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FINRA Says No to Re-Bankerizing Research

December 17th, 2014

In an echo of the 2003 Global Research Analyst Settlement, FINRA fined ten investment banks $43.5 million for allowing equity analysts to solicit investment banking business in connection with a proposed IPO for Toys ‘R’ Us (TRU).  Eight of the ten banks had participated directly in the Global Settlement.  Plus ça change, plus c’est la même.  However, FINRA’s actions make it harder for investment banks to monetize their research operations.  If banking research remains primarily funded by trading commissions, the future is not a happy one.

The 10 Banks

FINRA fined Barclays Capital (whose acquisition Lehman had been a Settlement participant), Citigroup, Credit Suisse, Goldman Sachs and JP Morgan $5 million each for violations of NASD Rule 2711, the research analyst conflict of interest rule.

Deutsche Bank, Merrill Lynch, Morgan Stanley and Wells Fargo were fined $4 million each, and Needham & Company was fined $2.5 million.  The banks consented to the fines but neither admitted nor denied the charges.

The Alleged Wrongdoing

FINRA alleges that each of the ten banks included their analysts in meetings their bankers held with TRU management and TRU’s private equity owners (Bain Capital, KKR and Vornado Realty Trust).  The meetings were set up to solicit the analysts’ views on key issues, including valuation factors, and to determine if the analysts were aligned with the views expressed by the firms’ investment bankers.  According to FINRA, each firm understood that the performance of their analysts at the presentations would be a key factor in determining whether the firm received an underwriting role in the IPO.

According to the settlement documents, each of the firms implicitly or explicitly offered favorable research coverage in return for a role in the IPO.  As an example, the unnamed analyst at Citigroup sent an email to a supervisor stating: “I so want the bank to get this deal!”  One of the private equity owners of TRU wrote that the bullishness of the Credit Suisse analyst was “off the charts.”  Most fervent of all, however, was the analyst at Needham, who wrote “I would crawl on broken glass dragging my exposed junk to get this deal.”

Rule 2711

FINRA charged the banks with violations of Rule 2711(c)(4), which prohibits participation by analysts in pitch meetings, and Rule 2711(e), which forbids the promise of favorable research.  Some of the banks were also charged with a failure to supervise, in violation of 2711(i), which outlines supervisory procedures.

Rule 2711(c)(4) states, “No research analyst may participate in efforts to solicit investment banking business. Accordingly, no research analyst may, among other things, participate in any ‘pitches’ for investment banking business to prospective investment banking clients, or have other communications with companies for the purpose of soliciting investment banking business.”

Under Rule 2711(c)(4), an analyst is allowed to communicate with an issuer during the solicitation period for due diligence purposes, but is not permitted to help solicit a role in the underwriting.   An analyst is prohibited from communicating views on the issuer, the issuer’s industry, valuation or comparable companies.

Rule 2711(e) states, “No member may directly or indirectly offer favorable research, a specific rating or a specific price target, or threaten to change research, a rating or a price target, to a company as consideration or inducement for the receipt of business or compensation.”

Reforms to Rule 2711

In 2012, the JOBS Act allowed analysts to participate in pitch meetings for Emerging Growth Companies, but the other Rule 2711 restrictions were not relaxed.  In other words, analysts could attend to the meetings but could not help efforts to solicit banking business.  The regulation begged the question of why bother to invite the analysts if they can’t help the bankers?

FINRA is also proposing to consolidate Rule 2711 into a new Rule 2241, with some minor changes.  One not-so-minor proposed change would be to reduce the current 15-day quiet period to 10 days prior to an IPO and 3 days after.  The comment period for the proposed changes expired December 16th.

Our Take

The 2003 Global Settlement weakened one the key business supports for investment research, the link to investment banking.  Post-settlement, research has been mainly funded by trading commissions.  However, with equity commissions increasingly under market and regulatory pressure, the temptation is very strong to “re-bankerize” research.  After all, why else would Evercore buy ISI?

The FINRA action throws cold water on the proposition of diversifying the research revenue base away from commissions, at least for U.S.-based research.  (Outside the U.S., analysts and bankers are permitted to be cozier.)  The weakened ties between banking and research makes it more difficult to monetize research in an environment of structurally declining commissions, increasing the likelihood of further rationalization of investment banking research operations.

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Insider Trading Reversal Deals Gov’t Major Blow

December 15th, 2014

Last week, a federal appeals court reversed two key insider trading convictions, in a decision which made it clear the government did not prove that a crime was committed.  More importantly, the court’s decision could have major implications on prosecutors’ ability to win insider trading cases in the future.

