Opinion ID: 219099
Heading Depth: 1
Heading Rank: 2

Heading: The Firms and their Research Reports

Text: The Firms are multinational financial entities that provide a variety of asset management, sales and trading, investment banking, and brokerage services to institutional investors, businesses of various sizes, and individuals. Among their many activities, the Firms compile research reports on specific companies whose securities are publicly traded, on industries, and on economic conditions generally. They disseminate such reports and accompanying trading recommendations to clients, such as hedge funds, private equity firms, pension funds, endowments, and individual investors. The reports, which vary in format, range from a single page to hundreds of pages in length. They typically include data analysis, qualitative discussion, and the recommendation. In the process of producing and disseminating the reports, the Firms employ hundreds of research analysts and spend hundreds of millions of dollars annually. In preparing a company report, an analyst will gather data related to its business, and may visit its physical facilities, converse with industry experts or company executives, and construct financial or operational models. The analyst then uses that information in light of his or her expertise, experience, and judgment to arrive at formal projections and recommendations regarding the value of the company's securities. This litigation concerns the trading Recommendations, a term which the district court defined as actionable reports, i.e., Firm research reports likely to spur any investor into making an immediate trading decision.[ [4] ] Recommendations upgrade or downgrade a security; begin research coverage of a company's security (an event known as an `initiation'); or predict a change in the security's target price. Fly I, 700 F.Supp.2d at 316. The better known and more respected an analyst is, the more likely that a recommendation for which he or she is primarily responsible will significantly affect the market price of a security. Most Recommendations are issued sometime between midnight and 7 a.m. Eastern Time, allowing stock purchases to be made on the market based on the reports and Recommendations upon the market opening at 9:30 a.m. [5] Timely receipt of a Recommendations affords an investor the opportunity to execute a trade in the subject security before the market has absorbed and responded to it. The Firms typically provide complimentary copies of the reports and Recommendations to their institutional and individual clients using a variety of methods. [6] The Firms then conduct an orchestrated sales campaign in which members of their sales forces contact the clients the Firms think most likely to execute a trade based upon the Recommendation, with the understanding that continued receipt of reports and Recommendations may be made contingent on the generation of a certain level of trading commissions paid to the Firm. [7] The Firms contend that clients are much more likely to place a trade with a Firm if they learn of the Recommendation directly from that Firm rather than elsewhere, and estimate that more than sixty percent of all trades result from Firm solicitations, including those highlighting Recommendations. It is from the commissions on those trades that Firms profit from the creation and dissemination of their reports and Recommendations. They assert that the timely, exclusive delivery of research and Recommendations therefore is a key to what they frequently refer to as their business model. [8]