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OFFICE OF SECURITIES
121 STATE HOUSE STATION
AUGUSTA, ME 04333
In the matter of
BEAR, STEARNS & CO. INC.,
WHEREAS, Bear, Stearns & Co. Inc. (“Bear
Stearns” or the “Firm”) is a broker-dealer licensed in the State of
WHEREAS, coordinated investigations into Bear Stearns' activities in connection with certain conflicts of interest that research analysts were subject to during the period of July 1, 1999 through June 30, 2001 have been conducted by a multi-state task force and a joint task force of the U.S. Securities and Exchange Commission, the New York Stock Exchange, and the National Association of Securities Dealers (collectively, the "regulators");
WHEREAS, Bear Stearns has cooperated with regulators conducting the investigations by responding to inquiries, providing documentary evidence and other materials, and providing regulators with access to facts relating to the investigations;
WHEREAS, Bear Stearns has advised regulators of its agreement to resolve the investigations relating to its research practices;
WHEREAS, Bear Stearns agrees to implement certain changes with respect to its research and banking practices, and to make certain payments; and
WHEREAS, Bear Stearns elects to permanently waive any right to a hearing and appeal under 32 M.R.S.A. §§ 10708-10709 with respect to this Consent Order (the “Order”);
NOW, THEREFORE, the Securities Administrator of the State of Maine Office of Securities, as administrator of the Revised Maine Securities Act, 32 M.R.S.A. §§ 10101-10713, hereby enters this Order:
Bear Stearns admits the jurisdiction of the Office of Securities, neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Order, and consents to the entry of this Order by the Securities Administrator.
II. FINDINGS OF FACT
2. Bear Stearns is registered with the Securities and Exchange Commission ("Commission"), is a member of the New York Stock Exchange, Inc. (“Exchange”) and the NASD Inc. ("NASD") and is licensed to conduct securities business on a nationwide basis.
3. Bear Stearns is currently licensed with the Office of Securities as a broker-dealer, and has been so licensed since at least 1984.
action concerns the time period of
1. During the relevant period, the Firm sought and did IB business with many companies covered by its research. Research analysts were encouraged to participate in IB activities, and that was a factor considered in the analysts’ compensation system. In addition, the decision to initiate and maintain research coverage of certain companies was in some cases coordinated with the IB Department and influenced by IB interests.
2. As a result of the foregoing, certain research analysts at the Firm were subjected to IB influences and conflicts of interest between supporting the IB business at the Firm and publishing objective research.
3. The Firm had knowledge of these IB influences and conflicts of interest yet failed to establish and maintain adequate policies, systems and procedures that were reasonably designed to detect and prevent the influences and manage the conflicts.
1. Research analysts were responsible for providing analyses of the financial outlook of particular companies in the context of the business sectors in which those companies operated and the securities market as a whole.
2. Research analysts evaluated companies by, among other things, examining financial information contained in public filings, questioning company management, investigating customer and supplier relationships, evaluating companies’ business plans and the products or services offered, building financial models and analyzing competitive trends.
3. After synthesizing and analyzing this information, analysts produced research in the form of full reports and more abbreviated formats that typically contained a recommendation, a price target, and a summary and analysis of the factors relied upon by the analyst.
4. The Firm distributed its analysts' research internally to various departments at the Firm and externally to the Firm’s retail and institutional investing clients. In addition, the Firm sold some of its research directly to non-clients, disseminated it through distribution agreements with other broker dealers, made it available to third party subscription services such as First Call, and offered it for sale via market websites such as MultexInvestor.
5. In addition to performing research functions, certain research analysts participated or assisted in IB activities. These IB activities included identifying companies as prospects for IB services, participating in "pitches" of IB services to companies, attending “road shows” associated with underwriting transactions, and speaking to investors to generate interest in underwriting transactions.
6. In preparation for each “pitch” the bankers, with the analyst’s input, prepared a "pitch book" which was distributed at the meeting and contained a summary of the Firm’s presentation.
7. The pitch books, in some instances, identified the covering analyst by name, provided information about that analyst’s background and reputation, sometimes characterizing the analyst as the "ax" in his or her coverage sector, and highlighted the success of Bear Stearns' underwritten IPOs covered by the analyst. The pitch books also highlighted such factors as the number of lead and co-managed IPOs that the Firm currently had under research coverage. This information was intended to convey to the issuer that such treatment would be accorded to it if Bear Stearns received the mandate for the IB transaction.