Background of Case

This case arises from the Government’s investigation over the past few years into suspected insider trading activity at hedge funds. At the initial trial in 2012, the Government presented evidence that a group of buy-side analysts exchanged material non-public information they had obtained from company insiders.

The Government alleged that these analysts received information from corporate insiders at Dell and NVIDIA disclosing those companies’ quarterly earnings before they were publicly released at various times in 2008.  These analysts passed the inside information to their portfolio managers, including Todd Newman of hedge fund Diamondback Capital Management and Anthony Chiasson of Level Global Advisors.  These managers in turn, executed trades in Dell and NVIDIA stock, earning approximately $4 million and $68 million, respectively, in profits for their respective funds.

In December 2012, Chiasson and Newman were found guilty of insider trading.  Subsequently, in May 2013, U.S. District Judge Richard Sullivan sentenced Newman to 54 months in prison and Chiasson received 78 months for their roles in what the prosecutor called a “criminal club” that netted them more than $70 million in illegal profits.

Appeals Court Decision

In its stunning 28 page decision, United States Court of Appeals for the Second Circuit in Manhattan overturned two of the government’s insider trading convictions, against hedge fund managers Todd Newman and Anthony Chiasson.

The unanimous decision by a three-judge panel was the first time that United States attorney in Manhattan, Preet Bharara, had one of his insider trading convictions overturned.  The appeal court’s rationale for this decision was based on two factors — an error by the trial judge in his jury instruction and insufficient evidence on the part of the government.

“We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.  Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons.    First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive.    Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.”

In its ruling, the appeals court consistently cited its reading of the US Supreme Court case Dirks vs. the SEC which has long been used in understanding the courts’ view of insider trading.  However, the appeals court went farther in its ruling to create a more defined line when assessing insider trading liability.

“In sum, we hold that to sustain an insider trading conviction against a tippee, the Government must prove each of the following elements beyond a reasonable doubt: that (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.”

The appeals court felt the government failed to prove all of these facts beyond a reasonable doubt.  Consequently, the three judge panel not only reversed the convictions, but they threw out the cases altogether.

In addition, the Second Circuit Court of Appeals attacked the Government’s contention that simply obtaining and trading on material nonpublic information was in itself enough to constitute a crime.

“Although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.    The Supreme Court explicitly repudiated this premise not only in Dirks, but in a predecessor case, Chiarella v. United States.    In Chiarella, the Supreme Court rejected this Circuit’s conclusion that ‘the federal securities laws have created a system providing equal access to information necessary for reasoned and intelligent investment decisions . . . . because [material non‐public] information gives certain buyers or sellers an unfair advantage over less informed buyers and sellers.’  445 U.S. at 232.   The Supreme Court emphasized that ‘[t]his reasoning suffers from [a] defect. . . . [because] not every instance of financial unfairness constitutes fraudulent activity under § 10(b).’”

Potential Impact of the Decision

The response to this decision has been extreme from both prosecutors and defense attorneys.  On the one hand, prosecutors feel the appeal court’s decision will make it extremely difficult to prove insider trading cases – particularly when tippees are far removed from tippers as it will be difficult to prove that the tippees knew what benefits the tippers received to provide material nonpublic information.

In a public statement, US attorney Preet Bharara said that the appeal court’s ruling “interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information.”  Mr. Bharara said he was still evaluating the ruling and was considering appealing it to the Supreme Court.

Defense attorneys, however cheer the clarity that the appeals court provided in its decision regarding what the government must prove to win an insider trading case.

Some also suggest that the appeals court ruling could be extremely good news for other insider trading cases awaiting appeal.  Michael Steinberg, of SAC Capital Advisors was also convicted of insider trading last year, and the judge who provided “erroneous instructions” to the jurors in  Newman’s and Chiasson’s trial was the same who presided over Steinberg’s case — Judge Richard J. Sullivan.  In that case, Steinberg was also far removed from the sources of the material nonpublic information.

The dismissal of the case against Mr. Chiasson and Mr. Newman could also lead to other dismissals — particularly those of cooperating witnesses who pleaded guilty to trading on the same material nonpublic information obtained from Dell and Nvidia insiders.  The reason these reversals might occur is because the appeals court concluded that not only were Mr. Chiasson and Mr. Newman unaware that insiders had received a benefit, but that no such benefit had ever existed. This means that no insider trading took place.

Integrity’s Take

It is important to note that there is no actual legislative statute which specifically addresses insider trading or makes it illegal.  Rather, courts have interpreted the general law against securities fraud and have applied it to prohibit “insider trading”.  Unfortunately, over the years the courts have not made it clear exactly what it takes for a tippee to be found guilty of insider trading.

