PAUL E. JOHNSON,
a former Wall Street analyst who never saw an overpriced technology stock
he didn't like, is still reeling from a federal jury's finding 10 days ago
that he violated securities laws by misleading investors with his research.
But his shock is less than shocking. After all, this is a man whose favorite
state seems to be denial. He continued to rate more than 20 bubble stocks
a "buy" in 2002 even after they had lost most of their value. And
he was so certain that it was O.K. to advise investors in 2001 to buy the
shares of a company as he was selling that he chose to try his case rather
than settle with regulators.
Bad move. While
Mr. Johnson could be enjoying life after Wall Street à la those other
fallen stock analysts, Jack Grubman or Henry Blodget, he instead faces unspecified
civil penalties, disgorgement of illicit profits and disgrace. Unless, that
is, the verdict is thrown out or Mr. Johnson wins his case on appeal.
civil case really jumps out. It is the only one contending bias by an individual
analyst that has gone to trial since the stock bubble burst in 2000 and investors
learned how corrupt Wall Street research had become. And by finding Mr. Johnson
in violation of federal securities laws for not disclosing personal stakes
in stocks he was recommending, the jurors have slapped down the notion that
conflicts among Wall Street research analysts were not illegal or that the
biases were so well known as to be irrelevant.
The trial concerned
the time that Mr. Johnson spent as an analyst at Robertson Stephens, a unit
of Bank of America and then FleetBoston Financial. Lawyers for the Securities
and Exchange Commission argued the case before United States District Court
Judge John F. Keenan. Representing Mr. Johnson were Mark Pomerantz and Eric
Goldstein of Paul, Weiss, Rifkind, Wharton & Garrison.
The whole thing
lasted two weeks, and Mr. Johnson spent three days on the stand. There, he
explained why in 2001 he did not tell investors that he was selling shares
in the Corvis Corporation, a company he was recommending. He also discussed
his failure to disclose how he stood to gain more than $12 million from stakes
in two private concerns about to be acquired by public companies he followed.
He praised both acquisitions in his reports and in comments to print and television
declined to be interviewed for this article. But his lawyers said he would
fight to restore his reputation. "Paul Johnson is an honest and decent
man, who did not commit securities fraud," Mr. Pomerantz said in a statement.
"His research always reflected his actual opinion of the companies he
covered, and his behavior was fully in accord with industry practice, his
firm's practice and the rules and regulations then in force."
The jurors rejected
that argument entirely. There seemed to be little doubt among them: their
verdict came after just a few hours.
laws are based on full disclosure, and the jury had to decide whether Mr.
Johnson's omissions were material. "The heart of it is the materiality
test," said Lewis D. Lowenfels, a specialist in securities law at Tolins
& Lowenfels in New York. "An omitted fact is material if there is
a substantial likelihood that a reasonable investor would consider it important
in making his or her decision. It's a Supreme Court opinion; if you were an
investor, wouldn't you want to know if the guy who was recommending that you
buy the stock was selling his own holdings in the same stock at the same time?"
jury thought so. Mr. Johnson's testimony on Nov. 7, 8 and 9, however, shows
a man deep in denial. For instance, when asked by a prosecutor if he would
agree that one of the major purposes of the securities regulations is to protect
investors, Mr. Johnson responded: "I don't know."
And when Russell
Duncan, an S.E.C. lawyer, inquired why he did not disclose to a Bloomberg
News reporter that he had a financial interest worth $1.8 million in a merger
that he was supporting in his writings and his comments, Mr. Johnson said:
"It wouldn't have occurred to me. Sorry. It would not have occurred to
me to mention that, no."
And why didn't
he disclose this financial interest to anyone in Robertson Stephens's research
department? "Again, it wouldn't have occurred to me, so no," Mr.