8. The analyst’s reputation played a role in pitching the Firm’s IB services to potential clients. Issuers often chose an investment bank because of the reputation of the analyst that would cover the company’s stock.
9. The pitch to an issuer by the research analyst contributed to Bear Stearns' ability to win investment banking deals and receive investment banking fees from that and subsequent investment banking relationships.
12. The IB activities in which analysts participated also included participating in commitment committee and due diligence activities in connection with underwriting transactions and from time to time assisting the IB Department in providing merger and acquisition ("M&A") and other advisory services to companies.
13. The Firm encouraged research analysts to support the IB and other businesses of the Firm. With regard to IB, research analysts were encouraged to work in partnership with the IB Department by participating in the foregoing IB activities, and the level of certain research analysts' participation in these IB activities was sometimes significant.
b. In her 1997/1998 business plan, an analyst stated, “If I were any more aggressive in the banking area, my office would be on the third floor [location of IB offices of the Firm].”
14. In connection with their participation in IB activities, certain research analysts and investment bankers ("bankers") communicated, in various frequency and extent, through meetings and via telephone and electronic mail ("e-mail").
IB department at the Firm was organized into industry groups that corresponded
to certain research sectors. Research
analysts were aware that, in certain circumstances, their positive and
continued coverage of particular companies was an important factor for the
generation of investment banking business.
Thus, some research analysts and
coordinated the initiation and maintenance of research coverage, based upon,
among other things, investment banking considerations.
D. Participation in Investment Banking Activities was a Factor in Evaluating and Compensating Research Analysts
1. The compensation system at the Firm provided an incentive for research analysts to contribute to all areas of the Firm’s business, including participating in IB activities and assisting in generating IB business for the Firm. Research analysts' participation in IB activities was one of several factors considered in determining their compensation. Notes of staff meetings reflect the following statements by the Head of Research to analysts:
a. "I’d like to remind everyone how you get paid at Bear Stearns. It is based on your contribution to your team and your contribution to the firm . . . Notice that being a partner with banking is part of the analyst job description. You are not compared or matrixed or in any way paid on a formula. Working on transactions is not incremental to your compensation, it is an expected part of it."
b. "I need to remind you that investment banking revenues are not incremental to your bonus. Being a partner to banking is part of your job. You are paid on performance and based on your contribution to the firm."
2. The performance of research analysts was evaluated through an annual review process. Where not set by contract, the research analyst’s salary and annual bonus were also determined through this process.
3. Information on the analyst’s job performance was gathered through annual self-evaluations, analyst’s business plans, surveys of management, and trading and institutional sales department personnel, e-mail and oral feedback from employees in the IB and other departments at the Firm, and the Firm’s institutional clients.
4. The research analysts' annual business plans contained, among other things, their contributions to various areas of the Firm, including IB, for the past year, and their plans for improving their contribution to these areas of the Firm, including IB, in the coming year.
5. In their self-evaluations, which were used to communicate their accomplishments to and petition management for increased compensation analysts discussed such areas as their rankings in independent research polls, the scope of their research coverage, their participation in industry conferences, and the Firm's Autex rankings in stocks they covered. Certain research analysts provided extensive information regarding their assistance to IB, including accomplishments, goals, and participation in lead- and co-managed underwritings, and sometimes also including the revenues to the Firm associated with the IB transactions on which the analyst worked. In addition, analysts were occasionally requested to inform research management of fees generated by the IB transactions on which they worked.
b. In a
6. Certain research analysts perceived that the amount of their bonus would be influenced by their contribution to and impact on the firm’s IB business, and the fees generated by IB transactions on which they worked.
7. Research analysts were encouraged to support and assist all areas of the Firm and to participate in IB activities and activities that enhanced the reputation of the Firm's IB business. Based upon statements by research management indicating that partnership with banking was part of their job as research analysts, the inclusion of a "Banking" section in their annual business plans, information regarding IB transactions in their self-evaluations, and requests from research management for specific information regarding IB transactions in their coverage sectors, certain research analysts believed that the revenues generated by their participation in IB activities was an important factor in their evaluations and compensation. Accordingly, some research analysts were encouraged to participate in IB activities, increase IB revenues, and enhance the reputation of the Firm, including its IB business.