The appeals court’s reversal of Mr. Chiasson and Mr. Newman’s insider trading convictions are important as this decision makes it clearer when a tippee is liable.  This decision is also likely to have a significant impact on the government’s ability to prove insider trading cases when the purported tippee is not directly connected with the tipper because it will be harder to prove that a tippee knows that the tipper breached his/her fiduciary duty by receiving a benefit to provide this inside information.

In addition, the appeal’s court made it clear that the Government could not rely on the argument sometimes used that a “benefit” is being bestowed merely as a result of the tipper and tippee being friends.  The appeals court clearly highlighted that a fraudulent breach of fiduciary duty could not be proven unless the personal benefit received by the tipper in exchange for the confidential information is of “some consequence”.

Ultimately, we feel that if the appeals court decision stands, prosecutors will be limited in their ability to win insider trading cases unless the tipper and tippee directly interact, or unless the tippee is clearly aware that the tipper breached his/her fiduciary duty by receiving a meaningful benefit, and despite knowing this the tippee still traded on the inside information.

We also see this case as important as it clearly outlines that a tippee IS NOT guilty of insider trading even if he/she obtains material nonpublic information AND ALSO trades on it.  Merely profiting from an informational advantage IS NOT the basis for criminal action.  Instead, a tippee is only guilty of insider trading if he/she provides a substantial benefit to the tipper to encourage him/her to breach their fiduciary duty by providing this inside information to the tippee, and then the tippee trades on this information.

Despite what many people beleive (including numerous regulators and journalists), hedge fund investors can still discover and profit from informational advantages without fear of being charged with a criminal activity.

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Survey Shows Concerns About MiFID II

December 10th, 2014

A recent Extel survey showed that while a majority of asset managers felt that the proposed MiFID II ban on paying for research with client commissions would reduce coverage of UK small cap stocks, they minimized the importance of external research relative to corporate access and in-house research.  Surprisingly, a majority of asset managers did not believe MiFID II would change the competitiveness of European asset managers relative to their non-European counterparts.

A recent survey, “Unintended Consequences- The impact of the UK equity market of proposed research payment changes in MiFID II”, was commissioned by Peel Hunt, a broker specializing in UK mid- and small-cap stocks, and executed by Extel WeConvene.  The survey was conducted in October and November 2014, and included 161 participants from 137 asset managers.  Copies of the report can be obtained by emailing Peel Hunt at marketing@peelhunt.com.

A resounding 84% of respondents felt that MiFID II proposals would decrease analyst coverage of UK small caps and 74% believed that they would affect liquidity of UK small-cap stocks (presumably for the worse).

At the same time, asset managers do not believe high levels of analyst coverage are necessary.  Approximately 30% felt that 1-3 analysts was the minimum coverage necessary to make research useful, while 45% felt 4-6 analysts sufficient.

Moreover, asset managers did not seem wildly supportive of the overall value of external research.  46% ranked corporate access (which is no longer payable with client commissions in the UK) most highly, followed by 35% that ranked in-house research most highly.  Only 22% ranked research reports most highly and 2% ranked access to external analysts highest.  Over 50% said they valued internal research more highly than sell-side research.

Nearly half believe research coverage of FTSE 100 stocks add value to their investment process either infrequently or not at all.  Only a third felt that way about small-cap coverage.

86% felt that the MiFID II proposals would affect small asset managers more than large asset managers and 84% felt that a ban would raise barriers to entry in the investment management industry.  However, 54% did not believe the proposals would change their competitive position relative to non-European asset managers.

Over 60% believed that a research commission ban would not impact their fund charges.  While obviously very concerned with the impacts of a potential research commission ban, fewer than 5% felt that their clients should pay for research.

Our Take

As we have discussed previously, we believe it unlikely that MiFID II will end up banning the payment for research with client commissions.  The FCA has said it will abide by the MiFID II guidelines even though it could go further than the guidelines require.

Nevertheless, the survey highlights the complex relationship that asset managers have with external research.  Asset managers clearly like the status quo, in which research is subsidized by client commissions, yet are not enthusiastic about the relative value of external research, especially when compared with internal research and corporate access.

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Wall Street Jobs Picture Brightens in November

December 8th, 2014

Layoffs at Wall Street investment banks and brokerage firms plunged in November 2014 after surging the previous month, according to a recent private jobs report.  In addition to the drop in layoffs, new hiring surged in November to the highest level seen in the past few years as Wall Street firms started expanding their investment banking payrolls as the M&A boom continues.

