Banks Can’t Shield Stock Tips From Web Reports

(CN) - Barclays Capital and three other major stock brokerages cannot block financial news service Theflyonthewall.com from releasing instant reports on stock ratings made by the banks' research arms, the 2nd Circuit ruled.

The decision by the Manhattan-based federal appeals court overturns an order that would have forced the site to embargo its reporting on stock recommendations made by the firms for up to two hours after the opening of the exchanges in which such stocks are traded.

Barclays, Morgan Stanley, Merrill Lynch, and Pierce, Fenner & Smith had argued successfully before the district court that Theflyonthewall.com was misappropriating its recommendations under a New York state law protecting so called "hot news." The website would report accounts of the firms' recommendations - which are published in proprietary reports given to select clients - before financial markets opened, thus reducing the value of the recommendations to the firms' brokerage arms.

A three-judge panel rejected the "hot news" argument Monday.

"A Firm's ability to make news - by issuing a Recommendation that is likely to affect the market price of a security - does not give rise to a right for it to control who breaks that news and how," Judge Robert Sack wrote for the court's lead opinion.

The District Court had applied a test found in a previous 2nd Circuit ruling, National Basketball Association v. Motorola Inc., to determine that the website was "free-riding" on the time and effort the plaintiff firms put into developing their recommendations.

It rejected Theflyonthewall.com's argument that it was not free-riding because of the time and effort it put into discovering what the recommendations were and then publishing the information, as news, on its site.

Before going to trial, the website stipulated that it had infringed the firms' copyright by quoting at length from their reports and that it had, in the past, relied on leakers within the firms to obtain the information before it was made available to the general public.

Theflyonthewall made it clear however, that it no longer relied on leakers and instead used standard journalistic methods to obtain the recommendations.

Judge Sack, a former media lawyer and author of two books on the subject, noted that there was a qualitative difference between what the firms were doing in publishing their reports and what Theflyonthewall was doing in reporting their recommendations. "Fly is not, under NBA's analysis, 'free-riding,'" Sack wrote. "It is collecting, collating and disseminating factual information - the facts that Firms and others in the securities business have made recommendations with respect to the value of and the wisdom of purchasing or selling securities - and attributing the information to its source. The Firms are making the news; Fly, despite the Firms' understandable desire to protect their business model, is breaking it."

To further the distinction, Sack reached even further back to the Supreme Court's 1918 ruling in International News Service v. Associated Press, which defined hot-news infractions as "taking material that has been acquired by complainant as the result of organization and the expenditure of labor, skill, and money, and which is salable by complainant for money, and appropriating it and selling it as [the defendant's] own."

"But, [that] does not describe the practices of Fly," according to the 71-page decision.

Sack said that the court could perceive no "meaningful difference" between Theflyonthewall.com's publication of stock recommendations and the "unexceptional and easily recognized behavior by members of the traditional news media - to report on, say, winners of Tony Awards or, indeed, scores of NBA games with proper attribution of the material to its creator."

In a concurring opinion, Judge Reena Raggi said the court should have applied the test set in the NBA decision to conclude that no direct competition existed between the brokerage firms and Theflyonthewall.com.

Raggi was also concerned that by distinguishing between those who make the news and those who break it, the majority would "foreclose the possibility of a 'hot news' claim by a party who disseminates news it happens to create."

The judges remanded the case to District Court for dismissal.

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