The downside of suing stock analysts

BANKATLANTIC Bancorp, Inc. (NYSE:BBX) is embarking on a risky strategy by suing a veteran bank analyst for defamation and negligence after he included the company in a research report that ranked 107 U.S. financial institutions on the chances of them going bust.

Yesterday, the bank holding company filed a lawsuit in the state court for Broward County, Florida, against Richard X. Bove, 67, an analyst at Ladenburg Thalmann who is described by The Street.com as “influential” and “outspoken.”

Bove is a regular on business television and is often quoted in the media. He has been named by The Wall Street Journal, Forbes and Zack’s as a top stock-picker, while Bloomberg last month rated Bove as one of the top two analysts who made investors the most money in the past year.

Bank sues analyst for defamation over dodgy banks report

The bank is seeking damages for “defamation and negligence” stemming from a report by Bove published July 13 entitled “Who Is Next?”, a reference to the IndyMac Bancorp collapse in California. The day after the report was published, BankAtlantic’s stock dropped more than 30%, but bounced back after the bank issued a news release labeling the report “erroneous and misleading.” 

In that first news release on June 14, the bank said the report “erroneously included BFC Financial Corp.,” a holding company that owns stock in BankAtlantic Bancorp, which in turn owns stock in BankAtlantic. It said that “wire service outlets and cable news services have picked up the incorrect Ladenburg story, confused BFC Financial Corporation with BankAtlantic, and published stories that omit reference to the actual financial condition of BankAtlantic as a well-capitalized financial institution.” The release noted that Bove’s firm had “acknowledged that the reference to BankAtlantic is incorrect.”

Responding immediately to the report was a good move by the bank. I wholeheartedly recommend that companies speak out quickly when they believe analysts or the media have made a mistake and won’t correct it, or when there are rumors in the market that are affecting their stock prices. The fact that BBX’s stock regained much of its losses in response to the first statement suggests the tactic worked. 

However, yesterday in a strongly worded statement announcing the lawsuit, BankAtlantic’s Chairman, Alan B. Levan expressed outrage at the analyst: “The problem is that, while Bove’s report purports to consider which banks might fail, he failed to examine the health of the banks and thrifts in his report. Instead, he only examined holding company data which, in at least our case, is meaningless information. This is simply shocking.”

Branding Bove’s analysis “totally false,” Levan added: “The problem we face is that the indisputable facts are now buried in the sensational headlines Bove and Ladenburg have falsely created — and, for whatever reason, have refused to retract. Literally dozens of other analysts and commentators have picked up on the Bove “analysis,” assumed its legitimacy, and passed it on to a growing audience on the Internet. Soon, the falsehood will be presumed true and the truth false, leading us to regretfully conclude that the only way BankAtlantic can clear its name from this irresponsible defamation — and that is what it is — is in the courthouse.”

Suing analysts and journalists for defamation is not a strategy I would recommend except in the most grievous cases where malice is the obvious intent. And here’s why:

Suing can look like a desperate act

Launching a defamation suit risks being seen as an act of desperation. Some people might wonder if the bank has been experiencing a run in the week since the initial media reports. The bank’s release does not say anything about this, but it says the negative stories have been spreading, so much so that falsehood will be perceived as truth “soon,” which is why it is suing. Interestingly, the bank says its financial position at the end of June will show that it continues to be a well-capitalized financial institution, but it is silent about its customers’ response to the bad press in July.

Defamation suits often attract even more scrutiny  

BBX had better hope that it doesn’t have any skeletons in its closet. By launching the defamation suit, it has just painted a big bulls-eye on its back. Experienced journalists and analysts know that when a company or individual has something to hide, they often will sue for defamation in an attempt to discourage people from investigating further.

Of course, all this does is make the researchers even more determined to unearth whatever dirt might exist. It puts the company under increased scrutiny rather than less. And when they do publish something the next time, you can be sure the analyst firm or the news outlet will have dotted every “i” and crossed every “t.” It will be very hard for a company to deny the next bombshell, if it comes.