November Challenger, Gray & Christmas Report

According to the Challenger, Gray & Christmas monthly Job Cuts Report released last week, the financial services industry saw a 61% drop in planned layoffs from 1,673 layoffs announced in October to 657 layoffs announced in November.  The November layoff total was 59% below number of announced layoffs reported in November of 2013, and was the lowest level of layoffs seen in November since 2010.

On a year-to-date basis, Wall Street firms have announced 26,953 layoffs during the first eleven months of 2014, 54% less than the 59,189 layoffs announced during the same period in 2013.  The decline in announced layoffs on a year-to-date basis is a signal that the Wall Street employment outlook is continuing to improve, although slowly.

The most surprisingly aspect of the November Challenger Gray & Christmas report was the extremely strong new hiring data for the month.  According to CGC, financial services firms announced 4,620 new jobs to be filled during November – the highest monthly new hiring level seen in the past few years.  On a year-to-date basis Wall Street firms have announced plans to hire 7,349 new positions, 67% higher than the 4,411 new positions announced during the first eleven months of 2013.

Some Banks Continue to Shed Workers

Last month, in a bid to reduce expenses, JP Morgan Chase announced plans to slash another 3,000 jobs in its consumer and community banking division by the end of the year.   This is on top of earlier reports from the company to cut 7,000 jobs in its mortgage banking business and 4,000 positions in its consumer and community banking division.

This is part of the bank’s overall plans to reduce expenses in its consumer banking unit by $2 billion between 2014 and 2016.  Some of this cost cutting is expected to come from increased technology usage.

Scotiabank, also in the midst of a round of cost reductions, announced that it plans to cut 1,500 jobs in the next few months – 2/3rds of these cuts are expected to come from its domestic Canadian operations.

In addition, Capital One Bank announced plans to lay off more than 100 people in Houston early in 2015 when it moves responsibility for managing and processing account activity for its local branches out of Texas.

M&A Boom Prompting Demand for Staff

However, some bright spots are evident on Wall Street. According to data from Thompson Reuters, the value of mergers and acquisitions during the first three quarters of 2014 totaled $2.66 trillion – marking a 60% increase on a year-on-year basis.  This torrid pace of acquisitions continued in the 4th quarter as two of 2014’s biggest M&A deals – Activis’ $66 billion bid for Allergan and Halliburton’s $34.6 billion offer for rival Baker Hughes – took place in November.

The steady improvement in global M&A activity during 2014 is expected to result in increased M&A advisory fees for investment banks.  Some analysts suggest that the increased volume of mergers activity seen so far this year should result in a 12% jump in investment banking fees for the industry as a whole in the third quarter as compared to the previous quarter.

As a result of this increase in M&A volumes and resulting rise in investment banking fees, some Wall Street firms have felt it necessary to increase their staffing in order to meet the demands of the increased workload in their investment banking divisions.

Impact on the Research Industry

While it is difficult to forecast whether the surge in M&A activity will continue into 2015, many experts believe that the surge in activity seen in 2014 is not a temporary phenomenon, but rather the beginning of an uptrend as CEO’s and corporate boards become more confident about the future.

If this does in fact take place, we would not be surprised to see investment banks invest more heavily in its equity research division in order to better compete for juicy banking mandates and provide appropriate aftermarket support for these deals once they are secured.

However, this does not mean that the cash equities business, which provides the economic foundation for the equity research business, looks to be improving very much in the coming year.  In fact, weak equity commission volumes and increased regulatory pressures are likely to moderate hiring at sell-side and independent research businesses for the foreseeable future.

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Insider Trading 2.0: Hackers Stealing Corporate Tips

December 4th, 2014

Cybersecurity researchers revealed earlier this week that they have uncovered a computer espionage ring that has been stealing corporate secrets from dozens of pharmaceutical and healthcare firms.  They argue that the hackers seem to have been stealing data that would give them an illicit leg up making stock transactions.

Background of the Story

The publically traded computer security firm, FireEye Inc, disclosed that over the past eighteen months this group of hackers, dubbed FIN4, has been attacking the e-mail accounts at more than 100 U.S. healthcare and pharmaceutical companies that trade on the NYSE or NASDAQ.

Executives at FireEye explain that FIN4 has only targeted people at these firms who have access to material non-public information which the hackers could profitably trade on before the data was made public.  In addition, FIN4 seem to have attacked key advisers outside the companies including investment bankers, attorneys and investor relations firms.

The kind of information collected by the hackers include drafts of SEC filings, merger and acquisition documents, discussions of pending legal cases, key board documents, and the results of medical research.

FireEye management believes that members of the FIN4 ring were trained at Wall Street investment banks, enabling them to knowledgeably identify their targets and draft convincing phishing e-mails.  In addition, the security firm says that the hackers are likely from the US or Europe based on the language and sentence structure used in their phishing e-mails.

