The NASD has fined Sanford C. Bernstein Analyst Charles B. "Brad" Hintz $200,000 for violating the regulator's industrywide conflict of interest rules. NASD also fined New York-based Bernstein, a subsidiary of Alliance Capital Management $350,000.
Charges focus on claims that Hintz made illegal arrangements with his employer to allow him to sell personal stock holdings in Lehman Brothers and options at Morgan Stanley at the same time when he was recommending the stocks to clients. The fines are the largest levied to date by NASD for its research analyst conflict of interest rules, which took effect July 9, 2000.
"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, the acting head of enforcement for the NASD in Washington.
According to the NASD, Hintz, hoping to sell his holdings in both companies, worked with lawyers and executives at Sanford to devise a plan to skirt NASD rules prohibiting analysts from selling or buying any interests in the companies they cover that might conflict with their own recommendations for those companies. At the time, Hintz covered both Lehman and Morgan Stanley, and rated both as "outperform," according to NASD.
The solution, Sanford Bernstein officials decided, was to allow Hintz to issue "final reports" on both stocks, and then to take a hiatus from covering them; only to resume after the sales were compete. Hintz's Morgan Stanley options were set to expire in January 2005. In those "final" reports, issued on Dec. 23, 2004, Hintz lowered his rating to "market-perform." According to the plan, he would resume covering those stocks in February 2005.
"Inconvenience or expense does not excuse non-compliance with NASD's rules." Shorris said.
In addition, NASD claimed that Hintz violated other rules, and that his company failed to intervene. Hintz's discretionary brokerage account included stocks of six companies that he covered. Between August 2002 and January 2004, Hintz made 27 transactions involving those stocks, each of which conflicted with his ratings. Furthermore, 39 other transactions were executed within 30 days of Hintz issuing reports, ignoring the NASD blackout period. Finally, in 60 separate reports, Hintz failed to disclose his personal holdings.