NEW YORK (Reuters) - A Manhattan federal judge on Thursday barred the financial news service Theflyonthewall.com from issuing immediate news about Wall Street analyst research, often before recommendations are shared with clients.
Ruling in favor of Bank of America Corp’s Merrill Lynch unit, Barclays Plc and Morgan Stanley, U.S. District Judge Denise Cote said Theflyonthewall.com engaged in “systematic misappropriation,” essentially getting a “free ride” from its quick publication of upgrades and downgrades that can move stocks higher and lower.
Cote issued a permanent injunction requiring the Summit, New Jersey-based company to wait until 10 a.m. to report research that was issued before the market opens, and at least two hours for research issued thereafter. The bulk of research is typically issued before the open.
While the banks had sought longer delays, Cote said: “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 recommendation on Wall Street.”
Cote added she could not excuse Theflyonthewall.com’s activities simply because recommendations are also reported by many rivals, or are otherwise leaked or rumored.
“The legally salient fact ... is that Fly is exploiting its self-described ‘hefty relationships with people in the know,’” she wrote.
The judge said Theflyonthewall.com may apply in one year to lift the injunction if the banks do not take reasonable steps to halt the unauthorized distribution of research.
According to the opinion, Theflyonthewall.com said the lawsuit has forced it to ritualistically engage in “confirming” the substance of research with two or three sources before publishing — still, typically, before the market opens.
The company has about 30 employees. It charges $50 a month, or $480 annually, for its services, its website shows.
Glenn Ostrager, a lawyer representing Theflyonthewall.com, said the ruling is “at variance with existing law.” He said his client will appeal to the Second Circuit Court of Appeals, and expects the financial press to “vigorously support” an appeal.
Like many rivals, Theflyonthewall.com typically posts headlines from research reports and press releases, and longer summaries when available.
It was not immediately clear how the 89-page ruling might affect the ability of real-time financial news providers such as Thomson Reuters, Bloomberg LP and News Corp’s Dow Jones Newswires to tell clients of potentially market-moving research.
Thomson Reuters spokeswoman Erin Kurtz and Bloomberg spokeswoman Judith Czelusniak declined to comment. A Dow Jones representative had no immediate comment.
The banks welcomed the ruling. Merrill spokesman Bill Halldin called it a “milestone in regaining control over the distribution of our proprietary research and preserving the value of our investment ideas for our clients.”
Barclays spokesman Mark Lane and Morgan Stanley spokeswoman Carissa Ramirez said the ruling shows the importance of protecting intellectual property.
Lehman Brothers Holdings Inc had been one of the plaintiffs when the lawsuit was filed in 2006. Barclays took its place when it bought much of that bank’s operations.
The judge noted that Merrill Lynch and Morgan Stanley have already taken steps to limit or delay the media’s ability to obtain analyst research. Other banks have acted similarly.
In her opinion, Cote said the value of analyst research derives not just from its quality, but also from its “exclusivity and timeliness.”
She said Theflyonthewall.com “free-rides” on banks’ research efforts because it make no effort to produce the recommendations or contribute to the underlying analyses.
The judge also said such “illegal conduct” cannot be excused because rivals might also engage in unlawful behavior.
“While it may be true that Fly is a news aggregator and is in direct competition with other financial news aggregators, both large and small, each of these news aggregators is in direct competition with the firms when they report the firms’ recommendations in a timely and systematic manner such that the firms are deprived of the opportunity to communicate them first-hand to their clients,” she wrote.
While noting the 2003 global research analyst settlement, the availability of discount electronic trading platforms, and the financial crisis might have hurt the banks, resulting in reduced staff, Cote said “these other events aside, the misappropriation of their recommendations by Fly and others has also had a profound effect on their business model.”
She also advanced a public policy argument for her ruling.
“A balance must be struck between establishing rewards to stimulate socially useful efforts on the one hand, and permitting maximum access to the fruits of those efforts to facilitate still further innovation and progress,” she wrote.
The case is Barclays Capital et al v Theflyonthewall.com, U.S. District Court, Southern District of New York, No. 06-04908.
Reporting by Jonathan Stempel and Grant McCool; editing by Leslie Gevirtz, Richard Chang and Andre Grenon