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It’s getting dangerous out there for banking analysts. Now they have to worry about defamation actions from financial institutions.

While some companies, when confronted with negative share activity and analyst commentary, rail against short-sellers and the like, others simply go ahead and sue the analysts, notes the Wall Street Journal’s MarketBeat column, commenting on Monday’s move by BankAtlantic Bancorp to sue Richard Bove, a prominent US banking analyst with Ladenburg Thalmann.

The bank, which accused Bove of defamation and negligence over a recently published research report, said Monday that the lawsuit, filed in a state court in Broward County, Florida, pertained to a July 13 report titled “Who Is Next?” The report was dated two days after federal regulators seized IndyMac Bancorp, a large mortgage lending specialist, following a run on that savings and loan.Shares in BankAtlantic slid more than 25 per cent on the July 14 report, mirroring share price movements that day for several other banks with similar assets, amid widespread investor fears about the growing impact of the credit crisis on small regional banks. However the shares bounced back after the bank issued a press release saying it remained well-capitalised and on Monday in New York, closed up 14 cents at $1.82.

The FT points out that Bove did not even name BankAtlantic as a cause for concern in his analysis, but in one of his two approaches for identifying troubled banks, one of the two companies classified as holding companies for BankAtlantic - BFC Financial Corporation - was above Bove’s “danger zone” threshold.Alan Levan, BankAtlantic’s chairman, said in a statement Monday that in light of the bank’s capital levels and ratios of non-performing loans to total loans and to capital and reserves, “no one would ever conclude” that BankAtlantic belongs to any list of lenders that might be “next” to fail.

Bove has been advised not to comment publicly but a spokesman for his employer said Ladenburg Thalmann would defend itself against the “meritless lawsuit”.
Regardless of who has the legal upperhand, 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 and legal industries.David Schulz, a New York-based lawyer who specialises in libel and defamation claims, told Reuters that the issue turned on whether Bove, in his report, knowingly or recklessly misstated a fact related to BankAtlantic.

“If his rationale is mistaken, that’s typically not a ground for a defamation claim,” Schulz said. “If the bank thinks his analysis is wrong, so long as he laid out his facts and the reasons for his opinion that the analysis is meaningful, then he has a right to that opinion.”The Journal’s Law Blog, meanwhile, checked in with media lawyer Ted Boutrous of Gibson, Dunn & Crutcher in Los   Angeles, who 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.
In his original report, Bove cited data from the Federal Deposit Insurance Corp in assessing more than 100 of the largest US banking companies.

He said he compared reported non-performing assets with levels of outstanding loans, and with levels of reserves plus common equity.Bove wrote that “at this point the desire is to look beyond IndyMac and see who the next failure is”. He also said that based on the data, the banking system “is not anywhere near the danger that existed in the late 1980s and early 1990s.”

In a later commentary, he acknowledged that BankAtlantic had disputed his figures, noting that the holding company had purchased $100m in non-performing assets from the bank, says MarketBeat. He didn’t give in entirely, however, saying investors could “either choose the numbers for the holding company as published, or use the number provided for the underlying bank.”The bank still isn’t thrilled, saying in a release that the method - comparing non-performing loans at the bank with the total capital of the holding company - is misleading. “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,” the bank said.

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.