Earlier this month, Jeff Miller posted an interesting discussion about The Fly on the Wall litigation (lower court decision here; coverage of appellate arguments here).

For those of you unfamiliar with The Fly, it is an online service that reproduced a headline feed of Wall Street Research coverage: Upgrades, downgrades, price targets. Several firms (Barclays/Lehman, Merrill, Morgan) sued The Fly, who lost the case after a bench trial (no jury).

This was not a First Amendment case (as it might appear), but instead was about protected work product and copyright infringement. Unauthorized parties — including the iBanks’ own employees — were forwarding research to the Fly, who was excerpting the stock calls.1

The Fly was ultimately found guilty under the theory of “hot-news misappropriation” and the plaintiffs were granted injunctive relief.

Here’s where things get rather interesting:  When determining the proper scope of injunctive relief, a court may be guided by matters of public policy. Specifically, the court noted that the granting of equitable relief, such as a permanent injunction, “may go much further both to give or to withhold relief in furtherance of the public interest than where only private interests are involved.

Now, I would argue that this was in fact a dispute between two private parties — The Fly on one hand, and the iBanks on the other. The public interest was not in any way represented here. However, the court inexplicably found a “Public Policy Consideration:”

“It was undisputed at this trial, and explicitly conceded by Fly, that the production of equity research in general, and its production by the plaintiff Firms specifically, is a valuable social good.”

This was a terrible error by the Judge. Wall Street Research does not meet the qualifications of “Valuable Social Good.”

In my opinion, this was an error on the part of legal counsel for the Fly to concede as much. There is no evidence whatsoever that equity research by the firms involved offer any such public good. Indeed, anyone familiar with Wall Street history can demonstrate that over time, the inherent conflicts have cost the public 100s of billions of dollars. It can also be demonstrated that Wall Street research exists to serve the needs of the firm’s syndicate and IPO business, not the public.

Wall Street research is guilty of groupthink, is congenitally too optimistic (by 100% according to McKinsey) — except at bottoms, when it is too pessimistic. Often times, it is a contrary indicator. If we include the fraud of the 1990s and 2000s, Wall Street research has worked as a mechanism for extracting wealth from the public. The nicest thing I can say about Wall Street research is it constitutes a nuisance (perhaps an Attractive Nuisance) at best, and at its worst is a menace to the public.

Let’s look more closely at what the judge found in her decision about Wall Street research:

“Such research plays a vital role in modern capital markets by helping to disclose information material to the market, to price stocks more fairly and, as a result, to produce a more efficient allocation of capital.”

Equity prices are driven over time by a variety of factors: Earnings, Discounted cash flow, dividends, etc. These are facts that comes directly from the comp0anies to the public via SEC filings. They do not come from Wall Street research.

The judge is not simply wrong — she is thoughtlessly repeating a Wall Street myth about equity pricing without any evidence. Companies themselves disclose information to the public about their revenues, sales costs, profitability and earnings. What The Street’s  research generates are opinions — sometimes right, often wrong, rarely in doubt.

This myth, not coincidentally, is promulgated by iBanks as a way to help sell their products and generate commissions. Study after study shows that the more an investor trades, the worse their performance is. Pray tell, how is generating more trading activity a “public good” if it hurts investor returns?

Some hedge funds and other active traders may find these calls valuable, as they swing in and out of equities. But is that a public good? I doubt it — and the judge, despite a lack of any evidence whatsoever, appeared to merely assume so.

Indeed, according to Graham and Dodd, the factors that matter the most to the valuation of any equity are not the opinions issued from Wall Street, but are the specific factors that describe the companies actual performance over time. And as laws (such as Sarbanes-Oxeley) require, that data comes from the companies themselves — and are not subject tot hew opinions of Wall Street.

In other words, the Judge based part of her remedy on a faulty understanding of equity pricing models:

“Although the gains from immediate trading and rapid stock movement based on knowledge of Recommendations may be realized initially only by sophisticated investors, all market participants benefit from a market operating to align prices with underlying value as quickly as possible. Indeed, three decades of jurisprudence in federal securities law have built upon the understanding that investors may rely in bringing a securities fraud lawsuit on the integrity of the market price of a stock to create a presumption of transaction causation.” (emphasis added)

The judge cites “three decades of jurisprudence” that is loosely based on the Efficient Market Hypothesis — a mostly discredited view of how markets operate, whose value was eviscerated by the financial crisis.

Conclusion:  I have no opinion on whether The Fly should have won its case or not. But the remedy fashioned was based on a market urban legend that has no basis in fact. Wall Street myths have worked their way onto American legal jurisprudence. It would be helpful if attorneys could understand these myths, and at the very least challenged them in open court.

Until then, Judges are issuing orders that have no basis in reality. This does not serve investors or a “social good” in any appreciable way.

