SEC Charges Paul Johnson
Yesterday, the 42-year-old part-time business school professor at Columbia University was slapped with a lawsuit from the Securities and Exchange Commission (SEC) for issuing fraudulent research reports.
Light Reading noted in September of 2000 that Johnson owned 100,000 shares of pre-IPO stock in ONI Systems at the same time he was issuing research reports on the company as a stock analyst (see Analyst Owns $9M in ONI Systems Stock ). That relationship, which was publicly disclosed, however, is not the topic of the SEC investigation. Now under investigation are Johnson's undisclosed relationships with at least two other startups and three public companies that he covered.
The SEC complaint, filed yesterday with the U.S. Federal Court in New York City, indicates that Johnson's dealings in pre-IPO stock extended well beyond ONI. The complaint alleges that Johnson also publicly touted Redback Networks Inc. (Nasdaq: RBAK) and Sycamore Networks Inc. (Nasdaq: SCMR) after they proposed mergers with private companies in which he had invested. Johnson failed to disclose his holdings in the private companies, and when the mergers were complete he walked away with over $12 million worth of stock, says the complaint. The Commission also alleges that, in 2001, Johnson issued "buy" recommendations on another publicly traded optical networking company, Corvis Corp. (Nasdaq: CORV), while giving the opposite advice to private Robertson Stephens investors.
The SEC has also filed civil action against Johnson’s former employer, Robertson Stephens Inc., a brokerage and investment bank formerly located in San Francisco. FleetBoston Financial, which owned Robertson Stephens before shutting it down last year, has agreed to pay $33 million in penalties to The National Association of Securities Dealers (NASD) and the SEC for improperly sharing customers' profits on hot IPOs and distributing allegedly fraudulent stock research that didn't disclose the analyst's conflicts of interest.
Johnson’s lawyers, Mark Pomerantz and Eric Goldstein of Paul Weiss Rifkind Wharton & Garrison LLP, said in a statement, "The SEC's complaint is not supported by the facts or the law. Mr. Johnson's conduct is consistent with the SEC's rules and regulations as they then existed, and he will litigate this case aggressively."
The Redback case goes back to January 1999, when Johnson invested about $50,000 of his own personal funds in Siara Systems Inc., an optical networking startup, according to the SEC. The complaint alleges that Johnson failed to submit the necessary written request to obtain approval before making the investment, breaking NASD and Robertson Stephens policy. Redback, a company Johnson began covering in June 1999, announced in November of that year that it would buy Siara for an estimated $4.3 billion. Johnson reiterated his “buy” rating through the close of the merger in March 2000. When the smoke finally cleared on March 8th, Johnson’s $50,000 investment was worth about $9.9 million, says the SEC.
From the time the merger was announced until it closed, Johnson issued several research notes and was quoted in news publications touting the merger, says the SEC. But he never disclosed either in his notes or to the media that he was a Siara shareholder, says the complaint.
“Johnson knew, or was reckless in not knowing, that the research reports he issued and the public statements he made concerning the proposed acquisition of Siara by Redback, failed to disclose either the fact or the magnitude of his personal financial interest in the outcome of the transaction and, thereby, omitted material facts regarding the objectivity of his opinions,” reads the complaint.
But Redback wasn’t the only company to lay a golden egg for Johnson. In January of 2000, according to the SEC, he invested roughly $75,000 of his own money in a small startup called Sirocco Networks Inc. As in the Siara incident, Johnson made his investment without submitting a written request and obtaining approval, again violating Robertson Stephens policies and NASD rules, says the SEC complaint.
In June, Sycamore, another company Johnson covered, announced that it would acquire Sirocco for $2.88 billion in stock (see Sycamore Gains Access). He was quoted in several publications and appeared on CNNfn calling the merger a "very smart combination." He continued to reiterate his “buy” rating, but never disclosed his large stake in Sirocco and the potential windfall he would receive if the merger was successful, says the complaint. In September of 2000, the merger closed and Johnson walked away with about $2.3 million worth of Sycamore stock.
The complaint also alleges that in January 2001, Johnson spoke privately about Corvis, another company he covered, to a partnership of investors. Johnson and other Robertson Stephens executives were investors in this group.
The group, called Bayview Partnerships, had invested in Corvis before it went public in the summer of 2000, says the SEC. The day before the lock-up period ended, Johnson was on a call with the other investors to discuss what to do with the partnership’s shares, the complaint continues. When asked what he thought, Johnson allegedly told investors that he felt the stock was worth only about $12 or $14 per share. It was trading at about $24 per share.
This contradicted his public research notes, which had reiterated a “buy” rating on the stock as its price fell from about $59 per share in October of 2000 to about $24.50 on January 23, 2001, says the complaint.
After Johnson spoke, the committee voted to sell all its Corvis stock. In addition, the day after he made his private recommendation to the committee, Johnson sold nearly all of his Corvis stock. Two days after his stock sale, Johnson issued another research report reiterating his “buy” recommendation on Corvis, but failed to disclose that he had sold his Corvis stock, says the complaint.
“I don’t think this is even in a gray area,” says one analyst who didn’t want his name used. “What Paul was doing was so clearly wrong. But it was the bubble and he certainly wasn’t the only one.”
Indeed, there were plenty of others whose IPO dealings have raised eyebrows. Matt Bross, former CTO of Williams (now WilTel Communications Group Inc. [Nasdaq: WTEL]), Joseph Nacchio, former CEO of Qwest Communications International Inc. (NYSE: Q), and Rich McGinn, former CEO of Lucent Technologies Inc. (NYSE: LU), are but a few key individuals from the bubble era who used their powerful and influential positions for personal gain (see Williams' CTO Profits From His Position , Tellium Lawsuits Allege Rigged IPO, and Lucent Stock Sales Raise Questions).
— Marguerite Reardon, Senior Editor, Light Reading