New York, NY – Last week Investorside, the trade association for the US independent research industry, jumped into the fray by filing an amicus brief in the appeal of Barclays Capital et. al. versus Theflyonthewall.com in the Second Circuit Court. The Investorside brief supported the court’s initial decision establishing an embargo between the time Wall Street research is released and when Theflyonthewall.com can distribute these firms’ research recommendations to its clients.
Investorside’s Rationale
While on the surface it might appear surprising that Investorside is supporting Wall Street’s lawsuit against Theflyonthewall, the trade association’s rationale is clearly targeted at trying to protect the intellectual property of its members.
The original ruling found that Theflyonthewall was engaged in a “hot news” misappropriation of Barclays, the Bank of America Merrill Lynch, and Morgan Stanley’s’ research recommendations. The legal concept of a “hot news” misappropriation is based on the determination that the firm in question is engaged in “free riding activity that is directly competitive with the firms’ production of time-sensitive information, thereby substantially threatening their incentive to continue in the business.”
Investorside, in its appellate brief, stated that its members “would be substantially harmed if the ‘hot-news’ doctrine were not available to protect their research products – their primary source of income – from misappropriation by competitors”. Moreover, the brief explains the benefits of independent research to equities’ investors and the regulators that oversee these markets, that these research firms are often small businesses and that the “systematic and virtually contemporaneous” distribution of their research will deny them the opportunity to profit from their research.
Original Ruling
On March 18, 2010, Judge Denise Cote of the United States District Court for the Southern District of New York issued a permanent injunction requiring that financial newswire, Theflyonthewall.com delay its reporting of stock recommendations produced by analysts at Barclays Capital, Merrill Lynch, and Morgan Stanley by at least two hours after these recommendations are released by the firms to their clients.
Judge Cote explained that Theflyonthewall’s instantaneous publishing of Wall Street analyst upgrades and downgrades on their newswire would damage these investment banks’ ability to obtain compensation from their clients for these time sensitive recommendations – a development that would threaten the investment banks’ willingness to continue to make the substantial investments necessary a provide these “socially valuable” recommendations in the first place.
Injunction Temporarily Overturned
Unfortunately, Judge Cote’s initial ruling did not stand for long. On Wednesday, May 19, 2010 a federal appeals court in New York temporarily overturned Judge Cote’s original ruling requiring Theflyonthewall.com to delay its publishing of Wall Street analysts’ upgrades and downgrades by at least two hours. This ruling was clearly a defeat for the Wall Street firms who brought the original lawsuit against Theflyonthewall.com.
Google and Twitter Enter the Picture
Then, on June 22nd Google and Twitter came out in support of Theflyonthewall by filing an amicus brief asking the federal appeals court to reverse the lower court’s order blocking Theflyonthewall from issuing immediate reports of banks’ stock upgrades and downgrades.
“In a world of modern communications technology, where anyone with a cell phone may disseminate news throughout the world even as it is occurring, the notion that a single media outlet should have a monopoly on time-sensitive facts is not only contrary to law, it is, as a practical matter, futile,” Google and Twitter said in the filing.
A Google spokesman explained their action, “In our brief, we’re not taking sides or focusing on the details of this particular dispute between the parties, but we believe that the case raises important issues of law that could affect the free flow of important factual information online.”
The Issues at Stake
It is clear that Theflyonthewall case is an extremely important one as a number of key issues for research providers, online newswires, and information aggregators are at stake. Clearly, the research firms are trying to protect their business models and maintain the value of the intellectual property they have created. They argue that Theflyonthewall (and other firms like them) are commercially benefiting by free riding on their research, and in doing so these firms are harming their businesses.
On the other hand, the aggregators and newswires are arguing that Judge Cote’s original ruling attacks the free speech protections they have enjoyed throughout the nation’s history, that consumers would be harmed if this free flow of information was stifled, and that the initial finding is impractical in today’s wired world. Of course, underlying their concern is that if the Judge’s original ruling against Theflyonthewall stands, it will establish the precedence that they too will be forced to delay their reporting of research firms’ BUY / SELL / HOLD recommendations.