And on the possibility that future cases are against not obscure investing websites, but Google News, Yahoo Finance, or even Bloomberg, this decision could have lasting importance.


Lawyer: Finance firms’ suit not free-speech attack
AP Aug 6, 2010  

Website’s instant posts of Wall Street research banned
Jonathan Stempel and Grant McCool
Reuters, March 18, 2010

Barclays v. TheFlyOnTheWall.com: Hot News Doctrine Alive and Kicking; Will News Aggregators Be Next?
Sam Bayard
Citizen Media Law Project, March 23rd, 2010

Barclays Capital Inc. v. Theflyonthewall.com, Inc. (06 Civ. 4908).


1. The Fly did not help its case by suing a competitor for essentially the same claims the iBanks made against it.

Further, the Wall Street firms’ research had inscriptions such as “This material may not be reproduced, forwarded, excerpted, etc, without prior wrritten permission.”

The Fly’s own website had a similar disclaimer: “The material presented on this Web Site is the property of Theflyonthewall.com, Inc. and is protected by copyright. None of it may be reproduced, broadcast or resold without our permission.

Thus, the judge appears to have found the Fly’s copyright position both novel and hypocritical.

Category: Financial Press, Intellectual Property, Legal, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Is Wall Street Research a “Valuable Social Good” ?”

  1. rvirmani says:

    Wall St Research is marketing. Is marketing a social good?

  2. nickgogerty says:

    valuable social good. Anybody who has ever researched “Wall Street Research” knows this statement is 0 for 3.

    1. Valuable? when was the last time you heard the buy side say. The Research delivered our Alpha.

    2. Social? Quoting from “Wall street research” at parties hardly endears one to fellow socialites.

    3. Good? See issue number 1.

  3. subscriptionblocker says:


    There are times I wished I could buy/sell shares on ebay – instead of Wall street jackals :)

    And enforcement of jail time for executives who falsify company data would do more for us than any “marketing advice”.

    Wall street = den of vipers. Has nothing to do with social good.

  4. Quite astonishing that the judge would simply get that so wrong.

    The danger of assumption is manifest, and unfortunatetly the judge stepped right into it.

  5. Transor Z says:

    This baby is a direct throwback to INS v. AP, a famous 1918 intellectual property case they probably still teach in law school. First of all, procedurally, if both parties stipulate that the equity research was a “socially valuable good,” then it’s a socially valuable good — for the purposes of adjudicating the dispute at hand. This is one of those technical points non-lawyers don’t give two shits about, and probably rightly so. But in this instance it (partially) explains the laugher on the part of the federal trial judge.

    So if Barry gets sued for embedding some hot-off-the-presses equity research drek via scribd to tear it apart, Barry is free to argue through his lawyers in his own case that it was drek and not a “socially valuable good” for the purposes of his case.

    In IP land, “socially valuable good” is construed about as broadly as you can imagine. The essence of these cases boils down to the time and effort somebody puts into capturing and organizing information. Sophisticated people may see equity research as so much b.s. propaganda designed to induce firm customers to churn their accounts and generate fees, but in the eyes of the law, somebody paid somebody to organize information into a format and then disseminate it. That’s “creating value.”

    Seriously, some of the early early IP case law legal reasoning analogized to the guy scooping up horseshit off the street and then selling it as manure. Manure = raw news and scooping it up and putting into a cart (“organizing it”) was value added, however basic. I always thought IP law had some shaky foundations, but that’s just me.

  6. Transor Z :

    No doubt, the defense lawyer failed to challenge this, hence the judge was free to enter it without any challenge into he decision.

    This does not make the underlying assumption correct — only unappeallable.

    But think about how embedded into the collective zeitgeist this erroneous assumption is — that neither the judge no0r the lawyers thought for a moment to challenge it.

    A false meme, repeated ad nausea, became a legal truism.

    Kinda frightening, don’t ya think?

  7. curbyourrisk says:

    Barry….shame on you for thinking this.
    “Equity prices are driven over time by a variety of factors: Earnings, Discounted cash flow, dividends, etc. These are facts that comes directly from the comp0anies to the public via SEC filings. They do not come from Wall Street research.”

    It has been years since that statement has been remotely true. Equity prices are driven by the OLDEST and most prolific rule of economics. SUPPLY and DEMAND….. If there are more buyers, stock prices go higher. If there are more sellers, they go lower. It is really that simple… What equity traders need to do is watch the flow. I have seen too many BAD Companies have their stock prices remain too high, too long……(protected by insiders) and have seen WAY too many GOOD companies unfairly get beat up and remain low despite meeting all your criteria.

    Supply and demand…….that’s it.