While FireEye says it does not know whether FIN4 traded on the information it stole, it has turned over what it’s learned about the hacking ring to the FBI.  Shares of FireEye were up more than 4% after the company disclosed that it had been tracking this hacking ring.

Integrity’s Take

What’s interesting about this story is that it marks the first significant case where potential insider trading activity could have resulted from a prolonged effort by hackers to steal sensitive corporate information.

Ultimately, this means that the DOJ and SEC will need to shift its focus from investigating insider trading activity at hedge funds to a new type of insider trading scheme – one engineered by computer savvy hackers.  While we suspect this won’t make it any easier on hedge funds, we do think it could make it more difficult for federal authorities who will need to investigate new types of criminal cases with limited resources.

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Harassing Short Ideas in India

December 1st, 2014

A former analyst for short-ideas researcher Veritas Investment Research Corporation was arrested by Indian police on Friday.   The arrest came as Indian regulators are finalizing new restrictions on foreign research firms.

Indian police reportedly arrested stock analyst Nitin Mangal after Indiabulls Real Estate Ltd. alleged that he demanded $50,000 to withhold an unflattering research report he wrote for Toronto-based Veritas in 2012, according to articles in the Economic Times and Bloomberg.  Mangal’s lawyer said the action was harassment.

Indian police are also reportedly seeking to extradite from Canada the co-author of the Veritas Indiabulls report.

Veritas published a report in August 2012 authored by Mangal and Neeraj Monga claiming poor corporate governance and lack of disclosure at Indiabulls group companies.  Indiabulls quickly responded by filing criminal charges against the two authors for extortion and forgery.

In August of this year, Veritas and Monga filed a claim in Canadian courts against Indiabulls Real Estate and Indiabulls Housing Finance Ltd. alleging libel, conspiracy and the infliction of economic harm and seeking C$11 million (US$9.7 million) in damages.  Veritas shut down its Indian operations in 2012 and no longer follows Indian companies.

Veritas shook Indian markets in 2011 with harsh reports attacking the financial reporting and governance of large Indian companies.  Veritas put out a report on Reliance Industries and Reliance Commuications in July 2011,  Kingfisher Airlines in September 2011, and DLF in March 2012.  Kingfisher subsequently reported large financial losses and the founder of DLF was banned from the company after regulators found financial reporting irregularities.

Veritas provides earnings quality, forensic accounting and fundamental valuation analysis on about 85 names.  Unlike Muddy Waters or Citron Research, which make money by front-running their research, Veritas relies on subscriptions from institutional investors.  The firm has been in business since 2000, and is primarily staffed with forensic accountants.

Mangal, who set up his own research firm Trudom Investment Research Corporation in 2012, is a chartered accountant who previously worked as an equity analyst at the Indian investment bank Edelweiss Capital.  Co-author Neeraj Monga left Veritas this summer to set up his own investment firm, ANTYA Investments.

As we noted at the time, the Securities and Exchange Board of India (SEBI) announced it was considering regulating independent research analysts in March 2012, apparently in response to the Veritas reports.

In November 2013, SEBI issued a consultation paper on draft regulation requiring foreign independent research firms to set up Indian subsidiaries which would need to be registered with SEBI.  The comment period closed last December and SEBI is reportedly close to finalizing the regulation.

Our Take

It is not uncommon for companies to take legal action against authors of short-oriented research reports.  Gradient Analytics was harassed for years by Biovail and Overstock.com before the charges were settled.  Biovail’s successor firm issued a statement that the original litigation against Gradient was ‘regrettable’.  However, that doesn’t stop publicly-traded companies from trying to suppress negative research and retaliate against equity analysts who hold negative opinions.

What is particularly regrettable is SEBI’s indirect support for suppressing “foreign” research.  It is unclear what protections independent research firms registering under SEBI’s new regulations would have against aggressive actions similar to those taken by Indiabulls.  Firms like Veritas have no incentive to subject their analysts to the legal risks posed by companies such as Indiabulls, not to mention the legal costs.  The net effect of the new SEBI regulation will be to discourage research firms from uncovering questionable practices in Indian companies.  Firms like Veritas will shun the market, leaving the ground open to the “short and shout” firms like Muddy Waters, Citron, and others that make money by driving down prices.  SEBI’s actions designed to police bear cartels will in the end make those cartels more lucrative.

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The Slow and Bumpy Recovery in Equities Hiring

November 26th, 2014

The following perspective on equities staffing is from Oliver Rolfe, who heads Spartan Partnership, a London-based executive search firm specializing in equities recruiting.

