Private Communications At Odds With Analyst’s Rating Result In SEC Charges

Posted On Monday, February 29, 2016
By: James W. Kraus

On February 17, the SEC charged a former Deutsche Bank research analyst with certifying a rating on a stock that was inconsistent with his personal view, in violation of Regulation AC.   On the same day, the analyst, Charles P. Grom, agreed to settle the charges by paying a $100,000 penalty, and consenting to suspension from the securities industry for one year.

According to the SEC, its investigation found that Grom certified that his March 29, 2012 research report about discount retailer Big Lots accurately reflected his own beliefs about the company and its securities.  In private communications with other Deutsche personnel, however, Grom indicated that he didn’t downgrade Big Lots from a “Buy” recommendation because he wanted to maintain his relationship with Big Lots management.

In announcing the charges and settlement, the SEC provided a summary of Grom’s actions, which included the following:

  • On March 28, 2012, at a non-deal road show hosted by Grom and Deutsche Bank, Grom became concerned by what he believed to be cautious comments by Big Lots executives;
  • After that road show, Grom communicated with a number of hedge funds clients about Big Lots, four of those hedge funds subsequently sold their entire positions in Big Lots stock;
  • The following day, Grom issued a research report in which he reiterated his buy rating;
  • During an internal conference call within hours after the publication of his report, Grom said to other Deutsche personnel, among other things, that he had maintained a buy rating on Big Lots because, “we just had them in town, so it is not kosher to downgrade on the heels of something like that.”
  • On April 24, 2012, during another internal conference call, Grom discussed disappointing first quarter sales figures at Big Lots and stated, “I think the writing was on the wall [that] we were getting concerned about it, but I was trying to maintain, you know, my relationship with them.”
  • According to the SEC, Grom consented to the entry of the SEC’s order finding that he willfully violated the analyst certification requirement of Regulation AC of the Securities and Exchange Act of 1934.  He neither admitted nor denied the SEC’s findings.

A link to the SEC’s order can be found here.