An investment bank last week advising investors to hold on to shares in a Bermuda insurer, as the company lost more than 40 percent of its value, didn't tell investors in its research report that it is one of the insurer's biggest shareholders.

Friedman Billings Ramsey Group Inc., an Arlington-Virginia based investment bank, and a founding director, W. Russell Ramsey, together own more than eight percent of Quanta Capital Holdings, making them the insurer's second largest owner, according to regulatory filings with the US Securities and Exchange Commission at the end of December.

Quanta, a Nasdaq listed insurer, saw its shares fall more than 40 percent on Thursday, and another eight percent on Friday as investors digested news of unexpectedly high losses in the fourth quarter and a subsequent downgrade to its credit rating by A.M. Best, calling into question the insurer's ability to continue in business.

Quanta has retained Friedman Billings to advise it on strategic alternatives, including a possible sale or closing to new business, something the investment bank disclosed on page one of its Thursday research report.

The investment bank's stake in Quanta was said to be "one percent or more" in fine print near the end of its investment report. The disclosure is in keeping with minimum requirements set by brokers' watchdog, the NASD.

"Investors who read these reports are entitled to know the details," said securities lawyer Jacob Zamansky, saying he was not familiar with the specific details of Friedman Billings' ties to Quanta, and speaking generally. He added that research reports should carry disclosure "at the top of the report, or at least in the body, (stating) what the relationship is and whether there is a financial interest that might skew the ratings".

Quanta spokesperson Sabrena Tufts said last night in an e-mail: "Quanta has made all required disclosures of beneficial ownership of its stock in its public filings which are accessible through our website's investor relations links". Neither Friedman Billings Ramsey nor Mr. Ramsey responded by Press time to questions on ownership of Quanta shares.

"If all they are doing is the boilerplate disclosures, my view is that they are asking for trouble," said Mr. Zamansky.

And he said companies can become the target of shareholder lawsuits if they feel a company's level of disclosure is minimal enough to be misleading, in a telephone interview from Houston where he was attending the Enron trial, as part of a trial blog he writes for Forbes.com.

Mr. Zamansky five years ago brought legal action against another investment firm that prompted New York Attorney General Eliot Spitzer to investigate if conflicts were being adequately disclosed in Wall Street research reports.

NASD rules, binding on banks such as Friedman Billings, pre-date the $1.4 billion paid by ten banks in a 2003 settlement of Mr. Spitzer's charges, leaving some calling for greater detail to be required when analysts recommend companies to investors.

David Finegold, professor, strategy and organisation for California-based Keck Graduate Institute of Applied Life Sciences, said companies that meet minimum disclosure requirements aren't necessarily complying with the legislative intent, or the ethical behaviour that new corporate governance rules were meant to foster.

Mr. Finegold, co-author of Corporate Boards: Adding Value at the Top and a ten-year survey into corporate governance practices among America's biggest companies, said it would be best to avoid having a director sit on the board of an investment bank while also serving as a director of a company the bank recommends in investment research.

"What you don't want are where there are business relationships, and conflicts of interest... clearly the thrust is to avoid that," he said, adding that a board should ideally be comprised of independent directors and up to three members of management. He said having some management on the board was important, as without that there was nobody "deeply knowledgeable about where the skeletons may be buried, or the internal workings".

Mr. Ramsey is a Friedman Billings' director, while also sitting on Quanta's board.

Quanta's shares were first recommended to investors by Friedman analyst Bijan Moazami, on the heels of the investment bank handling the insurer's 2003 private offering and subsequent public listing in May 2004.

Quanta's shares gained 11 cents, trading at $2.78 in 4 p.m. composite trading on the Nasdaq yesterday, putting the stock's value at about one-quarter of the $11 price fetched when the insurer first listed. The shares' 52-week high topped $9, while the shares fell to a $2.20 low last week.

Mr. Moazami's research report last Thursday revised Quanta's rating to "market perform" from "outperform".

A "market perform" rating indicates Friedman Billings' expectation that the company will perform in line with its peers, and that investors should hold on to the shares they own. Quanta has posted a loss in seven of the nine quarters since it began reporting its financial results, and on a consolidated basis has lost more than $199 million since first opening for business in late 2003.

"If we have learned anything from the stock research scandal it is you need to disclose your interest, particularly if the rating is a positive one," Mr. Zamansky said.

Analysis of Quanta is based on information generally available to the public, Mr. Moazami said in his report. Measures were put in place in recent years to separate analysts that work for firms that offer a range of services from any undue influence to sell a certain stock.

The fact that the research report doesn't disclose that Friedman Billings holds close to 2.9 million shares, or more than four percent, nor that Mr. Ramsey roughly owns an equal number of shares through Ramsey Asset Management, a company that he controls, isn't seen as a problem by some.

"If they have disclosed what they are supposed to disclose, I don't have a problem with that," said David Schiff, who started work in insurance nearly 30 years ago, before working in the investment-banking business. He has written about the insurance sector for the last 17 years through his newsletter Schiff's Insurance Observer.

Friedman Billings' research report also doesn't disclose that Mr. Ramsey is a director of both Quanta and the investment bank he helped found. Mr. Schiff pointed out that investors can find that information in proxy statements filed by the companies with the SEC. NASD rules don't require investment analysts to disclose when the firm's principals serve on the boards of companies recommended in research.

Quanta said in December that a second Friedman's director, Wallace Timmeny, had been considered an independent director ahead of his December 27 retirement. Mr. Timmeny continues as a director of Friedman Billings, according to the company's website.