On 22 November 2010, a Hearing Panel imposed a Revocation of CFA Institute membership and the right to use the CFA designation upon Margaret Lisa Springer (USA), a charterholder member. The Hearing Panel found that Springer violated Standards I(B) – Independence and Objectivity, I(D) – Misconduct, V(A) – Reasonable Basis, V(B) – Communication with Clients, and V(C) – Record Retention of the CFA Institute Code of Ethics and Standards of Professional Conduct (2005).
These findings were predicated on Springer’s authorship of at least 59 issuer-paid “research reports” for Beacon Equity Research from December 2006 through August 2009. These reports were for small-cap and microcap companies that were traded in the over the counter (OTC) markets. Springer rated all 59 companies as “speculative buys.” Her research reports were widely circulated and available to the investing public via the internet.
The Hearing Panel found that Springer did not conduct adequate, independent research and analysis regarding many of the companies she covered. In several instances, these were public shell companies that had no audited financial information and had made no recent public filings. As a result, in many cases, Springer relied exclusively on information provided to her by the issuers, which she accepted without question and failed to verify against publicly available information. As a result, Springer’s reports, formatted to resemble equity research reports with price targets and “speculative buy” recommendations, lacked independence, objectivity, and reasonable basis and were essentially extensions of the issuing companies’ promotional efforts rather than independent research.
According to the Standards of Practice Handbook (2005), analysts conducting issuer-paid research “must engage in thorough, independent, and unbiased analysis…otherwise, analysts risk misleading investors by becoming an extension of an issuer’s public relations department while appearing to produce ‘independent’ analysis….At a minimum, research should include a thorough analysis of the company’s financial statements based on publicly disclosed information, benchmarking within a peer group, and industry analysis.” Springer’s research reports gave the appearance of independence but failed to include analysis of the companies’ financial statements based on publicly disclosed information, in violation of Standard I(B) – Independence and Objectivity. Failure to reach the minimum standard of research also reflected adversely on Springer’s competence as a CFA charterholder in violation of Standard I(D) – Misconduct.
The Hearing Panel found that Spring, in conducting her research, failed to verify the accuracy and reasonableness of issuers’ statements, claims, and projections before using and publishing the information in her reports. She consequently published inaccurate and/or misleading information which was then distributed to public investors via the internet. Under the circumstances, Springer failed to exercise diligence, independence, and thoroughness in making investment recommendations and to have a reasonable and adequate basis, supported by appropriate research and investigation, for those recommendations. These actions violated Standard V(A) – Diligence and Reasonable Basis.
Springer also violated Standard V(B) – Communication with Clients and Prospective Clients, by failing to outline the limits of her analysis and/or include the risk of business failure in some reports. Finally, she violated Standard V(C) – Record Retention, which requires that members develop and maintain appropriate records to support their investment analyses and recommendations. Springer’s research records included promotional materials provided by issuing companies, but did not include public filings or audited financial statements for each company.