Don’t shoot the messenger


Early this week BankAtlantic filed a lawsuit against banking analyst Richard Bove and his firm Ladenburg Thalmann for alleged defamation and negligence in a report titled Who’s Next?, in which the bank appears among the most troubled institutions in the current market environment. Apparently one of the bank’s main objectives with the suit, besides intimidating analysts, is precisely what we are doing in this article-getting public coverage to show that they are alive and kicking. However, we believe that the case is relevant in what it entails for professionals involved in research whose responsibility is to unveil facts, even uncomplimentary ones.

The case

The plaintiff, Mr. Alan Levan, Chairman of BankAtlantic, argues that the report Who’s Next? examines data that belongs to the holding company, which, in his view, cannot be used to draw conclusions about the bank. His concern is that the report has generated reaction in the market. Indeed, the bank’s stocks fell within hours of the release of the report, rising up again within hours of the bank’s announcement of its suit plans.

“Literally dozens of other analysts and commentators have picked up on the Bove ‘analysis,’ assumed its legitimacy, and passed it on to a growing audience on the Internet.” Said Mr. Levan in a press release. “Soon, the falsehood will be presumed true and the truth false, leading us to regretfully conclude that the only way BankAtlantic can clear its name from this irresponsible defamation-and that is what it is – in the courthouse.”

Although Mr. Bove has not released an extensive response to the accusations, he did reveal that his report has a solid research base.  Mr. Bove noted that the holding company had indeed bought millions of dollars of non-performing assets from the bank.  In Mr. Bove’s view, it is legitimate for investors to look at the public numbers for the holding company as it is to look at the numbers provided by the bank.

The burden is on the bank to prove that malice -a “must” when alleging defamation– was involved in Bove’s report and his resorting to the holding company’s data.

Similar cases

Bove is not the first professional to be sued due to less-than-charming conclusions about companies as part of their investigative responsibilities. Past examples of plaintiffs in similar cases include, interestingly enough, BankAtlantic, Biovail and Nucor Corp.

In 1991 BankAtlantic sued ABC over a 20/20 segment called Too Good To Be True, which reported on real estate deals by the bank. In that case a federal jury granted BankAtlantic $10 million but the decision was overturned by an appeals court on the grounds that the report did not involve actual malice.

The following decade witnessed a similar case. Biovail, a Canadian drug company, sued the independent research firm Gradient Analytics and other analysts for what Biovail saw as illegal market manipulation. Short selling was the cornerstone of the suit and Gradient indeed was issued a probe by the SEC.  Nevertheless, almost two years after Biovail’s legal action against Gradient, the SEC sued that company on the basis of some of the same arguments Gradient had unveiled in its report. Time, in this case, suggested that Gradient’s initial findings on Biovail’s worrisome situation might have been deeper than a stubborn attempt to discredit a firm due to shorting interests.

The most recent legal decision on charges of defamation against analysts was made by a North Carolina appeals court which ruled that analysts cannot be sued for expressing their informed opinions. The steelmaker giant, Nucor corp., sued Prudential Equity Group LLC and two of its analysts for expressing that the company might trigger antitrust lawsuits.

Messengers being shot

The nature of the work of research firms, analysts, and journalists leads them to make early findings of facts that are not always cheerful for the companies involved. In addition to this, the United States stands out as a country where lawsuits have the strength of being distracters, if not intimidators, in many fields, and certainly in the financial arena. In some cases, it seems that the main goal of the plaintiffs is not the restoration of justice but rather the pursuit of publicity, time, or money (remember the $2.7 million award to a woman who ordered hot coffee and the coffee was too hot, among other similar gems).

BankAtlantic has experienced in the past the fact that defamation cases are hard for plaintiffs. The alleged falsehood and actual malice of Bove’s report can be refuted with the fact that BankAtlantic is a public company and the data is therefore available. The fact that the holding company purchased millions of dollars of the bank’s non-performing assets is relevant information included in the data of the report. Furthermore, the intrinsic and legitimate role of an industry analyst is evaluating the market using consistent and honest methods. Bove’s report examines 107 banking institutions through his methodology.

The lawsuit filed this week seems less an attempt to win in court, and more the utilization of the legal system to pose a public response to adverse comments. The fact that the American legal system is used to display one side of the story and counter adverse conclusions regardless the merits of the case, is not news. Nevertheless, independent research firms should not need to spend time and resources responding lawsuits that result from the nature of their work.

The legal system seems to be serving as a means of shooting messengers who, in doing their own job within legitimate parameters, reveal sometimes obscure facets of industry giants.


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