NASD Regulation Fines Hornblower & Weeks, Inc. $100,000 and Suspends Firm From All Research Activities for Six Months; Firm President Also Fined and Suspended
Washington, D.C. — NASD Regulation, Inc. today announced that as part of its ongoing focus on research analyst activities, it reached a settlement with Hornblower & Weeks, Inc. of New York, NY, and its President, John Rooney. NASD Regulation found that the firm and Rooney issued a research report recommending the common stock of MyTurn.com as a "strong buy" when, in fact, the report contained baseless projections, misleading and exaggerated statements and omitted important facts, in violation of NASD antifraud and advertising rules, as well as the antifraud provisions of the federal securities laws.
As part of its settlement with NASD Regulation, Hornblower was censured and fined $100,000. Hornblower also agreed to suspend its research activities for six months and, before resuming research reports, to retain an outside consultant to review and make recommendations concerning the firm's procedures relating to research reports.
Rooney was fined $85,000, along with the firm, and was suspended from associating with any NASD member firm for three months in all capacities, and for an additional four months in a supervisory or principal capacity. Rooney is required to requalify through examination as a principal before again serving in that capacity.
"Investors are entitled to research that is balanced, complete and not tainted by conflicts of interest," said Mary L. Schapiro, President, NASD Regulation Inc. "While our new research analyst rules will greatly strengthen our hand in bringing cases in this important area, today's enforcement action again demonstrates that we will aggressively use our existing rules to discipline both firms and individuals that issue research that contains misleading or exaggerated statements."
The research report, issued on Aug. 30, 2000, recommended MyTurn.com as a "strong buy" and set a target price of the stock at $55 per share. At the time of the issuance of the report, the common stock of MyTurn was trading on the Nasdaq National Market for approximately $9 per share. In November, the firm issued a press release reiterating the buy recommendation and the $55 target price.
MyTurn was a provider of Internet-related computing products and services. Its only product, the Global PC, was a low cost personal computer system that was targeted toward the first-time user market. In Jan. 2001, several months after the research report was issued, MYTN filed for bankruptcy protection under Chapter 11.
Approximately eleven months before the research report was issued, Hornblower received 400,000 shares of restricted MyTurn.com stock for its role in conducting two private placements for the company. 150,000 of those shares were subsequently provided to John Rooney, 80,000 of the shares were provided to another officer of Hornblower, 70,000 shares were provided to members of the officer's family, and Hornblower retained 70,500 of the shares. Hornblower, Rooney and the officer sold these shares several months following the release of the research report; however, they did not profit from it. The price of MyTurn.com shares rose slightly the day after the issuance of the research report and steadily declined thereafter.
NASD Regulation found that the research report contained misleading, exaggerated and baseless statements about MyTurn.com and its business prospects, including the following:
- "We project revenues to reach $17.6 million for the combined third and fourth-quarters of 2000. As the product becomes increasingly available on a global basis, we expect revenues to significantly increase to $265 million for 2001."
- "It is our belief that MyTurn.com's first-mover advantages will quickly penetrate a significant portion of this market and build brand recognition."
- "MyTurn.com is quickly expanding as a household name as an Internet service provider."
- "A 12-month price target of $55…"
Despite the research report's revenue projection of $265 million for 2001, the company reported revenue for the year ended Dec. 31, 1999 of only slightly more than $233,000, and for the two quarters preceding the issuance of the research report, combined revenue of under $85,000. MyTurn also reported a net loss for 1999 of over $13 million and losses of over $65 million and $45 million for the two quarters preceding issuance of the report.
Significantly, MyTurn's public filings, contrary to the research report, emphasized the company's need to secure additional funding and stated that if the company was unable to secure additional financing it might be unable to continue its current business plan. The company disclosed that its Chairman of the Board was personally funding MyTurn's working capital deficits of up to $500,000 per month. NASD Regulation found that none of these important facts was disclosed in the research report.
NASD Regulation also found that Hornblower failed to establish, maintain or enforce supervisory procedures or systems reasonably designed to ensure that research reports issued by the firm complied with NASD rules and federal securities laws and regulations.
In the past, NASD Regulation has successfully used its existing rules to investigate and discipline firms and analysts whose behavior violates NASD rules and the federal securities laws. In addition to a number of other pending investigations involving research analysts, NASD is conducting a joint inquiry with the Securities and Exchange Commission and the New York Stock Exchange and state securities regulators into market practices concerning research analysts and potential conflicts that can arise from the relationship between research and investment banking.
As a part of the settlement with NASD Regulation, Hornblower and Rooney neither admitted nor denied NASD Regulation's findings. NASD Regulation's Department of Market Regulation referred this matter to the Enforcement Department.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD Regulation's Web Site at www.nasdr.com.
The National Association of Securities Dealers, Inc. is the largest securities industry, self-regulatory organization in the United States. It is the parent organization of NASD Regulation, Inc.; the American Stock Exchange, LLC; and NASD Dispute Resolution, Inc. For more information about the NASD and its subsidiaries, please visit the following Web sites: www.nasd.com; www.nasdr.com; www.amex.com; www.nasdadr.com.