As Enron deteriorated into bankruptcy, many Wall Street analysts maintained buy ratings on its stock. In response, debate surrounding the potential for analyst bias has resurfaced. When an investment bank underwrites an offering, its goal is to create a market for its client’s securities. If that same investment bank issues recommendations to its investors regarding the company with which it has an underwriting relationship, a potential for conflict of interest arises that is generally addressed by the establishment of a “Chinese Wall” between research and investment banking functions.
During the past six months, the U.S. District Court for the Southern District of New York has dismissed three class action lawsuits alleging various breaches of broker fiduciary duties stemming from purported analyst bias. In each of these cases, the grounds for dismissal was federal preemption and preclusion under the Securities Litigation Uniform Standards Act of 1998 (SLUSA).[1]� While two of the cases were dismissed in their entirety,[2]� the third was dismissed while holding that certain members of a theoretical subclass of the original broader putative class could refile their claims in state court.[3]�
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