Reference no: EM132403103

In 2000, Charles Hintz was hired by Sanford Bernstein as an equity analyst covering the financial services industry. Hintz also held stocks and options in a personal domestic trust fund, including the securities of some of the companies he covered in his research.

In 2004, Hintz had a large holding of Lehman Brothers stock and expiring options from Morgan Stanley. The Lehman Brothers stock and Morgan Stanley options were earned as part of his compensation while working at those companies. Hintz sought to sell the securities despite his positive ratings on both stocks. He had a rating of ''outperform'' on Morgan Stanley and ''market perform'' on Lehman. Hintz consulted Sanford Bernstein's compliance department to find a way to maintain his positive coverage and sell his stocks. Sanford Bernstein requested an exemption from NASD to allow the transactions. The firm claimed that Hintz needed the proceeds from the sale of Lehman to pay the cost of exercising the expiring Morgan Stanley options. Bernstein claimed the situation was unusual and arranted a waiver.

The exemption request was denied. Sanford Bernstein temporarily terminated Hintz's coverage so that he could sell the securities and then resumed coverage. Bernstein and Hintz disclosed this plan to investors on December 23, 2004. Hintz proceeded with the termination of coverage and subsequent sale of securities from December 2004 to February 2005. After the sale, he resumed coverage on the two stocks.

On February 8, 2006, NASD fined Charles B. Hintz and Sanford Bernstein $200,000 and $350,000, respectively, the largest fine for this type of incident that the NASD had ever assessed.

DISCUSSION QUESTIONS

1. Was the NASD correct in fining Hintz and Bernstein?

2. Did Hintz have a conflict with his ratings and his actions?

3. Was there another alternative set of actions that Hintz could have taken with respect to selling his securities in 2004?

4. What policies could Bernstein enact to avoid these situations in the future?