ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
Richard Bove is a bank analyst who had the audacity to tell the truth, such as predicting troubles for the bank industry at the beginning of the financial crisis. BankAtlantic did not care for the truth to be revealed to the public, so it sued him. After all, Bove had no right to disclose the truth about the banking industry!
It all started in July 2008 when Bove issued a report entitled “Who Is Next?” Bove constructed a list of firms who were at risk according to two metrics: BankAtlantic was the tenth riskiest bank on one list and the twelfth on a second. (Sources are Bloomberg, “BankAtlantic Sues Firm, Analyst Bove for Defamation”; Dealbook, “The War Between an Analyst and a Bank,”; and New York Times, “The Loneliest Analyst”.)
BankAtlantic did not like this exposure. Among other reasons, the company’s stock price fell 25 percent just after the report was published. Consequently, BankAtlantic sued Richard Bove for defamation. CEO Alan Levan indeed was put off by Bove’s remarks and vowed vengeance.
It turns out that Mr. Bove was correct in his analysis. Eight of the 20 banks on the first list have gone bankrupt and most of the others lost a significant amount of market cap and have not recovered. Similarly for the second list.
What makes this story delicious is that the SEC weighed in on January 18, 2012. In Litigation Release No. 22229, the SEC
alleges that BankAtlantic Bancorp and its CEO and chairman Alan Levan made misleading statements in public filings and earnings calls in order to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and Levan then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.
We guess we now know the real reason for the lawsuit—Bove was getting too close to uncovering the securities fraud. Levan implemented the-best-defense-is-a-good-offense strategy and sued the analyst for the critical comments against him and the corporation. After all, if Bove had to deal with legal matters, he would have less time to investigate further. In addition, other analysts might be intimidated and not criticize the entity.
This story reminds us of an exchange between Wyden and Cox because preparers routinely retaliated against financial analysts. Senator Wyden expressed concerns about corporate managers who attempted to intimidate those who issue research reports critical of them and their operations. In his letter to then SEC Chairman Christopher Cox, dated August 4, 2005, he correctly stated that the impact of such retaliation could have an adverse reaction on the publication of objective research. This in turn could have a negative impact on the quality of information that is employed by the investment community and could lead to an inefficient allocation of resources.
Chairman Cox responded to the Senator in a letter dated September 1, 2005. After thanking the senator for his inquiry, he stated that he shared the Senator’s concerns about issuer retaliation and its adverse impact on the investment community. He added a postscript in his own handwriting, “This is indeed a concern and we will tackle it.”
In the letter sent to Senator Wyden, Cox attached a memorandum from Robert Colby, Deputy Director for the Division of Market Regulation. Dated August 23, 2005, this memorandum reviewed the results of an informal survey conducted by the SEC staff. Several analysts and their firms revealed issuer retaliation in the form of limits to participation in company organized conference calls or other events, reduced access to senior management, limited time with managers during road shows and similar events, threats to withdraw business from other areas of the researcher’s firm, intimidation and humiliation, and threats of litigation. These incidents prove the issuer retaliation is a reality.
But Christopher Cox in fact did nothing to decrease preparer retaliation, and unfortunately Senator Wyden did not pursue the topic. And, as far as we can see, nobody since then in Congress and nobody at the SEC have come to the defense of research analysts.
It is vital to allow the flow of critical information so that investors and creditors can correctly evaluate the performance of business enterprises. Anything that impedes that flow of information is detrimental to the economy. In particular, if we wish to attenuate the destruction of financial accounting by managers who wish to advance their own selfish interests, then it is necessary to prevent these managers from harassing and persecuting those who analyze corporate reports.
Richard Bove incurred approximately $800,000 in legal fees when defending himself against the defamation lawsuit. The suit was settled in 2010 without Bove’s paying anything to the plaintiffs, but of course he was still out the $800,000.
In the complaint against Levan and BankAtlantic, the SEC seeks “financial penalties and permanent injunctive relief.” We suggest the SEC go a step further. It ought to ask the Court to require the defendants to reimburse Bove for all his legal costs. Such a move by the SEC would warn corporations not to retaliate against financial analysts who have the courage to write critical commentary about them.
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
I’d go further — he should get $2.4 million. Just like antitrust damages are tripled when the abuse is willful and deliberate, legal intimidation should also carry 3x damages.
In any case, “loser pays” ought not to be an extraordinary remedy for special cases — but the general rule for all lawsuits, as it is in much of Europe. There are certainly problems with “loser pays,” but fewer than there are with “each pays.”