Stock analysts under fire
BY DEBORAH LOHSE
Mercury News
Wall Street's stock analysts, many of whom grew rich and famous during the tech-stock boom, are now facing a whole new kind of attention: lawsuits and regulatory scrutiny.
The actions are coming from many angles: One investor claimed in arbitration that he was urged to stay in a money-losing stock recommended by Henry Blodget without being told about a banking relationship Blodget's firm had that affected the stock. The investor got a $400,000 settlement out of the once-hot analyst's firm, Merrill Lynch.
That opened the floodgates, and last week two lawsuits were filed accusing Morgan Stanley's famed Internet analyst Mary Meeker of irresponsible stock promotion, a claim her firm calls meritless. And another suit filed Thursday in New York alleged that several firms failed to tell investors that their analysts were pressured to issue only bullish stock reports on investment-banking clients of their firms.
The Securities and Exchange Commission is also considering enforcement actions against three unnamed analysts who profited by selling shares of stocks they were recommending to investors.
For analysts, once a green-eye-shade bunch, such attention is a shocking turnaround from their brief celebrity status during the boom. ``What's new is that all these various mechanisms are being brought to bear on analysts,'' said Jeffrey Evans, the president of the New York Society of Security Analysts.
Many are concerned that ``their reputation as ethical professionals is being tainted by a small segment of the industry,'' said Patricia Walters, a senior vice president with the Association of Investment Management and Research, an analyst-certifying group.
The lawsuits contend that because analysts increasingly must help investment bankers that raise money for companies by selling their stock to the public, there is insurmountable pressure to write only bullish reports on such companies. The latest suit, filed in federal court in Manhattan, charges that six firms ``mandated that..analysts issue a favorable recommendation.'' They also contend that, because many analysts had bought cheap shares in the stocks before they were public, the analysts profited themselves from such bullishness.
The suit doesn't cite any instances of analysts profiting from such alleged deceitful behavior. However, the SEC found at least three instances in which analysts sold stock at the same time that they recommended the public buy it, according to testimony by acting Chairwoman Laura Unger before a congressional subcommittee. Unger noted that such analysts may have violated securities laws, and SEC officials are reportedly weighing enforcement actions against the three unnamed analysts.
``Wall Street did not tell the whole truth in its standardized research reports, '' alleges Chris Lovell, a lawyer for the potential class-action suit against six firms including Credit Suisse First Boston and Salomon Smith Barney. ``Had the truth been known, the prices would not have been as high as they were.''
Credit Suisse and Salomon representatives said they had no comment on the suit.
Many Wall Streeters are dubious that investors will be able to prove that analysts acted fraudulently, or that investors' losses were caused by a belief in the analyst, rather than the investors' own optimism or greed.
But many agree that the conflicts of interest got out of hand.
Ron Glantz, former head of research at PaineWebber, said that in 1997 he interviewed for a research position at one of the five largest brokerage firms, which he declined to name. He was interviewed not by the firm's head of research, but by its investment banker, who cared little that Glantz's stock picks had done well or that he'd won accolades from institutional investors. ``He gave me a list of 15 companies and said how soon could you issue `buy' recommendations,'' said Glantz, who recently testified before Congress on this matter.
Lawyers for investors are already planning who's next on the hit list. ``We're now looking at cases against Mary Meeker of Morgan Stanley and Jack Grubman at Salomon Smith Barney,'' said Jacob Zamansky, the lawyer who brought the case against Blodget, referring to two hot analysts during the boom.
Morgan Stanley has defended Meeker in the other suits, calling them meritless. A Salomon spokeswoman called talk of a lawsuit ``speculation'' and said the firm had no comment.
But Zamansky said that firms will have to show that they didn't violate rules requiring analysts to have a ``reasonable basis'' for recommending stocks. That will especially tough for some Internet start-ups without earnings or revenue, which were sometimes given a ``buy'' rating because they had more ``eyeballs'' or ``clicks'' from people viewing their site than other companies.
``You can't just say `Buy XYZ company,' '' said Zamansky. ``You have to have done your due diligence and have a reasonable basis for making your recommendation.''
Analysts scoff at such Monday-morning quarterbacking.
``For more than a year it was more than acceptable'' to measure companies by eyeballs or clicks, said Evans of the New York analyst group. As long as analysts have spelled out their rationale, ``I would think it's up to the investor whether they think that opinion is reasonable or valid,'' he said.
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Contact Deborah Lohse at dlohse@sjmercury.com or (408) 271-3672. |
