Bear Stearns has become the latest investment bank to stumble as it adjusts to the new standards for Wall Street research, delaying an initial public offering because of an inappropriate disclosure of an analyst presentation.
Bear told regulators of its mistake last week and the immediate impact appeared limited. It completed the IPO for credit-card processor iPayment on Monday – only a few days behind schedule and the bank’s own shares wound up 1 per cent higher.
However, the episode underscores the landmines that face investment banks as they implement the complex settlement reached with regulators last month to resolve conflicts of interest in equity research and IPO procedures. Peter Harvey, acting attorney-general in New Jersey, the lead state investigating Bear before the settlement, said the latest disclosure raised “serious concerns about Bear Stearns’ good faith in complying with the agreement”. He said he also wondered about Bear’s internal controls.
Regulators previously had criticised statements by officials of Merrill Lynch and Morgan Stanley, arguing that they reflected a lack of contrition on the part of executives.
The irony for Bear is that it was among the banks least anxious to enter into the settlement. These faced less serious accusations of wrongdoing and seemed to be settling partly for public relations reasons to clear the decks and let Wall Street get back to business.
Bear’s reluctance was also in keeping with its image as something of a lone wolf on Wall Street. In 1998 its chief executive Jimmy Cayne was famously reluctant to take part in the rescue of the Long-Term Capital Management hedge fund.
In the most recent incident, Bear conducted an internet roadshow for iPayment that inadvertently included videotaped comments by its analyst, Richard Kissane. The Wall Street Journal reported that Bear distributed a computer link for the presentation on May 2. Last month’s global settlement with regulators forbids analyst from taking part in IPO roadshows, and although those rules have not been officially implemented, the presentation appeared to violate the spirit of the settlement.
Bear said: “Once the problem was identified we took immediate action to rectify the situation and we are taking precautions to ensure that it will not occur again.”
Bear said it pointed out its mistake to regulators last Thursday, leading to a delay in the the IPO. Bear also agreed that Mr Kissane would not cover iPayment.
“Bear’s response to this was absolutely professional,” said Brad Hintz, analyst at Sanford C Bernstein. “They jumped in and pulled the offering. Hopefully, we don’t have too many of these things.” The market also appeared in a forgiving mood. iPayment’s offering, which raised $80m, was the first IPO in nearly three months.
Bear increased the share allotment from $4.5m to $5m and priced the offering at $16, the top of its $14-$16 range. It opened at $19.30 and closed at $21, a gain of 31 per cent.
One hedge fund manager said: “I didn’t get the amount of shares I asked for and I’ll be a buyer of the stock in the after-market.”
He added that the controversy was a “purely regulatory issue that had to do with underwriter process. It had nothing to do with the quality of the deal, which is very solid”.
If that reaction is any indication, the argument could be made that Wall Street is tiring of scandal and wants to get back to work.