Earlier this month, Richard X. Bove, a well-known financial institutions analyst for Ladenburg Thalmann & Co., Inc., issued a report entitled “Who Is Next?,” in which he identified other financial institutions that could be at risk in the wake of IndyMac’s failure.  Among the financial institutions Bove identified was BFC Financial Corporation, a holding company for BankAtlantic, which is headquartered in Fort Lauderdale, Florida.

    BFC, one of two holding companies for BankAtlantic, was on the list because it was in Bove’s “danger zone,” but BankAtlantic was not on Bove’s list.  Its absence did not stop BankAtlantic from filing suit on Monday against Bove and Ladenburg Thalmann in Broward County Circuit Court (Fort Lauderdale), alleging defamation and negligence.  BankAtlantic v. Bove, Civil Action No. 0832714 (July 21, 2008).   Here is an excerpt from the complaint:

The hysterical market conditions that existed when the Bove Report ["Who Is Next?"] was published, republished and promoted by the firestorm of media attention intentionally generated by Bove and Ladenburg, made it particularly critical that those seeking wide audiences to comment on the financial condition of financial institutions be careful for the harm careless assertion of false facts can cause.  BankAtlantic and Bancorp bring this action not simply to collect the damages they have suffered to their reputations as a consequence of these inexcusable wrongs, but also to deal with the current reality that exists in this marketplace — a falsehood, when widely circulated, becomes its own truth as it is repeated over and over again, at some point replacing the truth altogether.  BankAtlantic for the benefit of its customers and employees and Bancorp for the benefit of its shareholders cannot let the lie become the truth.

    According to this story on ABC News’ website, Eugene Stearns, BankAtlantic’s lawyer, declined to provide a copy of the complaint because he “can’t republish the defamation.”  That’s the same answer he (very politely) gave me when I called to ask him for a copy of the complaint.  Mr. Stearns’ theory is because Bove’s report was defamatory, then by disseminating the report, even by sharing the complaint, he makes his client’s situation worse. 

    This case has attracted a lot of attention from the financial press, which is concerned that Bove and his company are being sued because Bove expressed an opinion that BankAtlantic didn’t like, but which wasn’t libelous or defamatory, and which may make other media outlets targets of future lawsuits.

    The observation made in this post in Alphaville, the Financial Times’ blog, sums it up:

"Regardless of who has the legal upper hand, it is clear, as the FT notes, that as problems grow in the US banking industry, so does the sensitivity of banks to commentary on their financial health.

How far they can go to quell their critics, however, is a critical question raised by the Bove case for all in the banking, broking [sic] and legal industries."

    These legal theories have been addressed very recently, as noted in Bloomberg.com’s story by Edvard Petterson, which considers BankAtlantic’s lawsuit in the context of a North Carolina appeals court decision that held that analysts couldn’t be sued for expressing their opinions.  Nucor Corp. v. Prudential Equity Group, LLC, 659 S.E.2d 483 (N.C. App. 2008). 

    In that case, Nucor, a steel manufacturer whose stock is traded on the New York Stock Exchange, sued Prudential and two of its analysts (one of whom had worked at Nucor previously) for making statements about possible antitrust violations committed by Nucor, and alleged claims for libel and unfair and deceptive trade practices. Prudential filed a 12(b)(6) motion to dismiss, which the court granted as to both claims. 

    The Court of Appeals of North Carolina found that the allegedly libelous statements, “construed only in the context of the document in which they are contained, ‘stripped of all insinuations, innuendo, colloquium, and explanatory circumstances[,]’” were not defamatory and affirmed the trial court.

    Nucor’s claim for unfair and deceptive trade practices had been based on the alleged libel and thus could not serve as the basis for relief.  Nucor also alleged that its former employee’s alleged misappropriation of confidential information constituted tortious conduct that could support its claim for unfair trade practices, but Nucor did not allege in its complaint that its former employee had committed any such acts nor did it allege that the misappropriation proximately caused any injury. The court found that, at best, Nucor had alleged that its employee had breached his confidentiality agreement, which did not constitute an unfair or deceptive trade practice.

    Andrew Ross Sorkin, who writes the DealBook blog for The New York Times, wrote a column on July 8 entitled “Psst! Hear The Rumor Of the Day?,”  which discussed the rumor du jour tendency on Wall Street, especially since Bear Stearns’ meltdown in March, and a precipitous drop in Lehman Brothers’ stock price amid recent takeover rumors.  Coincidentally, Sorkin quoted Bove in the column for the proposition that “absurd rumors can have legs,” which seems to be the point of BankAtlantic’s lawsuit.