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SEC Orders Sanctions Against Deutsche Bank Research Analyst Who Issued Stock Rating In Opposition To Personal Views

On February 17, 2016, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21c of the Securities Exchange Act of 1934, Section 203(f) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (the “Order”), against Charles P. Grom (“Grom), a Deutsche Bank  Securities, Inc. (“Deutsche Bank”) Analyst, for issuing a stock rating for Big Lots, Inc. (“Big Lots”) that was inconsistent with his own personal opinions, in violation of Rule 501 of Regulation AC, which requires that “brokers, dealers, and certain persons associated with a broker dealer, including research analysts, include in their research reports a certification by the research analyst that the views expressed in the research report accurately reflect the research analyst’s personal views about the subject securities and issuers.”

Grom worked as a Managing Director and a senior equity research analyst at Deutsche Bank from June 2011 to February 2013, covering two subsectors of the consumer retail sector – broadlines/department stores and supermarkets.  According to the Order, he was terminated in February 2013 for “‘conduct not consistent with firm standards.’”  He is currently employed at CRT Capital Group LLC.

Deutsche Bank equity research analysts provide insight and recommendations through publicized research reports, which include ratings based on a company’s performance for the prior twelve months (BUY, SELL or HOLD), the expected price of the stock in the next twelve months, and “estimates of the company’s upcoming quarterly and annual earnings per share.”    As part of Deutsche Bank’s evaluation of an analyst, it reviews how well the analyst is able to cultivate relationships with senior-level management at the companies on which the analyst is conducting research.  Such relationships ultimately allow Deutsche Bank greater access to those companies, and yield more accurate and complete research.

According to the Order, Grom began covering Big Lots in September 2011.  On March 2, 2012, Grom issued a report on Big Lots, stating that “‘[a]ll told, we think the momentum [from the last fiscal quarter] will continue with BIG and reiterate our BUY rating.’”  According to the Order, that same day, after Big Lots’ stock price fell four (4) percent, Grom further reassured Deutsche Bank’s clients that “Big Lots’ management ‘sounded great’ and expressed positive views about the company’s stock.”

Over the next several weeks, Grom met with executives from Big Lots in various settings, in which he learned further information that caused him to have reservations about the strength of their financial projections.  Specifically, on March 28, 2012, Grom and Deutsche Bank hosted the Chief Executive Officer and Senior Vice President of Big Lots at Deutsche Bank’s Boston offices, where the executives were given a chance to meet with Deutsche Bank’s clients.  According to the Order, it was at this event that Grom heard, what he believed to be, negative comments “about Big Lots’ consumables business, which comprised approximately twenty-five (25) to thirty (30) percent of Big Lots’ total sales at the time.”

Despite his growing negative viewpoint, on March 29, 2012, Grom issued another report on Big Lots reiterating his previous BUY rating.  Hours after the report’s release, Grom spoke with Deutsche Bank personnel, and stated that he maintained the favorable rating because “‘we just had them in town so it’s not kosher to downgrade on the heels of something like that.’”

Grom submitted an Offer of Settlement, which the SEC has chosen to accept.  As part of the settlement, the SEC has ordered that Grom be subjected to the following sanctions and penalties: censure; suspension from association with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization for a period of twelve (12) months; prohibition from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter for a period of twelve (12) months; and suspension from participating in any offering of a penny stock for a period of twelve (12) months.  In addition, Grom must pay a civil penalty in the amount of $100,000 to the SEC.

Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation.  Please contact our team of attorneys for a consultation at (212) 696-1999.

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