In the summer of 2001, the lofty stock price of SBC Communications was coming down, but the company appeared strong.
On July 25 that year, it issued its second-quarter earnings report, boasting that disciplined financial management had driven its earnings higher despite a recession in America. Its stock rose 6.3 percent that day. On Aug. 8, SBC filed its quarterly report with the Securities and Exchange Commission, and at least one Wall Street analyst concluded that there was less to SBC’s good earnings than there had appeared to be.
Andrew Brian Hamerling, then 27, was the Banc of America Securities analyst covering the company, and he wrote a report concluding that SBC had beaten Wall Street forecasts in the recent quarter through one-time stuff, as an e-mail message written by one of his bosses put it at the time.
But that research report was never published. SBC was given a copy, according to that same message, which was quoted Tuesday by NASD, a U.S. securities-business regulator, in a disciplinary action against Hamerling. The company then threatened, the message continued, to pull out of a Banc of America investment conference scheduled for the next month and to pull potential corp fin business. Presumably that meant corporate finance, or underwriting, business. Hamerling chose to issue more positive research reports to the public while telling hedge fund clients by e-mail that he thought SBC shares were likely to fall. The contrasting opinions led to the NASD action on Tuesday, in which he was banned from working for any brokerage firm for nine months and fined $125,000. That fine must be paid only if Hamerling goes to work for a brokerage firm. He now works for Galleon Partners, a hedge fund manager.
The case sheds light on how Wall Street and at least some companies operated during the stock market boom.
According to NASD, one research manager at Banc of America thought Hamerling should publish his negative report despite the threats, but another did not, and investment bankers at the firm were also opposed to taking the risk of losing business. In the end, the decision was left to Hamerling, who told NASD that he feared losing access to SBC information and chose not to publish his real opinion.
An SBC spokesman said Tuesday that the company would not comment on whether it had made threats to Banc of America. But he said it was absolutely not its policy to make threats and added that the company had not been asked about the accusations by NASD or the SEC. Jennifer DiClerico, a spokeswoman for Banc of America, pointed out that ultimately it was his decision not to publish but declined to comment on whether managers had pressed Hamerling to avoid offending SBC.
When Hamerling did issue a research opinion on SBC in September 2001, it had a buy recommendation and a $51 target price. At the same time, he was sending e-mail messages to hedge fund clients saying the stock should be sold short because the company was faking its earnings, was clearly overvalued and has nothing fundamentally sound going for it. It turns out that Hamerling was right in his private opinion. SBC was trading at about $43 a share the day he sent his report to the company, down from a high of $59 the previous October. The shares closed Tuesday at $23.97
