Updated Friday, August 1, 2014 as of 6:33 PM ET
Practice - Regulatory/Compliance
N.Y. Probes Brokerages and Analysts After BlackRock Survey
by: Chris Dolmetsch and Alexis Leondis
Friday, January 10, 2014
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(Bloomberg) -- New York Attorney General Eric Schneiderman said the probe that led to his settlement with BlackRock over analyst surveys is looking at brokerage firms and individuals who provided nonpublic information that could have been used to trade.

BlackRock, the world’s biggest money manager, agreed to end its program as part of the accord. It was developed by Scientific Active Equities, an investment group within Barclays Global Investors, which BlackRock acquired in 2009.

The program relied on the willingness of analysts to provide advance information. According to statements cited in the Jan. 8 accord, analysts had an incentive to provide answers to a large client that made up a “huge chunk” of their pay.

The conduct “does not fit into the classic framework of insider trading,” Schneiderman said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.” “It’s something we’re now calling insider trading 2.0. This is stuff that is not hard information. It’s just front-running what the analysts are saying.”

The attorney general said his office interviewed people at firms other than New York-based BlackRock, but declined to identify them, citing the ongoing investigation. He said he would be probing recipients of information as well as providers.

“This is a broad investigation,” Schneiderman said today.

EARNINGS ESTIMATES

Under the BlackRock survey, data sought included analyst views on the likelihood of a surprise to their forecasted earnings estimate and the possibility a company they cover would be acquired in a merger, according to the agreement.

“Analysts and their firms are prohibited from providing to select clients early disclosure of research reports, and are supposed to disseminate reports to clients simultaneously,” Schneiderman said at a news conference yesterday in Manhattan.

New York said analysts gave earnings predictions they had yet to make public, and that from 2009 to 2013, the survey collected about 60,000 responses indicating an earnings surprise direction other than neutral.

“This is a growing area of concern because it includes increasingly common practices,” Schneiderman said. It provides “an unfair advantage over the rest of us and creates a two- tiered system that is bad for our markets, it’s bad for our economy.”

BlackRock agreed to pay the state $400,000 to cover the cost of the investigation, according to the settlement. BlackRock didn’t admit or deny the attorney general’s findings. It has agreed to cooperate with the attorney general’s probe.

‘IMPROPRIETY’

“BlackRock is committed to operating with the highest ethical standards,” Brian Beades, a spokesman for BlackRock, said in an e-mailed statement. “This survey was initiated by Barclays Global Investors prior to its acquisition by BlackRock. We have discontinued its use to avoid even the appearance of any impropriety.”

BlackRock’s conduct, according to the accord, violated New York’s Martin Act, an almost century-old law that gives the state’s attorney general broad powers to target financial fraud.

The Scientific Active Equity, or SAE, unit has more than $80 billion in assets globally and offerings include separately managed accounts, hedge funds and mutual funds. About 87% of the unit’s funds outperformed their benchmarks in the five years ending Sept. 30, up from 47% two years earlier, according to the firm’s earnings releases.

QUANTITATIVE MODELS

The division relies on quantitative models to make investments. It focuses on consistent and reliable absolute returns through a diversified blend of investment insights that are implemented in a systemic way, according to a marketing document from April.

Its hedge funds include European Diversified Equity Absolute Return, 32 Capital, Global Alpha Opportunities, Emerging Markets Alpha and Pan Asia Opportunities, the document stated.

Schneiderman said at the Bloomberg Markets 50 Summit in New York in September that his office was looking into combating the advantages won by securing early access to market-moving data.

The BlackRock survey program, begun in 2003, solicited from stock analysts at “dozens” of prominentbrokerage firms worldwide information about the management, competitive position, earnings and views of the companies they covered, according to the agreement.

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