8. Research Analysts’ salaries and bonuses were determined by a multiple factor-based approach. Among other things, analysts were judged for compensation purposes based on the performance of their stock picks, their impact on the buy-side accounts as measured by votes, the Firm's market share in trading volume in the stocks they covered, their participation in IB activities, and the fees and secondary trading commissions generated from those activities were considered.
1. In general, the Firm determined whether to initiate and maintain research coverage based upon institutional investors' interest in the company, and the company's importance to the sector or IB considerations, such as attracting companies to the Firm to generate IB business or maintaining a positive relationship with existing IB clients.
2. The nature and duration of research coverage were important criteria for a company’s choice of a broker dealer for IB services. The pitch books typically contained information stating, among other things, that: "an important element to successfully executing an IPO is having an assurance that the Firm will provide research coverage to the IPO candidate in the offering and in the aftermarket."
3. The Firm generally initiated coverage on companies that engaged the Firm in an IB transaction. In pitching for IB business, the Firm sometimes represented to the company the frequency with which reports would be issued.
4. The Firm’s ratings system, which was intended to reflect the long-term prospects of a rated stock, allowed research analysts to assign one of five ratings to a stock: (1) "Buy" - Expected to outperform the local market by 20% in the next 12 months. Strong conviction and typically accompanied by an identifiable catalyst; (2) "Attractive" - Expected to outperform the local market by 10% or more, it is usually more difficult to identify the catalyst; (3) "Neutral" - Expected to perform in line with the local market; (4) "Unattractive" - Expected to underperform the local market; and (5) "Sell" - Avoid the stock.
5. During the relevant period, there was a sharp downturn in the stock market and stocks in certain sectors performed poorly. During this period, the Firm did not issue ratings of "Unattractive" or "Sell" in connection with any covered companies in these sectors.
6. Research management communicated with IB management to ensure that research opportunities were appropriately aligned with identified IB opportunities.
7. The Stock Selection Committee was ultimately responsible for making the determination to initiate coverage of a given company. The Head of Research was ultimately responsible for making the determination to maintain research coverage. Nonetheless, IB considerations sometimes influenced the decision to initiate and maintain coverage.
8. Some research analysts and bankers actively coordinated the initiation and maintenance of research coverage based upon, among other things, IB considerations. This coordination consisted of meetings and communications by telephone and e-mail.
9. In some circumstances, research coverage was initiated based on IB considerations.
a. In an April 19, 2000 e-mail from a member of his staff, the head of the IB Technology Group communicated the following to the Heads of Research and IB as well as numerous analysts and bankers: “[Analyst A] and [Analyst B] agree that [Analyst B] will be the analyst covering CacheFlo [Cacheflow]. [Banker] and [Analyst B] will discuss with CacheFlo what the planned timing of their offering will be so as to insure that if we initiate coverage in advance of the transaction we will not be prohibited from being an underwriter. [Analyst B] and [Banker] will also stress to the company that if we initiate coverage we expect our position in the company’s future financing and strategy actions to be materially improved."
10. Given that research analysts participated in determining in which IB transactions in their sectors the Firm would participate, if the Firm determined to participate in an equity offering for a company, it was expected the company would qualify for an initial "Buy" rating.
11. An analyst who anticipated initiating coverage of such a company with less than a "Buy" rating informed IB in advance as follows.
b. In a
c. In his annual evaluation, this analyst was criticized as follows: "Has been working poorly w/bankers - in changing opinions after the firm has committed to co. mgmts". The analyst testified that he believed the statement related to his communicating his opinions regarding companies to bankers in a timely manner, and that if his opinion regarding a company changed from a more positive opinion to a more negative opinion about a company after a banker had already made some sort of commitment to a company, it made life difficult for the banker and was not ideal from his standpoint. He went on to testify that, particularly in his highly volatile sector, companies often changed a lot between the time of the first organizational meeting and the date of the IPO.
