The Game (Part Two):
The trough that Wilson called in September became deeper and deeper. On Feb.
10, Unum reported a loss of $183 million for 1999 and earnings of 57 cents a
share for the fourth quarter -- 15 cents short of the consensus estimate. The
stock price dropped another 37 percent to 16 1/4 that day -- then its lowest level
since 1991. Yesterday, the stock closed at 19 7/8.
Red Flag
Wilson's change in tone from May to September raised eyebrows among
investors. Jim Edelman, an analyst at Highland Capital Management in
Memphis, wondered if Wilson's upgrade of her rating for Unum on April 14, 1999,
was related to the IPO of StanCorp Financial Group Inc., another insurance
company, a day later. DLJ was one of Stancorp's underwriters, and good news
about a single stock is often good news for others in the same business.
Edelman says his firm sold almost half of its 236,975 Unum shares in December.
Wilson says the two events are unrelated and that DLJ's investment bankers or
salespeople have never influenced her research. ``I act in the interest of
shareholders,'' she says. ``There's no one with a gun to my head.'' DLJ says it
has participated in one $100 million bond issue for Provident, and the firm is one
of five that manage UnumProvident's $25 billion bond holdings. Wilson says she
has never received any pay related to that work.
Dumped
Money manager Palley-Needelman absorbed its loss on UnumProvident shares
in December, before the stock plummeted again. An analyst at Palley blamed
investment-bank researchers for being too willing to believe what the company
told them. ``Have you ever been dumped by a girlfriend or boyfriend?'' he asked.
``It's the same feeling with a stock like this.''
Imagine, then, that you've been married for decades and never had a reason to
mistrust your spouse. Until now. The shareholders of Procter & Gamble know
what that's like. When then Chief Executive Durk Jager announced that the
company wouldn't meet its earnings target, its stock took its steepest daily drop
in at least two decades.
If analysts had done their job, the shock might not have been so great. Jager
blamed the rising costs of oil and pulp for much of the shortfall. Oil prices tripled
from January 1999 to March 2000, and pulp prices rose 30 percent in 1999.
Hadn't analysts noticed? Some did, but they didn't sound the alert. Andrew
Shore, then an analyst with Paine Webber Group Inc., remarked on the
commodity risk in an August report. Then he raised his rating on P&G shares to
``attractive'' from ``neutral.'' This was stranger still because, just two months
earlier, Shore had complained that P&G management hadn't delivered to
investors for six quarters and wouldn't be able to turn the company around soon.
Buy, He Said
Shore turned even more favorable on P&G in January, when he crowned the
shares with a ``buy.'' He praised the company for walking away from a possible
merger with pharmaceutical companies Warner-Lambert Co. and American
Home Products Corp., calling it proof that management wouldn't be financially
irresponsible. Sales growth that was accelerating for the first time in two years
gave him new confidence, too.
``It could likely be one of the best investments in our group over the next 12-24
months,'' Shore said of P&G shares, even though the company had for the
second time in a few months lowered its estimate for quarterly results.
When P&G issued yet another profit warning on March 7, Shore was no longer
with Paine Webber, having jumped to Deutsche Banc Alex. Brown. At his new
firm, he immediately cut his rating on P&G to ``market perform'' and halved his
12-month price target to 60.
The question is whether Shore had turned favorable on P&G to help Paine
Webber win business. The firm managed an $81 million debt sale in October,
though Goldman Sachs Group has handled four of eight public issues since
1996. Did Paine Webber or P&G pressure him to be more positive? Or did he
simply change his mind? Shore did not return repeated calls or respond to e-mail
or fax messages seeking comment.
One person who didn't survive P&G's soaking in the market was Jager. He quit
on June 8.
Little Recourse
Shareholders can complain about being sandbagged by analysts, and that may
be all they can do. The courts probably won't be much help, says John Coffee
Jr., a professor of securities law at Columbia Law School. Although the law
technically bars analysts from releasing false or misleading statements, there's
nothing illegal about being wrong and it would be tough to prove intent to defraud.
Most class-action lawyers target the companies because it's easier to show that
managers have a direct interest in moving a stock price, says Coffee. Numerous
class-action lawsuits are pending against MicroStrategy, UnumProvident and
P&G.
Call the SEC
Fiascone turned to the SEC instead. He called the chairman's office to complain
after MicroStrategy's fall. ``No one would accept this behavior in any other area of
their business life,'' he says. ``Imagine if a family member got a full-scale
checkup at the Mayo Clinic and no one checked for prostate cancer, or
something that big was overlooked by industry experts. It's that absurd.''
Arthur Levitt has made it clear that he thinks analysts' conflicts are a problem.
He has asked the industry's self- regulating bodies -- the New York Stock
Exchange and the National Association of Securities Dealers -- to review the
issue. ``We cannot settle for boilerplate disclosure, cloudy language that masks
a firm's position, or small-type disclaimers at the end of a document,'' he said in
October.
Investors will always have to deal with Wall Street's conflicts of interest. But as
securities analysts increasingly cross traditional lines of behavior, at least the
conflicts should be disclosed in bold print.
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