Stephan Bogner works in investor relations for Zimtu Capital
http://online.wsj.com/articles/...oncerns-on-paid-research-1401723912
Canadian Miner's Saga Spotlights Concerns on Paid Research
Western Potash Stock Jumps After Analyst Linked to a Major Investor Writes of a Bidding War
By Alistair MacDonald and Ben Dummett
June 2, 2014 11:45 a.m. ET
One day a few months ago, the stock of Western Potash Corp. WPX.T +8.54% abruptly jumped 20% after a research report said potential buyers were likely circling the Canadian miner.
The analyst who wrote the report, Zurich-based Stephan Bogner, has another job: investor relations at one of Western Potash's biggest investors, Zimtu Capital Corp. ZC.V +1.56% Zimtu says it hired Mr. Bogner and his firm, Rockstone Research Ltd., to, among other things, prepare materials on Zimtu's equity holdings. As published on March 13, the report by Rockstone didn't disclose this relationship.
In the days that followed the publication of Mr. Bogner's report, David Hodge, a director on Western Potash's board and president of British Columbia-based Zimtu, sold shares of the mining company. John Costigan, a senior executive of Western Potash, also sold shares during that period. Messrs. Hodge and Costigan said they sold the shares for personal reasons and the sales weren't related to the report.
Some of the provincial regulators who police Canadian markets are increasingly expressing concern that retail investors aren't being adequately informed when analysts or newsletter writers are paid by companies they write about, or by their investors.
The British Columbia Securities Commission is monitoring disclosure by newsletter writers. It has also recently pursued a number of administrative cases against researchers and newsletter writers who it alleges have disguised financial interests in the stocks they cover.
Canada's substantial small-capitalization mining sector has seen a proliferation of research paid for by companies or their investors. It's helping fill a vacuum created as big brokerage firms pay scant attention to the sector, which doesn't generate large fees.
It isn't illegal for a company or investor to pay for financial research, although regulators look for disclosure, and the practice has been around for many years. But in recent years the impact of such reports has been magnified as they become disseminated more widely through online media, blogs and bulletin boards.
"Paid research without proper compensation disclosure is very much of interest and a concern to us," said Peter Brady, the BCSC's director of corporate finance, speaking generally about the industry. He said disclosure should be "meaningful" enough for investors to understand the potential conflicts involved.
Mr. Brady said the regulator is concerned that paid-for research without proper disclosure can be used to orchestrate "pump and dump" schemes in which positive research is released to boost stock prices, after which stock promoters can sell shares at higher prices.
Mr. Brady declined to comment on Mr. Bogner's research or Zimtu. Neither Mr. Bogner, Mr. Hodge, Mr. Costigan nor their companies have been accused of any wrongdoing.
Regulatory experts say disclaimers on paid-for research aren't always included as reports get disseminated in online publications.
"This kind of stuff is more easily disseminated and, once it's out there, anybody can take it and paste into a blog or a website, or whatever," said Edward Waitzer, a lawyer at Stikeman Elliott LLP and a former chairman of the Ontario Securities Commission, Canada's biggest regulator.
In the case of Western Potash, Mr. Bogner also wrote a March 18 article published by Hard Assets, a website aimed at resource investors, saying that the mining company was becoming "increasingly attractive" to suitors. The article didn't disclose Mr. Bogner's relationship with Zimtu. Hard Assets didn't return a call seeking comment. Mr. Bogner said that as far as he knew, he had always disclosed in media interviews if he was paid by a company or investor.
After reading other online coverage of Mr. Bogner's research, Toronto-based carpenter Shan Nathan bought 11,000 shares of Western Potash, believing that it was a takeover target. The share price has fallen since his purchase. He said Mr. Bogner's relationship with Zimtu wasn't declared in the article he read.
"That is really misleading to investors like us," Mr. Nathan said.
A disclaimer at the bottom of Rockstone's eight-page Western Potash report said neither the research firm nor Mr. Bogner were paid by Western Potash but that the author was paid "indirectly" by the company. After Mr. Bogner was approached by The Wall Street Journal, Rockstone updated the report's disclaimer, noting that "the author's employer Zimtu will benefit from appreciation of Western Potash's stock price."
Mr. Bogner said the original disclaimer was adequate, even though he acknowledged that he wasn't paid indirectly by Western Potash, but rather that he receives a retainer from Zimtu.
Zimtu's Mr. Hodge said that disclosure is important to the firm and that after being approached by The Wall Street Journal, the firm had improved disclosure of its relationship with Mr. Bogner. It issued a news release in April announcing it had retained Mr. Bogner and Rockstone. Mr. Hodge and Mr. Bogner both said that Mr. Bogner wasn't paid specifically for the Western Potash report but that the two had discussed it beforehand and it was part of the work Mr. Bogner had been hired to do. Both men said there was no pump-and-dump scheme.
Shares of Western Potash closed at 45 Canadian cents on March 12, the day before the Rockstone report was released. They climbed as high as 69 cents on March 27 before falling back to close at 41 cents on Friday.
In the week after the report was released, Mr. Hodge sold 100,000 shares in Western Potash at prices from 51 Canadian cents to 59 Canadian cents, according to regulatory filings.
Mr. Costigan, vice president of corporate development at Western Potash, sold 30,000 shares in the days after the report for 64 Canadian cents apiece, filings show. Mr. Costigan said Mr. Bogner, who interviewed him for the report, didn't tell him of Mr. Bogner's connection to Zimtu. Mr. Bogner didn't respond to requests for comment on that point.
Regulators in British Columbia are pursuing several administrative cases in which they allege people sought to benefit from share-price moves brought about by researchers and promotional materials called "tout sheets."
In one such case, the BCSC in December accused a hedge-fund manager of fraud and acting contrary to the public interest for writing a negative research report about Silvercorp Metals Inc. SVM.T +1.14% and posting it on a financial blog that he ran, in an alleged attempt to profit from a falling share price. The fund manager, Jon Carnes, denied the allegations and said he was preparing his rebuttal.
Separately, the BCSC's administrative tribunal has yet to rule on the agency's allegations of acting contrary to the public interest against British Columbia-based Colin McCabe, who was allegedly being paid by a Swiss-based asset manager to recommend stocks under pseudonyms and in promotional materials. Mr. McCabe couldn't be reached for comment; a spokeswoman for his lawyer declined to comment. Mr. McCabe, in filings submitted to the BCSC, said he wasn't liable for any wrongdoing, a commission spokesman said.
Last year, the regulator started a program to monitor disclosure by newsletter writers of any payments from companies they write about. The program includes investigating offshore accounts to trace the ownership of companies selling stocks promoted through newsletters, Mr. Brady said.
Read more at http://www.stockhouse.com/companies/bullboard/...#oI4tKlrRlqv5zA3E.99
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