12. In some circumstances, the determination to maintain research was influenced by IB considerations.
a. Due to IB influences a supervisory
analyst perceived and communicated to others that IB approval was required
before coverage could be dropped. In
response to an inquiry by an associate analyst regarding dropping coverage of 2
companies, a supervisory analyst stated in an
b. In an
F. Research Analysts Were Visible on Stocks to Generate Investment Banking Business
1. Issuers also considered investment banks' aftermarket trading support as a factor in selecting an investment bank. The Firm’s trading volume and trading rank were factors it promoted to IB clients in pitch presentations.
2. The Firm distributed to sales and trading personnel and research analysts the "Trading Focus List," which contained stocks of companies from which the Firm was seeking or with which the Firm had IB business.
3. A research analyst actively marketed companies on the Trading Focus List in order to obtain IB business.
b. In a September 14, 2000 e-mail to Equity Trading the same analyst wrote the following regarding banking client SonicWall ("SNWL"): "We need help in boosting our trading stat for SNWL. Both management and their VC called me yesterday complaining about our trading - #2 in August and #3 so far in September. More importantly, they argued that we are not supporting the stock when it is weak...I made a positive call on Monday but am not getting much support. Pls help us here since this important technology client indicated to me that if we do not improve, it will hurt our banking relationship with the company."
a March 8, 2001 e-mail the same analyst again wrote to Equity Trading regarding
two IB clients he covered: "Subject: MUSE [Micromuse] and ISSX [Internet
Security Systems] autex - both on focus list. On MUSE - we dropped from #3 or 4
in 2000 to #10 in Feb and March to date. I just called the trader to see what
we can do. I have been extremely active on the name- took management to
4. In order to raise or maintain the Firm’s visibility on stocks with which the Firm wanted to do IB business, certain research analysts nominated companies to participate at Firm sponsored conferences, took company managements on non-deal road shows, hosted field trips for institutional investors to companies' headquarters and arranged other meetings between institutional investor clients and companies.
5. Research analysts were visible on stocks of companies with which the Firm wanted to do IB business in order to generate IB business.
G. Research Analysts Were Subject to Pressure by Covered Companies
1. Certain research analysts communicated regularly with employees of the companies that they covered, including executive and senior management of those companies. These communications occurred through telephone and e-mail exchanges, company-sponsored events, and analyst calls.
2. Research analysts were sometimes subject to pressure from companies they covered to issue better ratings and recommendations. Research analysts understood that negative ratings and recommendations could adversely affect the Firm’s ability to attract and retain IB business from those companies.
a. On November 2, 2000, in his 2000 self-evaluation an analyst wrote in a section entitled "Areas to Improve: We want our banking clients to know that our research is objective and independent but always sensitive to their best interests. There have been instances in my career where certain banking clients felt that our research and public comments weren’t sensitive to their interests. This is a very important issue for us and we take it most seriously. We will continue to make every effort to be sensitive to our clients and our banking partners."
3. When research analysts downgraded or issued a negative comment on a banking client, they sometimes received direct feedback from high-ranking company officials.
H. In Certain Instances, the Firm Published Exaggerated or Unwarranted Research
1. On several occasions, the conflicts of interest discussed above resulted in analysts publishing recommendations and/or ratings that were exaggerated or unwarranted, and/or contained opinions for which there was no reasonable basis. The following are examples of how these conflicts affected the research.
Stearns lead managed the IPO and secondary offerings for SonicWall in November
1999 and March 2000 respectively. An
analyst rated the stock a "Buy" from the IPO until April 2002. In
Stearns initiated coverage of MUSE with an "Attractive" rating in
September 1999, raised the rating to a "Buy" in January 2000 and
maintained a "Buy" rating on the stock until July 2002. While listening to a MUSE analyst call on
Stearns lead managed the IPO for CAIS Internet, Inc. in May 1999. The analyst rated the stock a "Buy"
from the IPO through his last report on the company in November 2000. On
d. Bear Stearns co-managed the IPO and
secondary offerings for
1. In August 2000, as part of an offering that took place in May 2000, the Firm made a payment of $102,750 to another broker-dealer in connection with research coverage it provided for Andrx Corp. ("ADRX"), a Bear Stearns' investment banking client in connection with an underwriting transaction for which Bear Stearns was a lead manager.