On other matters,
jurors got a glimpse of how Wall Street's haves become have-mores. He described
in some detail how he often bought stakes in private companies looking to
issue stock publicly, positioning him for hefty profits.
a very prominent analyst in this area during this time," Mr. Johnson
allowed. "I did make investments in these private companies; I visited
these private companies on numerous occasions; I developed a very close relationship
with the management; and when it came time to become their investment banker
we had a leg up, we had an advantage against our competitors."
Now we know
why Mr. Johnson only uttered the word sell privately, not publicly. How can
you stay close to executives if you advise stockholders to sell?
from Mr. Johnson seemed ripped out of the pages of "The Bonfire of
the Vanities," Tom Wolfe's phenomenal study of Wall Street arrogance.
Asked why he sold stock in the same company he was advising his clients to
buy, Mr. Johnson said that he still believed in the company but that he needed
cash for a $6 million apartment he and his wife were buying on the Upper East
Side of Manhattan.
Then he treated
the jury to an account of the New York real estate market, circa 2000, that
each and every one of them could no doubt relate to. "When we bought
- in the real estate market in New York things move really fast,"
Mr. Johnson said. "When I tell my friends outside of New York, they
are sort of horrified. We bought this apartment, my wife had seen it for 20
minutes, and I had seen it for 20 minutes. We had heard the apartment was
about to come on the market, and we were allowed to see the apartment before
it came on the market. She saw it on a Friday, I saw it on a Sunday, each
for about 20 minutes. Sunday night we put in a bid. The apartment was going
on the market on Monday morning. We put in a bid, they accepted our bid, and
we owned the apartment - well, technically we owned the apartment Sunday night.
This was in late November.
the ensuing six weeks," he continued, "We got to see the apartment
one more time for about 40 minutes. We decided at that point that we thought
that we would repaint, we would clean up the kitchen - the kitchen was not
in great shape - and we would redo one of the bathrooms.
we moved forward and started to do inspection on the apartment, we were informed
that the electrical in the apartment was not up to code; we were informed
that the plumbing in the apartment was not up to code. The building informed
us that if we opened even a single wall we would have to bring up the plumbing
and the electrical throughout the apartment up to code."
Alas, Mr. Johnson
explained, this was going to cost money. And that meant selling his Corvis
shares at around $23, even though he was advising clients to buy. The stock
later went to 49 cents.
budget for renovations was $300,000, he said. "By the time we heard
we had to bring the electrical and plumbing up to code," he continued,
"we were quickly approaching the better part of a million dollars,
at which point we knew we would have to open up every wall to replace the
electrical and replace the plumbing, at which point my wife said now that
we're into this, let's just gut the place."
the renovation budget to $1.2 million, Mr. Johnson continued, "which
was a pretty good estimate but low by about 50 percent than what we ultimately
paid. And that was before we decorated. Well, before she decorated."
Oh, that explains
And what of
the folks who followed Mr. Johnson's advice, riding stocks like the Clarent
Corporation, Sonus Networks and Oni Systems into the cellar? You
know how it is: when you're in the nightmarish throes of a Manhattan renovation,
everything else just pales.
While Mr. Johnson
and his legal team decide how to proceed, he is running Nicusa Capital, a
private investment partnership he started in January 2003. According to his
Web site, the partnership is named for Nicholas of Cusa, "a 15th-century
scholar and theologian who is considered by some historians to be the father
of modern science."
is also an adjunct professor at the Columbia Business School, where he has
taught securities analysis since 1992. A copy of his syllabus noted that students
would earn bonus points "for creative thinking and insightful analysis."
Proving that truth is stranger than fiction, Mr. Johnson's most recent course,
offered last spring, was on value investing.
a Columbia Business School spokeswoman, said that Mr. Johnson was not teaching
this year. Asked whether the jury's verdict in his securities law case would
have a bearing on his employment as a professor, Ms. Graham said: "We
can't comment on future employment prospects for any individual person."
Well, at least
Mr. Johnson is not teaching business ethics.