I’m not saying BankAtlantic has anything to hide, just that a lot more people are going to be looking to see if it does.

As the Financial Times’ Alphaville put it this morning: “It would seem to us, though, that slapping a defamation lawsuit on an analyst is another good way to draw even more attention to the original contention.”

Defamation cases are hard to win

According to almost all of the attorneys quoted by the media yesterday, defamation cases are difficult to prove. Take this opinion quoted by the Wall Street Journal Law Blog:

We checked in media lawyer with Ted Boutrous of Gibson, Dunn & Crutcher out in Los Angeles, who handles libel and defamation claims from time to time, albeit mostly from the defense side. Boutrous declined to address the lawsuit specifically, but said that defamation suits are fairly hard for plaintiffs to win, for several reasons. First, proving the statement was “false” can be hard. Second, it could be argued that BankAtlantic, as a public company, is also a public figure. To prove defamation, says Boutrous, a public figure has to show that the plaintiff exhibited “actual malice” in making his statement. Finally, proving damages in situations like this can be difficult, especially if and when the stock goes back up.

Or these extracts from an excellent Bloomberg article on the case:

The Florida lawsuit follows a North Carolina appeals court ruling in April holding that analysts couldn’t be sued for expressing opinions.

“These cases are not easy,” said Bruce Rosen, a lawyer with McCusker Anselmi Rosen & Carvelli who specializes in media law. An analyst need only show that he was relying on facts to defend himself, he added. “As long as your opinion is based upon real facts, that’s permitted, especially when you are talking about issues of major public concern.”

Kevin Goering, a defamation specialist at law firm Sheppard Mullin Richter & Hampton in New York, said the BankAtlantic lawsuit may be an “uphill battle” for the bank. “The bank will have to show actual malice because it’s a public figure.”

Columbia Law School securities professor John Coffee said the BankAtlantic case is “exactly what the First Amendment is there to preclude.”

To me, the BankAtlantic case looks even less likely to succeed than your typical corporate defamation case. According to the bank itself, Bove and his firm were not the ones who pointed a finger at BankAtlantic. Rather it was media outlets and other analysts who jumped to conclusions.

Bove’s report, meaningless or not, was based on facts the bank has not disputed. To suggest that Bove knew that journalists would be confused between the holding company and the federally insured bank is a big leap. In fact, he wasn’t writing the report for bank customers or the media. He was writing for investors who might be investing in stock of bank holding companies, so it’s difficult to argue he could have “foreseen” the impact on customers.

Why exactly the bank wants to spend valuable time and money on a case as tenuous as this, at a time like this, doesn’t make much sense to me.

When you lose, the falsehood becomes fact

Losing a defamation case typically creates the impression with the public that the false and defamatory statements on which the case was based were in fact true. Of course, defamation cases can be lost by the plaintiff for a wide range of reasons, but the public doesn’t always catch the legal nuances.

Develop a thicker skin

Being a public company means being in the limelight, good or bad. It is best for management not to take disparaging comments and negative publicity personally. If you do, you’re bound to be clouded in your judgment.

Of course, it’s very difficult to be objective and rational when you feel you’re under attack. Which is why it’s always a good idea to get outside advice from a variety of experts before launching a defamation suite.

Speak to experienced legal counsel, an outside PR firm, and ask an analyst or journalist you have a good relationship with for their opinion on your plans to sue.

Related posts:

1. SEC’s new guidance for websites and blogs posted
2. "Super IRO" DiRaimo joins firm, stock soars*
3. IROs more short-term focused than analysts — Updated
4. Why do you like email more than RSS?
5. Who said the sell-side is dead?

Get More From IR Web Report
Subscribe to our paid publication Online IR Trends Quarterly. Ask us to recommend improvements to your IR website (we're really good at it).