2. Bear Stearns did not take steps to ensure that this broker-dealer disclosed in its research that it had been paid to issue research on ADRX. Further Bear Stearns did not disclose or cause to be disclosed the details of this payment.
1. While the role of the research analysts was to produce objective research, the Firm also encouraged them to participate in IB activities. As a result of the foregoing, research analysts were subject to IB influences and conflicts of interest between supporting the IB business at the Firm and publishing objective research.
2. The Firm had knowledge of these IB influences and conflicts of interest yet failed to manage them adequately to protect the objectivity of its published research.
3. Bear Stearns failed to establish and maintain adequate
policies, systems and procedures reasonably designed to ensure the objectivity
of its published research. Although Bear
Stearns had some policies governing research analyst activities during the relevant
period, these policies were inadequate and did not address the conflicts of
interest that existed.
III. CONCLUSIONS OF LAW
1. The Office of Securities has jurisdiction over this matter pursuant to the Revised Maine Securities Act, 32 M.R.S.A. §§ 10101-10713.
2. The Securities Administrator finds the following relief appropriate and in the public interest.
3. 32 M.R.S.A. § 10313(1) states that the Securities Administrator may by order deny, suspend, or revoke any license if she finds that the order is in the public interest and that the applicant or licensee or, in the case of a broker-dealer or investment adviser, any partner, executive officer, or director, any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling the broker-dealer or investment adviser: (G) has engaged in any unlawful, unethical or dishonest conduct or practice in the securities business; or (J) has failed reasonably to supervise sales representatives if a broker-dealer, or employees if an investment adviser.
a. Bear Stearns failed to ensure that analysts who issued research were adequately insulated from pressures and influences from covered companies and investment banking. This conduct was a dishonest and unethical practice under 32 M.R.S.A. § 10313(1)(G).
b. Bear Stearns failed to reasonably supervise its employees to ensure that its analysts who issued research were adequately insulated from pressures and influences from covered companies and investment banking as required by 32 M.R.S.A. § 10313(1)(J).
On the basis of the Findings of Fact, Conclusions of Law, and Bear Stearns’ consent to the entry of this Order, for the sole purpose of settling this matter, prior to a hearing and without admitting or denying any of the Findings of Fact or Conclusions of Law.
IT IS HEREBY ORDERED:
1. This Order concludes the investigation by the Office of Securities and any other action that the Office of Securities could commence under the Revised Maine Securities Act on behalf of the Securities Administrator as it relates to Bear Stearns, relating to certain research or banking practices at Bear Stearns.
2. Bear Stearns will CEASE AND DESIST from violating sections 10313(1)(G) and 10313(1)(J) of the Revised Maine Securities Act in connection with the research practices referenced in this Order and will comply with the undertakings of Addendum A, incorporated herein by reference.
3. If payment is not made by Bear Stearns or if Bear Stearns defaults in any of its obligations set forth in this Order, the Office of Securities may vacate this Order, at its sole discretion, upon 10 days notice to Bear Stearns and without opportunity for administrative hearing.
4. This Order is not intended by the Office of Securities to subject any Covered Person to any disqualifications under the laws of any state, the District of Columbia or Puerto Rico (collectively, “State”), including, without limitation, any disqualifications from relying upon the State registration exemptions or State safe harbor provisions. "Covered Person" means Bear Stearns, or any of its officers, directors, affiliates, current or former employees, or other persons that would otherwise be disqualified as a result of the Orders (as defined below).
5. The SEC Final Judgment, the NYSE Stipulation and Consent, the NASD Letter of Acceptance, Waiver and Consent, this Order and the order of any other State in related proceedings against Bear Stearns (collectively, the “Orders”) shall not disqualify any Covered Person from any business that they otherwise are qualified, licensed or permitted to perform under applicable law of the State of Maine and any disqualifications from relying upon this state’s registration exemptions or safe harbor provisions that arise from the Orders are hereby waived.
6. For any person or entity not a party to this Order, this Order does not limit or create any private rights or remedies against Bear Stearns including, without limitation, the use of any e-mails or other documents of Bear Stearns or of others regarding research practices or limit or create liability of Bear Stearns or limit or create defenses of Bear Stearns to any claims.
