Analyst Accused of Trying to Extort Cash From CKE
A Wyoming stock analyst was arrested Monday for allegedly trying to extort $300,000 from CKE Restaurants Inc., the parent of the Carl’s Jr. and Hardee’s fast-food chains.
FBI agents took C. Clive Munro, 54, into custody at his Cheyenne home on charges of extortion, wire fraud and securities fraud, according to federal authorities. Munro allegedly threatened to publish negative research reports about CKE unless the Carpinteria, Calif.-based company hired him as a consultant and paid him $25,000 a month for a year.
Munro remained in custody Monday afternoon after a morning court appearance in Cheyenne and couldn’t be reached for comment.
An independent stock analyst who does business as Javelin Research and Montecito Research, Munro produced reports about CKE over the last five years that he sold to institutional investors, according to an account released by U.S. Atty. James G. Martin in St. Louis, where the Hardee’s unit is based.
According to the account, Munro wrote a negative report on CKE in August -- a month during which the company’s stock fell more than 10% -- and then e-mailed another negative analysis of CKE to a client Sept. 15. In a separate Sept. 15 e-mail to CKE Chief Executive Andrew Puzder, Munro allegedly offered to stop writing negative reports about the company in exchange for a job.
“Hi Andy, if you were smart, you would hire me at $25K per month for 12 months (for half my time) and take me out of the game ... ,” Munro wrote, according to the federal authorities. “So far this year, this would have saved you $160 million in lost market value.”
Company executives reported the e-mail to federal authorities Sept. 16. The FBI said it later taped Munro repeating his offer to CKE executives in person and on the telephone.
“We wanted all of the investors to know the context in which [Munro’s] reports were made,” said Mike Murphy, general counsel for CKE.
If convicted, Munro faces as many as two years in prison on the extortion charge, 20 years on the wire fraud charge and 25 years on the securities fraud charge. Each charge also carries a possible $250,000 fine.
Financial analysts can exert a strong influence over a company’s stock price. Their reports, which analyze financial condition and business prospects and provide earnings forecasts, influence “buy” and “sell” decisions made by investors. A negative report can result in a flood of “sell” orders.
“A corrupt financial analyst can affect millions of dollars’ worth of investments and individuals’ life savings and retirement plans,” Martin said in a statement.
However, it’s not clear how widely Munro’s reports circulated or to what extent they influenced CKE’s stock price.
“It depends on how influential the analyst is on Wall Street and how widely followed the stock is,” said Brett Trueman, professor of accounting at the UCLA Anderson School of Management. “If he did say something really important, you would think the stock price would have reacted more strongly the day of the announcement, but you don’t see it.”
John Coffee, director of the Columbia Law School Center on Corporate Governance, noted that it was unclear whether there was any factual basis for Munro’s initial negative report on CKE and whether the decline in the stock in August and most of September was justified.
In 1997, BusinessWeek reported that Munro used inside financial information in 1994 to prepare research reports on SafeCard Services Inc., a now-defunct credit card protection provider. According to the magazine, SafeCard executives reviewed Munro’s research reports before they were sent to institutional clients. Munro and former SafeCard executives denied the reports.
Stacy Roughan, director of investor relations of Glendale-based IHOP Corp., said Munro followed IHOP for about a year, ending September 2003. “We hadn’t had a similar experience,” she said, referring to reports of Munro’s dealings with CKE.
CKE fell 16 cents to $11.83 on the New York Stock Exchange.