    BR: Over the short term, you are correct, it is a voting machine. But I have yet to see any evidence that markets are not, over longer terms, weighing machines. Indeed, that is the process we are currently going thru . . .

  8. constantnormal says:

    Perhaps The Fly can fall back and regroup by treating the bon mots they issue as humor, rather than news. Kind of like The Onion for Wall Street, with a suitably snarky comment accompanying each “news” bit.

  9. constantnormal says:


    But what causes “demand”?

    Is it perhaps “a variety of factors: Earnings, Discounted cash flow, dividends, etc.”, and the expectations that these things engender?

    Or is “demand” simply the expression of the current fad among equity buyers, driven as much by the attractive models used in their advertising as by their financial performance?

  10. curbyourrisk says:

    Constantnormal….. That is my point. In today’s day and age, it [demand] is created by algorithms, HFT and the FED. That is neither a fair market nor a healthy one. This is why I am on the sidelines actively rooting for a crash….not just a little one, but one that destroys every HFT, every algo-trader and why not….the FED too. It will save us from all that nasty auditing we should do of their toxic asset base. If the FED did not openly break the law and crap all over their Charter, I might not wish for their demise, as unlike most other Libertarians outt here, I agree that we need the FED…..Just have to limit and restrict their actions.

  11. constantnormal says:

    Ok, you confused me there with your mention of “more buyers and more sellers” … had me thinking of actual public free markets as opposed to the orchestrated frauds that we have today.

  12. ACS says:

    Wall Street research is a public nuisance. Equity prices are driven by the expansion and contraction of P/E multiples, a manifestation of crowd psychology and impossible to predict.

  13. curbyourrisk says:

    crowd psychology is the definition of supply and demand……

  14. dead hobo says:

    OK. let’s assume away the fact that maybe 5% to 10% of Wall Street research, private or public, has positive economic value to the consumer of the research and the rest has the value of a shit sandwich, or less, to the same consumer.

    The value of the research is irrelevant in this instance.

    Wall Street research has the same value to Wall Street researchers that copyrighted music has to musicians and record labels. It’s a work product that is owned by it’s creator and assignees. The creator or owner may give it away or license it or sell it. It may require the purchaser to keep the contents private or allow the user to distribute it freely. If the seller gets the user to agree to terms, then the user is at risk if those terms are violated. If a product is stolen and freely distributed to anyone, then the unauthenticated distributor has a lot of explaining to do and will probably be in a lot of trouble if any real damages occur. Theft of information is still theft.

  15. AHodge says:

    sometimes they are even worse than randomly wrong.
    from late 2007

    “Bloomberg lists ten most undervalued stocks based on polls of analysts. I am or was short 5 of them. I use the list to add a 6,th Radian, another pool insurer.
    This is the ultimate statisticians insult. It is one thing to do an analysis that is randomly wrong. It is quite another to take a list that analysts say are the very best stock buys out of 500 (most undervalued) and use as a list to pick your shorts from, a worst list. The stock price forecasters are caught, because those prices have collapsed and the analysts have massively lagged behind reality, while holding to their old price target goals”.

  16. Transor Z says:

    @Barry at 8:30 am:

    The Law and Econ influence in the law is beyond awful, EMH is still a hateful meme all over the place. Economists have physics envy and a lot of lawyers seem to have economics envy, so what does that tell you? Probably 80% of the lawyers I know with legit science/engineering undergrad and science/engineering masters are in the patent bar. A lot of the others are transactional and do contracts for software or pharma. One guy I’ve heard of is a WS trader/blogger — wtf?

  17. In law school, I recoiled at how the EMH had worked its way into the law — no legislation, no common law history — just a bad theme that had found its way in via Judges like Easterbrook and Posner.

    I told one law prof I thought it was a treasonous betrayal of the US Constitution, and he laughed out loud over the mere suggestion.

  18. BR:
    Who were the defendant’s lawyers? Something tells me they weren’t top notch.

  19. DM RTA says:

    welcome (back) to the era of “sticks and stones will break my bones but names can really kill me!” The underlying assumption relative to value has a changing fulcrum: accuracy vs. how much does it seemingly move people to feel and act? You can think about past events like Lehman’s and Bear’s demise or you can think about how burning The Koran (sp?) is either a social issue or not based on how it makes people feel at the time. Why is it we ignore people using the flag for a rug sometimes and it enrages us other times? Why is it that the vitriolic short selling argument comes and goes like unpredictable social weather?

  20. branman21 says:

    The real issue is this proprietory work (upgrades, downgrades, changes in thesis) which is meant for cleints of the firm, not the public. It’s just another example on how fast information moves these days and how difficult it is to monetize good content.

  21. SpottyDog says:

    Does anyone know, is this the same as TheFly blog on ibankcoin.com?


    BR: Different fly . . .