Over the past 6 years the world of equities has taken a dramatic turn which has left hundreds, if not thousands of talented analysts, sales people and traders out of a job they loved so dearly. However in 2011 I had predicted that we would see an uptick in the equity world by September/October of 2013 that would spark the new, albeit slow beginning. This is has happened and the time is now to reorganise and structure any bank or broker to mirror their core values or fear the potential of being swallowed by the markets.

In the years following 2008 and the financial crash, equity markets have wanted to rebound as quickly as they had fallen. In 2009/10 we had a false dawn that had seen many firms either merge with one another, significantly reducing in size or shutting down altogether. With the global governments pumping in billions of dollars in to the financial system we had to see some improvement.

From the CEO’s and founders I know personally, the consensus view was one of crash to boom to bust, and finally to a settled level. The Wall Street Crash in the 1920’s took circa 15 years to recover and we now are 8 years down the road from our latest crisis.  Although we are on uncertain ground, with the likes of Espirito Santo more recently, we will continue to ride the curve both up and down until it levels off again. Throughout this time period you will see the cream rise to the top and hiring become more specialised and focused, but you will definitely see it.

Recruitment, since September/October 2013, has seen a real rise in opportunities both on the buy-side and sell-side. Whilst the buy-side has been happy to take talent of any age and sector, the recruits on the sell-side have been much more specific and reliant on seniority and a strong client franchise that would benefit the hiring company on revenues and client base.

Due to the pool of talent in the City of London dwindling dramatically in recent years, from those either leaving or being pushed out of the market, we will either see a rise in the cost of hiring and bidding up to secure talent or there will be a drive towards hiring individuals from consulting and accounting firms.

We have seen the likes of Oliver Wyman, PWC, Deloitte, Gartner & many other consulting firms be a hunting ground for asset managers, hedge funds & investment banks globally. This is driven towards hiring more sectorially focused analysts that would be in line with a banks strategy across their verticals or the buy-side across their funds. Additionally, the increase in hiring consultants will also come as a further service to clients on both the buy & sell side in a market that is screaming out for a full service.

Personally, I do not see how we can afford to increase costs in these markets but I do expect the best to get paid whilst banks and brokers look to hire the new breed of analysts outside of the market at a considerably lower cost.

We have seen a big jump in the number of US firms entering the European market and we have personally been building teams to attack the market share of JP Morgan, Citi, Morgan Stanley and BoA-ML as their service to clients worsen and they lose their way. The time is now for the mid-tier to gain market share and profitability, the market place; is Europe. We see Sterne Agee as an example of a firm which has been building it’s equities team, and is one to watch, now and in the future, for US Equities in Europe.

With the FSA, no sorry, FCA, let’s just call them the City Police banning the payment for corporate access with client commissions, we have seen some companies being heavily affected. None more so than Atlantic Equities, the US Equities broker famed for their strong corporate relationships. It is said that a number of Atlantic’s clients have halved the number that they can pay the firm, and in some cases more than half.  Atlantic has made some tough decisions and have cut two founding partners as well as individuals in sales and research, whilst losing some analysts to competitors – the world has changed and all companies must restructure and compensate for this loss, now and in the future.

Spartan Partnership offers an executive search capability within Global Equities, including Equity Research, Equity Sales, Equity Sales Trading and Equity Trading.   As a pure Equities search firm, Spartan provides a consultative approach, adding strategic advice, human capital growth and organisational development.  Founder Oliver Rolfe has over a decade experience in equities recruiting, assisting clients in building their global offices, departments and teams.   For more information on Spartan Partnership please visit www.spartan-partnership.com or contact Oliver Rolfe, Founder & Managing Director at +44 203 440 5885 or +1 646 688 2393, oliver.rolfe@spartan-exec.com.

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Dodilio Looking To Sell Business

November 24th, 2014

Dodolio, a custom investment research procurement platform, is now looking to find a strategic buyer to purchase the assets of its business, after spending the past few years building out its proprietary technology platform and proving its business model.

Firm Background

Founded in April 2011 and headquartered in Needham, Massachusetts, Dodilio was fully launched in April 2013.  Dodilio is a research procurement platform, bringing providers and consumers of custom research together to make it more accessible and affordable for both parties.  Dodilio’s competitive advantage comes down to process and technology – being able to deliver research better, faster and at a lower cost.

The Dodilio platform enables research consumers to make a request for a specific custom research project to numerous research providers that have expertise in delivering the needed type of work.  Dodilio’s competitive auction platform makes providers compete on both competence and price for every RFP promoting both price transparency and process efficiency.  Dodilio’s traditional customers are typically larger scale purchasers of custom research.  The Company is focused on three customer end markets:

  1. Financial Institutions – both public and private investors that need custom investment research including capital markets professionals in need of transaction due diligence;
  2. Corporations – companies requiring market research solutions which span business development, corporate marketing, and investor relations; and,
  3. Service Firms – includes consulting firms and universities.

