US financial industry regulator FINRA has handed out of one its largest fines in recent memory – in part because a total of 10 investment banks are involved – hitting a number of firms involved with the proposed 2010 Toys ‘R’ Us IPO a total of $43.5 million.
The violation?
Having the firms’ equity research analysts involved in pitching each firms’ participation in the offering.
FINRA’s conflict of interest rules make it clear that investment banks may not use research analysts, or the promise of offering favorable research, to win investment banking business such as an underwriting position in an IPO. Equity analysts are supposed to be independent, with investment banks required to create a serious ‘Chinese Wall’ between investment banking and research.
According to FINRA, each of the firms involved used their analyst to solicit investment banking business from Toys ‘R’ Us and offered favorable research.
The investment banks involved, and the amounts fined?
Barclays – $5 million
Citigroup – $ 5million
Credit Suisse – $5 million
Goldman Sachs – $5 million
JP Morgan – $5 million
Deutsche Bank – $4 million
Merrill Lynch – $4 million
Morgan Stanley – $4 million
Wells Fargo – $4 million
Needham – $2.5 million
Toys R Us is owned primarily by three private equity firms – Bain Capital, KKR and Vornado – each owning just under one third of the company. While Toys R Us did indeed file for an IPO in mid 2010, and made several subsequent updates to its IPO prospectus, it eventually decided not to go public, and remains a private company. A copy of Toys R Us last IPO prospectus updated June 30, 2011 can be seen here.
In settling this matter, the 10 firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
FINRA complete press release on the Toys R Us matter can be seen here.