7. Nothing herein shall preclude the State of Maine, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations, other than the Office of Securities and only to the extent set forth in paragraph 1 above (collectively, “State Entities”) and the officers, agents or employees of State Entities from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against Bear Stearns in connection with certain research and/or banking practices at Bear Stearns.
V. MONETARY SANCTIONS
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that:
As a result of the Findings of Fact and Conclusions of Law contained in this Order, Bear Stearns shall pay a total amount of $80,000,000.00. This total amount shall be paid as specified in the SEC Final Judgment as follows:
to the states (50 states, plus the
$25,000,000 as disgorgement of commissions, fees and other monies as specified in the SEC Final Judgment;
$25,000,000, to be used for the procurement of independent research, as described in the SEC Final Judgment;
$5,000,000, to be used for investor education, as described in Addendum A, incorporated by reference herein.
Bear Stearns agrees that it shall not seek or accept, directly or indirectly, reimbursement or indemnification, including, but not limited to payment made pursuant to any insurance policy, with regard to all penalty amounts that Bear Stearns shall pay pursuant to this Order or Section II of the SEC Final Judgment, regardless of whether such penalty amounts or any part thereof are added to the Distribution Fund Account referred to in the SEC Final Judgment or otherwise used for the benefit of investors. Bear Stearns further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any penalty amounts that Bear Stearns shall pay pursuant to this Order or Section II of the SEC Final Judgment, regardless of whether such penalty amounts or any part thereof are added to the Distribution Fund Account referred to in the SEC Final Judgment or otherwise used for the benefit of investors. Bear Stearns understands and acknowledges that these provisions are not intended to imply that the State of Maine Office of Securities would agree that any other amounts Bear Stearns shall pay pursuant to the SEC Final Judgment may be reimbursed or indemnified (whether pursuant to an insurance policy or otherwise) under applicable law or may be the basis for any tax deduction or tax credit with regard to any state, federal or local tax.
VI. GENERAL PROVISIONS
This order and any dispute related thereto shall be
construed and enforced in accordance, and governed by, the laws of the State of
The parties represent, warrant and agree that they have received independent legal advice from their attorneys with respect to the advisability of executing this Order.
Dated this 28th day of August, 2003.
By: s/Christine A. Bruenn
Christine A. Bruenn, Securities Administrator
CONSENT TO ENTRY OF ADMINISTRATIVE
ORDER BY BEAR, STEARNS & CO. INC.
1. Bear Stearns hereby acknowledges that it has been served with a copy of this Order, has read the foregoing Order, is aware of its right to a hearing and appeal in this matter, and has waived the same.
2. Bear Stearns admits the jurisdiction of the Office of Securities, neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Order, and consents to entry of this Order by the Securities Administrator as settlement of the issues contained in this Order.
3. Bear Stearns states that no promise of any kind or nature whatsoever was made to it to induce it to enter into this Order and that it has entered into this Order voluntarily.
Bear Stearns understands that the State of
Mark E. Lehman represents that he is General Counsel of Bear Stearns and that, as such, has been authorized by Bear Stearns to enter into this Order for and on behalf of Bear Stearns.
Dated this 21st day of August, 2003.
Bear, Stearns & Co. Inc.
By: s/Mark E. Lehman
Title: Senior Managing Director and General Counsel
SUBSCRIBED AND SWORN TO before me this _____ day of __________________, 2003.
My Commission expires:___________________
 A "pitch" is a presentation made by bankers and research analysts to a potential IB client in order to obtain the mandate for an upcoming IB transaction. In competing for an IB mandate, the Firm typically sent bankers and the analyst to meet with company management to persuade the company to select the Firm as one of the investment bankers in a contemplated transaction. At these "pitch" meetings Firm bankers would present their level of expertise in the company’s sector and discuss their previous experience with other such companies, as well as their view of the company’s merits and likelihood of success.
 A "road show" is a series of presentations made to potential investors in conjunction with the marketing of an upcoming underwriting.
 The "commitment committee" was responsible for, among other things, evaluating and determining the Firm's participation in IPOs and other IB transactions.
 In fact, Bear Stearns had not yet initiated coverage on IPET at the time this e-mail was sent.