Gradient has been trying very hard to present a perspective that positions them as not in violation of 17b - by taking money from hedge funds and then writing hatchet jobs - and they are relying on the notion that they are not in violation because they didn't take money from "issuers."
That is no surprise, and at first blush, holds some water.
The problem is that it relies on an incomplete understanding of securities law. I turned to an attorney who has been a securities specialist for many years, and who was a state securities regulator at one point in his career.
His take, not surprisingly, was in stark contrast to the benign view presented by Gradient.
Again, Gradient is saying that they didn’t take money from “issuers”, thus 17b, which precludes doing so and not disclosing it in the research, doesn’t apply.
That is a specious argument. Rocker and SAC are both "issuers." They are hedge funds that issue securities to their investors.
17b doesn't make any distinction between types of issuers - between issuers seeking to promote their stock price, or tank someone else's. Issuers means issuers. No differentiation is present in 17b, or under the law.
When Gradient takes big fat envelopes of money from an issuer to write a report, 17b requires them to disclose it. Period.
Second, the anti-fraud provisions of the securities laws would kick in, under Section 17a of the Securities Act and Section 10b and Rule 10b-5 of the Securities Exchange Act. These cover instances where there is intent to defraud--as there clearly was here if the allegations are true. It’s impossible to hear the interviews and read the allegations in these cases without recognizing the clear fraud involved, in the form of payment for non-independent analytics and pre-positioning and market front-running.
Now, the talking heads that are trying to spin this as a persecution of research companies by mean old companies are full of it. They know it, and I know it.
The journalists doing so are also trying to distort what occurred, and to rewrite history. It isn’t working.
I point to the classic NFI case where Gradient issued their now infamous and clearly flawed Feb. 14, 2005 report, which erroneously omitted the hundreds of millions on income the company generates from their portfolio of loans, as well as mistakenly multiplied the preferred dividend by the number of common shares, instead of the number of preferred shares, creating a $50 million dollar error. They were advised of its flaws by a number of folks, myself included. They continued to issue weekly research updates that repeated their lie, for months. I have seen the reports. Gradient mistakenly said that GAAP for 2005 would be $1.23, down 70% from 2004. Very alarming stuff. And a lie.
Herb was referencing that report the same day, in his Marketwatch article. Same day. He claims that he researches the reports he receives for accuracy, and yet a 3rd grader would have picked up on the gross and unexplainable blunders in the report. But not Herb.
This is very obvious to me for what it is. It also should be to you. If CNBC will allow these miscreants to go on TV and spin lies, I think it would be worth noting that. They are affording them a platform to issue false and misleading information, and I would argue that they are doing so to further damage the price of the companies involved in the suits against the research firm and the hedge funds.
By insisting that they are innocent, and mischaracterizing what they actually did, they are trying to make the companies look shifty and vindictive – unbalanced, if you will.
That has to have a negative impact on the stock prices. Look at OSTK over the last few days for confirmation.
So in my opinion, CNBC is now aiding and abetting, either wittingly or unwittingly, the dissemination of false and misleading information by representative of the firms who made a living doing so, from what I can tell.
After reading the Motley Fool message board posting from Patrick, I can’t help but think that they are complicit – there are apparently emails on their servers that show Cramer knew of and touted the negative info from Gradient, as well as Becky Quick. By not investigating those contentions by the CEO of one of the attacked companies, I believe that they are treading an extremely thin line and could easily be considered culpable in a cover-up. And there are attorneys that love to go after deep pockets like CNBC and the much wealthier parent company.
Consider this public notice that there is a problem, and that the media outlets that are propagating the spin that Gradient is a victim and that Herb is a victim, are assisting them in their agenda, to the detriment of the shareholders in the afflicted companies, and to the detriment of the truth.