Analyst and Broker Dealer Liability under 10(b) for Biased Stock Recommendations


In the aftermath of the turn-of-the-millennium Wall Street scandals, class action suits have been brought by thousands of investors against securities analysts and their broker-dealer employers, based upon stock research and recommendations that were allegedly biased by such conflicts of interest as analysts' ownership interest in researched stocks or other relationships between analysts and issuers, and the fact analysts’ compensation was tied to their ability to generate investment banking business from issuers. This work exhaustively analyzes federal 10(b) liability for misleading representations and omissions in this context, through the prism of existing general securities fraud precedent, scant existing authority in cases involving communications by analysts and other non-issuers, and the initial district court opinions that have been generated by pending suits. The author identifies the best arguments in support of and against analyst liability in the case of tainted research, opining that reliance and loss causation will serve as the biggest battlegrounds for the ongoing litigation, and ultimately concluding that in many of the pending cases the alleged facts will suffice to make a prima facie case for jury consideration.


Securities Law

Date of this Version

August 2004