Email Evidence Supports Investors' Claims that Credit Suisse Research Analysts Lied about AOL
Christina DeIasi | Bloomberg Law
The U.S. District Court for the District of Massachusetts denied defendants’ motions for summary judgment in a class action accusing research analysts at Credit Suisse First Boston, LLC (CSFB) of hyping AOL-Time Warner, Inc. (AOL) stock to secure investment banking business. In addition to CSFB, plaintiffs named as defendants CSFB’s parent company (Credit Suisse First Boston (USA), Inc.), two research analysts (James Kiggen and Laura Martin), and two managing directors (Frank Quattrone and Elliot Rogers) (collectively, Defendants). The Court’s decision sets the stage for a possible trial on whether Defendants committed securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.
The gravamen of plaintiffs’ complaint is that “Defendants intentionally ignored material information regarding AOL’s financial future in formulating recommendations for the investing public.” These recommendations were not the result of “naive optimism” or “an honest disagreement.” Instead, plaintiffs claim that Defendants issued research reports—which they did not believe and which they vetted with AOL—”in the hope of generating business for CSFB’s investment banking division.” The alleged misconduct occurred between January 12, 2001 and July 24, 2002, shortly after the AOL-Time Warner merger, and allegedly caused AOL’s stock price to be inflated. The stock price declined in July 2002, plaintiffs claim, in reaction to a Washington Post article, revealing “accounting gimmickry” at AOL, and AOL’s disclosure of a Securities and Exchange Commission investigation into the company’s accounting practices.
Internal Emails Contradict Research Reports
In denying Defendants’ motions, the Court noted that “Plaintiffs have provided striking direct evidence to buttress their claims.” Specifically, plaintiffs offered emails that were written contemporaneously with—and contradict—the 35 research reports that encouraged investors to purchase AOL stock. According to the Court, some emails “strongly suggest that AOL was being given editorial control over the CSFB reports.” Other emails suggest that Kiggen and Martin believed that AOL could not meet its revenue and earnings projections given the weakening advertising market. One email from Martin to Kiggen was particularly candid: “I believe that AOL will not hit the guidance given us for film, cable nets, and music for 2001 . . . at least not without accounting gimmickry. I’m willing to hold on with them in public but let’s not lie to ourselves.” (emphasis added by Court). The Court was not persuaded by Defendants’ argument that Martin and Kiggen merely were engaged in an “‘honest intellectual debate’ about AOL’s financial prospects and Kiggen’s ‘more optimistic’ view won the day.” Instead, the Court concluded that the emails are admissible evidence that CSFB’s reports omitted material information and that Defendants had an ulterior motive in issuing them.
The Court further rejected Defendants’ argument that they should be excused for incorrectly, but honestly, valuing AOL following the merger. “Given the novelty of this merger,” the Court explained, “the investing public would have relied on analyst’s reports even more than in the usual case, and, arguably, on these particular respected analysts.” Moreover, the Court found support in the record for plaintiffs’ position that these were no ordinary analysts but rather “‘celebrity analysts.’” Quattrone referred to Kiggen, for instance, as a “‘rock star internet analyst.’”
As for whether Defendants caused AOL’s stock price to be inflated, the Court acknowledged that they were “one voice of many reporting on AOL.” Nonetheless, the reliance and loss causation elements of securities fraud “necessarily rely on expert testimony,” and summary judgment is not the appropriate way for Defendants to challenge the event study of plaintiffs’ expert. Rather, a full Daubert evidentiary hearing is required.
Control Person Claims
Lastly, the Court denied Quattrone’s and Rogers’ motion for summary judgment on plaintiffs’ control person claims. In doing so, the Court opined that proof of “culpable participation” is not necessary under Exchange Act Section 20(a). But, even if it were, the Court found sufficient evidence, in the form of emails, of their malfeasance. According to the Court, emails reveal that Quattrone and Rogers “continuously and specifically exerted influence over Kiggen and Martin, and that they went so far as to sanction the muffling of Martin’s negative AOL analyses and views.”
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