NOTICE: In an effort to promote full disclosure, the author of this post, Michael W. Mayhew, is also a member of Investorside’s Board of Directors.
For more information about the amicus brief submitted by Investorside, refer to the press release posted below.
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Investorside Research Association Files A “Friend-of-The-Court”
Brief In Support Of Barclays, et. al. v. FlyOnTheWall.com
To Defend the “Hot News” Doctrine
(July 22, 2010, New York, NY) Today the New York-based Investorside Research Association filed an Amicus Curiae brief, or “friend-of-the court” brief, in the appeal of Barclays Capital, et. al. versus FlyOnTheWall.com in the Circuit Court for the Second Circuit, which includes southern New York.
In a March 18th decision, Judge Denise Cote ruled in favor of Barclays Capital, Merrill Lynch, and Morgan Stanley and against FlyOnTheWall.com (Fly). The essence of the decision was that the paid distribution of proprietary equity research without license or permission, and often before the originator of the research distributed it to their clients, violated the “hot-news” doctrine. The judge imposed a short time limit before Fly could distribute a synopsis of the buy-hold-sell recommendations of the banks and established a one-year review of the decision.
Cote said that reports issued before the market in New York opens, will be embargoed until 10 a.m. For those issued when the market is open, the embargo will last two hours.
In the lower court decision Cote wrote, “This time frame preserves incentives for the firms to create and disseminate research reports to their investor clients, while still recognizing the inevitable, fast-moving and widespread informal communication of recommendations on Wall Street.”
The “hot-news” legal doctrine prohibits news organizations from lifting and selling time-sensitive information that a rival expended time and resources to gather.
“The Internet’s wide reach and rapid distribution capability can quickly turn information and analysis into a commodity. In this environment, research providers must protect their intellectual property rights,” said John Eade, President of New York-based Argus Research Group and a member of the board of Investorside Research Association.
Investorside, in its appellate brief, stated that its members “would be substantially harmed if the ‘hot-news’ doctrine were not available to protect their research products – their primary source of income – from misappropriation by competitors”. Moreover, the brief explains the benefits of independent research to equities’ investors and the regulators that oversee these markets, that these research firms are often small businesses and that the “systematic and virtually contemporaneous” distribution of their research will deny them the opportunity to profit from their research.
Washington, DC-based attorney Will Edick, the primary author of the Investorside brief, summarized Investorside’s argument as follows. “This is our work. And you are taking our work and putting it out there before we can get it to our clients. And you are charging for it without our permission. And if our clients can get it from you without paying us, then we can go out of business”.
The brief also cited a July 2006 interpretative release by the Securities and Exchange Commission regarding third-party research.
“Third-party research arrangements can benefit advised accounts by providing greater breadth and depth of research. First, these arrangements can provide money managers with the ability to choose from a broad array of independent research products and services. Second, the manager can use third-party arrangements to obtain specialized research that is particularly beneficial to advised accounts.” (Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934, 71 Fed. Reg. 41978, July 24, 2006).
Rich Leggett, Chairman of Investorside Research and CEO of Business Intelligence Advisors, with offices in Boston and McClean, VA., said that, “This case raises significant concern for the Investorside membership. As conflict-free, independent research firms, our members’ economic models are largely, and in some cases exclusively, based upon the protection of our content. If our economic models come under pressure, it could reduce the size of the industry and the well-documented positive impact the independent research industry provides to the capital markets including, greater coverage, increased transparency, conflict-free, independent, and in some cases, contrarian views.”
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The Investorside Research Association is a non-profit trade association of 90 investment research providers that do not engage in investment banking, company consulting or research-for-hire. The members constitute the leading investment research firms in the world, providing research that works purely for investors, said executive director Patrick Shea. Mr. Shea can be reached for comment at 877-834-4777, or via email at pshea@investorside.org. The Investorside Research Association Website URL is http://www.investorside.org.