investor Protection Trust, if any, shall not be affected and shall remain as stated in this Consent Order. | ||||||
6. | If payment is not made by Wachovia Capital Markets, LLC, the Commissioner may vacate this Consent Order, at its sole discretion, upon 10 days notice to Wachovia Capital Markets, LLC and without opportunity for administrative hearing and Wachovia Capital Markets, LLC agrees that any statute of limitations applicable to the subject of the Investigation and any claims arising from or relating thereto are tolled from and after the date of this Consent Order. | ||||||
7. | Wachovia Capital Markets, LLC agrees that it shall not seek or accept, directly or indirectly, reimbursement or indemnification, including, but not limited to payment made pursuant to any insurance policy, with regard to any civil monetary penalty that Wachovia Capital Markets, LLC shall pay pursuant to this Consent Order. Wachovia Capital Markets, LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any amounts that Wachovia Capital Markets, LLC shall pay pursuant to this Consent Order. Wachovia Capital Markets, LLC understands and acknowledges that these provisions are not intended to imply that the Commissioner would agree that any other amounts Wachovia Capital Markets, LLC shall pay pursuant to this Consent Order may be reimbursed or indemnified (whether pursuant to an insurance policy or otherwise) under applicable law or may be the basis for any tax deduction or tax credit with regard to any state, federal or local tax. | ||||||
8. | This Consent Order is not intended by the Commissioner to subject any Covered Person to any disqualifications under the laws of the United States, any state, the District of Columbia or Puerto Rico, including, without limitation, any disqualifications from relying upon the state or federal registration exemptions or safe harbor provisions. “Covered Person” means WCM or any of its affiliates and their current or former officers, directors, employees, or other persons that would otherwise be disqualified as a result of the Orders (as defined below). | ||||||
9. | This Consent Order and the order of any other state in related proceedings against WCM (collectively, “Orders”) shall not disqualify any Covered Person from any business that they otherwise are qualified, licensed or permitted to perform under applicable law of Connecticut and any disqualifications from relying upon this state’s registration exemptions or safe harbor provisions that arise from the Orders are hereby waived. | ||||||
10. | For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against WCM including, without limitation, the use of any e-mails or other documents of WCM or of others regarding research practices or limit or create liability of WCM or limit or create defenses of WCM to any claims. | ||||||
11. | Nothing herein shall preclude Connecticut, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations, other than the Commissioner and only to the extent set forth in paragraph 1 above, (collectively, “State Entities”) and the officers, agents or employees of State Entities from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against Wachovia Capital Markets, LLC, in connection with certain research and/or banking practices at WCM. | ||||||
12. | This Consent Order and any dispute related thereto shall be construed and enforced in accordance, and governed by, the laws of Connecticut, without regard to any choice of law principles. | ||||||
13. | The parties represent, warrant and agree that they have received independent legal advice from their attorneys with respect to the advisability of executing this Consent Order. | ||||||
14. | Wachovia Capital Markets, LLC agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in this Consent Order or creating the impression that this Consent Order is without factual basis. Nothing in this Paragraph affects Wachovia Capital Markets, LLC’s: (i) testimonial obligations or (ii) right to take legal or factual positions in defense of litigation or in defense of a claim or other legal proceedings in which the Connecticut Department of Banking is not a party. | ||||||
15. | This Consent Order shall be binding upon Wachovia Capital Markets, LLC and its successors and assigns. Further, with respect to all conduct subject to Paragraph 2 above and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events and conditions, the terms “Wachovia Capital Markets, LLC” and “Wachovia Capital Markets, LLC’s” as used here shall include Wachovia Capital Markets, LLC’s successors and assigns (which, for these purposes, shall include a successor or assign to Wachovia Capital Markets, LLC’s investment banking and/or equity research operations, and in the case of an affiliate of Wachovia Capital Markets, LLC, a successor or assign to Wachovia Capital Markets, LLC’s investment banking or equity research operations). | ||||||
16. |
Wachovia Capital Markets, LLC, through its execution of this Consent Order, voluntarily waives its right to a hearing on this matter and to judicial review of this Consent Order under Connecticut law.
NOW THEREFORE, the Commissioner enters the following:
|
Dated at Hartford, Connecticut
this 4th day of April 2007. ________/s/_________
Howard F. Pitkin
Banking Commissioner
CONSENT TO ENTRY OF
CONSENT ORDER BY
WACHOVIA CAPITAL MARKETS, LLC
1. | Wachovia Capital Markets, LLC hereby acknowledges that it has been served with a copy of this Consent Order, has read the foregoing Consent Order, is aware of its right to a hearing and appeal in this matter, and has waived the same. |
2. | Wachovia Capital Markets, LLC admits the jurisdiction of the Commissioner neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Consent Order; and consents to the entry of this Consent Order by the Commissioner as settlement of the issues contained in this Consent Order. |
3. | Wachovia Capital Markets, LLC states that no promise of any kind or nature whatsoever was made to it to induce it to enter into this Consent Order and that it has entered into this Consent Order voluntarily. |
4. | Wachovia Capital Markets, LLC understands the State of Connecticut may make such public announcement concerning this Consent Order and the subject matter thereof as the State of Connecticut may deem appropriate. |
Charles S. Neal represents that he is a Vice President of Wachovia Capital Markets, LLC and that, as such, has been authorized by Wachovia Capital Markets, LLC to enter into this Consent Order for and on behalf of Wachovia Capital Markets, LLC.
Dated this 23rd day of March 2007
Wachovia Capital Markets, LLC
By: ________/s/_________
Charles S. Neal
Vice President
CONSENT TO ENTRY OF ORDER
I, Charles S. Neal, state on behalf of Wachovia Capital Markets, LLC that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Wachovia Capital Markets, LLC; that Wachovia Capital Markets, LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Wachovia Capital Markets, LLC voluntarily consents to the issuance of this Consent Order, expressly waiving any right to a hearing on the matters described herein.
By: ________/s/_________
Charles S. Neal
Vice President
State of: North Carolina
County of: Mecklenburg
On this the 23rd day of March 2007, before me, Sharon D. Hedgecoth, the undersigned officer, personally appeared Charles S. Neal, who acknowledged himself to be a Vice President of Wachovia Capital Markets, LLC, a corporation, and that he, as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as Vice President.
In witness whereof I hereunto set my hand.
________/s/_________
Notary Public
Date commission expires: 2/24/08
1. Associates assist Research Analysts in gathering information on the covered companies in writing reports. Associate positions provide training for becoming a Research Analyst and many Associates at WCM openly discussed what they needed to improve in order to “move to the next level” of becoming a Research Analyst.
2. The Analyst stated these were “More than I can count”.
3. References by Research Analysts to “space” mean the industry sector which the analyst covers.
4. The evidence does not indicate that the prior research ratings were influenced by Investment Banking.
5. The evidence does not indicate that the prior research ratings were influenced by Investment Banking.
6. During the Relevant Period, Investment Banking was headquartered in Charlotte; Equity Research and Equity Capital Markets were headquartered in Baltimore. No research analysts were located in Charlotte.
7. For purposes of this Consent Order, “e-mail folder” refers to the file produced by WCM for a specified analyst retrieved from a back-up tape for a specific date. The folder contained e-mail messages sent and received through the e-mail address assigned to a particular analyst; WCM represented that the folder would also contain all messages deleted by the analyst during a period of seven days prior to the date of the back-up tape from which the folder was pulled. In addition, a folder may contain an address book of contact information for frequent correspondents, calendar entries, and a journal of activities, depending on the set-up for the particular analyst.
8. Six of the missing folders subsequently were produced on December 2, 2003.