Since Dodilio went operational in 2013, they have consummated close to 40 transactions on their platform averaging close to $20,000 per deal.  The company makes money in two ways, including charging a base level subscription to research purchasers to gain access to their database of providers; and a commission based on the value of the custom research project purchased over the platform.

Market Opportunity

According to Dodolio management, the global investment research and data marketplace totals approximately $20 bln per year.  However, Dodolio is focused on serving the marketplace for custom research mandates – which they estimate totals close to $2.0 bln per year globally.

Dodolio believes that the demand for custom research is growing rapidly.  However, they see significant barriers for consumers to engage custom research providers, including:

  • Providers are hard to find;
  • Quality is uncertain;
  • Pricing is difficult to assess; and,
  • Acquiring custom research lacks anonymity.

Today, custom research is purchased in one of three primary ways:  (i) an in-house analyst runs a one-off, infrequent process; (2) the request is outsourced to a specific large scale incumbent research provider (e.g., Gartner, Forrester); or (3) the request is procured from an expensive middle-man, often a large consulting firm.

Dodilio sees three primary types of competitors serving consumers who want custom research.  Full-service consulting firms sell a total solution, aggregating expertise from diversified providers, i.e. not direct.  Second, research platforms exist which distribute syndicated research, but they lack customization.  Third, expert networks offer custom solutions, but the projects are advisory based versus project based and are sourced by moonlighters and independent members, rather than institutional grade research providers.

Dodolio believes that their proprietary technology platform and their database of custom research providers solves many of the issues potential clients currently face.

Assets To Be Sold

As mentioned previously, Dodolio plans to sell all the assets necessary to operate and expand its business on a going forward basis.  This includes:

Software – Dodilio has created a system where an automated request for proposal (“RFP”) enables clients to efficient and transparent share requirements for potential projects and research firms can share their specific capabilities which line up with the project.  In addition, the Dodilio platform aggregates bids and cost-sharing opportunities transparently; and, matches research provider responses to enable the selection of the best provider.  All code for the system will be provided as part of the sale.

Patent – Dodolio has applied for a relevant patent regarding its system.  This patent is for a computer implemented system and method for conducting and disseminating financial research products and services among users in an investment community including a social network module configured to store electronic user files for each of the users.  Generates a network user interface configured to enable communication among the users via the users’ client computers in real time and/or asynchronously. U.S. App. No. 13/563,900, Filed on August 1, 2012, Status: Pending

Database – Critical to the Dodilio platform is its database of 4,000+ research providers, all of which are tagged and classified based on domain expertise.  Participating providers include expert networks (e.g., Maven and Primary Insights), broker-dealers (e.g., UBS, J.P. Morgan, Merriman, Wunderlich), data providers (e.g., ITG, Discern), and other institutional-grade independent research providers (e.g., HSI, Deloitte).  The database will be provided as part of the sale.

Management Team – Dodilio’s principals are integral to the operations and technology of the platform and are available to operate the virtual procurement exchange on behalf of the acquiring party or provide related consulting services.

Rationale for Sale

For the past year, Dodolio management has been looking to raise capital to fund the scaling of its business.  And while many investors were interested in the firm’s business model, platform, and competitive advantage, most felt the firm lacked one key asset required for an exchange like Dodolio to become successful – and that is access to a large universe of potential research consumers.

Consequently, in recent months, Dodolio management made the difficult decision to consider trying to sell the assets of the business to a buyer who might have the right distribution.  A few of these types of firms include:

  1. Trading firm / Agency broker – Any firm that provided execution services to institutional investors but who did not already have their own in-house research services.
  2. Market Data Vendor – Any firm like Bloomberg, Thomson Reuters, or FactSet that was in the business of selling content to the institutional investor community.
  3. Social Media / Technology Vendor – Any firm like LinkedIn, Yahoo, Google, Seeking Alpha or SumZero which was in the business of building and serving a community and who might benefit from being able to commercialize these relationships by selling professional content to them.
  4. Startup FinTech Company – Any firm that was interested in adding investment content to their business and providing a way to make money from this content..
  5. Global Investor – Any large global investor like Bridgewater, Fortress, or Fidelity who might find the Dodolio platform useful to manage the internal process of finding and procuring external research among their staff of investment professionals.

