Sense on Cents

Brad Hintz is currently an analyst at Sanford C. Bernstein, a division of Alliance Capital Management. In the 1990s, Hintz served as CFO of Lehman Bros.. As such, Hintz is well positioned to comment on the ‘cooking’ that occurred at Lehman in the midst of the economic crisis which led to Lehman’s filing bankruptcy.

How does Hintz define Lehman’s accounting? In a word, “shenanigans.”

Take a look at a brief Bloomberg video clip to get an insider’s view of the Lehman kitchen:

In the spirit of full disclosure, while looking for background material on Mr. Hintz himself, I unearthed the fact that Mr.Hintz was sanctioned by the NASD (now FINRA) for selling his own personal positions in stocks (Lehman and Morgan Stanley) while continuing to recommend them. An NASD release highlights:

NASD announced today that it has imposed a fine of $350,000 against Sanford C. Bernstein & Co. LLC of New York and a fine of $200,000 against Charles B. (“Brad”) Hintz, one of the firm’s research analysts, for violations of NASD’s research analyst conflict of interest rules.

In its investigation, NASD found that Sanford Bernstein, a subsidiary of
Alliance Capital Management L.P., had favorable ratings on Morgan Stanley and Lehman Brothers securities that remained in effect while its research analyst, Hintz, was selling his own shares in the two companies, a violation of NASD Rules prohibiting trading contrary to an analyst’s recommendation. Hintz also engaged in transactions in six securities held in a discretionary personal account that were contrary to his then-current recommendations.

The fines represent the largest NASD has imposed to date for violations of its new research analyst conflict of interest rules, which were first approved by the SEC on May 10, 2002 and went into effect beginning July 9, 2002.

“NASD’s research analyst conflict of interest rules are designed to give
customers confidence that analysts’ stock recommendations are not biased due to any financial self-interest of the analyst,” said James S. Shorris, Acting head of Enforcement. “Inconvenience or expense does not excuse non-compliance with NASD’s rules against analysts trading contrary to their research recommendations.”

NASD found that Hintz, a high profile analyst covering financial services
companies, held a substantial amount of stock in Lehman Brothers and options to purchase stock in Morgan Stanley that he received as compensation when he served as the Chief Financial Officer and Treasurer, respectively, at those firms. Hintz’s Morgan Stanley options were set to expire in January 2005. NASD found that Hintz wanted to sell his holdings in both companies to realize the substantial gain in the value of the securities and to diversify his portfolio.

NASD rules, however, prohibit an analyst from effecting stock
transactions contrary to the analyst’s current recommendations; Hintz had favorable ratings on both companies at the time.

In 2004, Sanford Bernstein — at Hintz’s request — unsuccessfully sought an exemption from the rule prohibiting the sales, arguing that Hintz’s circumstances constituted a “hardship” and that he should be allowed to sell his holdings. Thereafter, Sanford Bernstein developed a plan — approved by the firm’s legal and compliance department and senior management — that it believed would allow Hintz to sell his holdings in Morgan Stanley and Lehman Brothers without violating NASD rules. Under this plan, Hintz issued what were purported to be his “final” reports on Morgan Stanley and Lehman on Dec.23, 2004. Those reports rated the two companies “outperform” (the firm’s highest rating) and “market-perform,” respectively, and purportedly “terminated” coverage, while indicating that Hintz intended to resume coverage in February 2005 after selling all of his holdings in both companies.

The reports further stated that the only “alternative” open to Hintz to allow him to sell his stock was to “terminate” coverage. One of the reports emphasized Hintz’s purported dilemma by quoting Joseph Heller’s Catch-22: “That’s some catch, that Catch-22.” To the contrary, Hintz did not have to sell his holdings and could have continued to hold his Morgan Stanley and Lehman Brothers securities, using other funds to pay for the costs of exercising his Morgan Stanley options.

Sanford Bernstein’s plan did not comply with NASD rules. There was no
bona fide termination of coverage because the firm intended to resume coverage of both stocks shortly after Hintz’s stock sales were complete. The investment recommendations on both companies therefore remained in force, despite the purported “termination,” and the stock sales in January 2005 violated NASD rules.

NASD also found that Hintz violated NASD rules as a result of numerous
stock transactions in a discretionary brokerage account maintained at a
domestic trust company. Sanford Bernstein, which received copies of the account statements, failed to supervise the activity in the discretionary account with a view towards preventing the violations. The account held securities in six companies that Hintz covered. Between August 2002 and January 2004, Hintz’s discretionary account engaged in 27 transactions in those securities that were contrary to his ratings. Also, 39 transactions were executed in the account either 30 days before or five days after Hintz published a research report on the company, thus violating NASD rules prohibiting transactions during a proscribed blackout period.

In addition, between August 2002 and December 2003, Sanford Bernstein and Hintz did not disclose his holdings in these six securities in 60 research reports, as required by NASD rules.

In connection with these settlements, Sanford Bernstein and Hintz neither admitted nor denied the charges, but consented to the entry of NASD’s findings.

What is the real lesson to be learned in both the Lehman case and also with this news about Brad Hintz as well? Once again, investors need to take the mantle of CAVEAT EMPTOR.

What a world.

LD

This entry was posted on Friday, March 12th, 2010 at 12:00 PM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.