Next Steps for Interested Parties

As part of this effort to sell the business, Dodilio has hired business advisor, Sherwood Partners, Inc. to identify interested parties and to manage the sales process.  If you are interested in learning more about the possibility of acquiring Dodolio’s assets, contact:

Mr. Kumar Singla
Sherwood Partners, Inc.
555 Fifth Ave., 14th Floor
New York, New York 10017
Direct:         212-994-8156
Facsimile:   650-454-8049
Email:          ksingla@shrwood.com

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Herb Greenberg Founding Short Ideas Research Firm

November 19th, 2014

Journalist Herb Greenberg announced he will leave TheStreet at the end of the year to set up a short-oriented research firm, GVB Financial Research.  He will be joined by Donn Vickrey, a founder of Gradient Analytics, and John Bossler, founder of C & L Research, a short ideas boutique.

Greenberg announced his decision in a post on LinkedIN.   Greenberg ran an independent research firm, Greenberg Meritz Research & Analytics, for two years prior to becoming a commentator on CNBC.

Donn Vickrey is a well-known forensic researcher, having been a founder of Camelback Research Alliance in 1995 which, after a name change to Gradient Analytics, sold its qualitative research unit to Sabrient Systems in 2011.  Vickrey recently left Sabrient to co-found Vickery-Brown Investments, which specializes in investment strategies which combine quantitative strategies, forensic accounting and volatility controls.

John Bossler also has an extensive research pedigree, having started as an analyst at Fahnestock in 1998, then moving to Dominick & Dominck.  He recently ran C & L Research, a provider of  proprietary short/long research for hedge funds.

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Singular Research Hosts Ninth Annual “Best of the Uncovereds” Investment Conference

November 18th, 2014

Small and micro cap companies often outperform the overall stock market.  Unfortunately, most investment banks focus on large and mid-cap names, resulting in a lack of high quality research on companies with market caps under $2.0 billion.  Fortunately, a number of independent research firms traffic in this type of research.  One such firm is Singular Research, who is sponsoring its Ninth Annual “Best of the Uncovereds” Investment Conference this Thursday, November 20, 2014, from 9 a.m. to 5 p.m. at the Westin New York at Times Square. Refer below to the press release for this upcoming conference.

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Singular Research invites press and analysts to attend our Ninth Annual “Best of the Uncovereds” Investment Conference on November 20, 2014, from 9 a.m. to 5 p.m. at the Westin New York at Times Square.

We feature some of the best, uncovered companies with small and microcap market capitalizations. Learn more about the event here.

You will hear from over 20 specially selected top tier companies. Presenting companies will give a 30 minute presentation in a formal setting, followed by a group question and answer break-out session. We can also arrange one-on-one meetings with presenters upon request.

“The recent West Coast edition of this conference was our best ever with 25 company presenters interacting with over 200 financial professionals and we expect a similar event in New York,” said Robert Maltbie, President, Singular Research. “We are thrilled to feature presenters who are not typically covered and are ‘off the radar,’ but who also show great performance potential for investors. They truly are the best of the uncovered and positioned for explosive growth.”

A preliminary presenter list is below (we expect over 20 presenters):

ACETO Corporation (ACET)
Acme United Corporation (ACU)
Adaptive Medias, Inc (ADTM)
Advanced Emissions Solutions (ADES)
Axion Power International (AXPW)
Bacterin International (BONE)
Comstock Mining Inc. (LODE)
DXP Enterprises (DXPE)
Highpower (HPJ)
IntelGenx Technologies Corp. (IGXT)
INTL FCStone Inc. (INTL)
Manitex International (MNTX)
Midwest Energy Emissions Corp (MEEC)
Multi-Color Corporation (LABL)
Newtek Business Services (NEWT)
Prospect Capital Corporation (PSEC)
Seabridge Gold (SA)
Sparton Corporation (SPA)
Trecora Resources (TREC)
Youngevity International (YGYI)
* Presenter list is subject to change

Our audience consists of institutional investors with a specific interest in identifying attractive small and microcap companies. Their makeup includes portfolio managers, hedge fund managers, family offices, wealth managers, and analysts representing over $70 billion in assets and investing funds. Our attendees include leading banking, trading and brokerage firms and their clients, as well as prominent five star-rated small and micro-cap portfolio managers.

Singular Research, based in LA and NY, is one of the most trusted providers of unbiased, performance-based research on small and micro-cap companies to fund managers. Singular provides initiation reports and quarterly updates for approximately 60 companies. In many cases, Singular’s analysts research companies that are not often covered by any other firms.

Qualified editorial press are invited to request a comp pass to cover this event. Send an email with your name, title, outlet and link to articles or coverage to Bill Jones. wjones@singularresearch.com.

Contacts

Singular Research
William Jones, CFA
267-987-2082
wjones@singularresearch.com


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