How Analysts and Investment Bankers Cut the Pie-Mephisto
FULL DISCLOSURE: STOCK TIPS
Excerpt from Online News Hour with Jim Lehrer
pbs.org
December 27, 2000
TERENCE SMITH: For three decades, Louis Rukeyser, the host of the popular PBS broadcast "Wall Street Week with Louis Rukeyser," has been turning to the nation's most renowned stock pickers and asking the inevitable money question:
LOUIS RUKEYSER: What are some of your favorites?
TERENCE SMITH: On this particular evening, Abby Joseph Cohen, a top analyst at Goldman Sachs and one of Wall Street's brightest stars, was put on the spot.
ABBY JOSEPH COHEN: Among names I've discussed with you before, Lou, would include Citicorp and AIG, and a new name might be AXA, which is an insurance company selling at a very low PE ratio of about 12 times earnings.
LOUIS RUKEYSER: Okay. You like financial services? What else do you like?
ABBY JOSEPH COHEN: We like technology. I don't think it's as cheap as it was, but we think there's some good opportunities. And at the top of the list would be IBM.
TERENCE SMITH: Valuable advice, but neither the host nor the guest disclosed to viewers an important piece of information: Cohen's firm had significant and profitable financial relationships with three of the four companies she recommended. Goldman Sachs confirms in research reports to investors that it handled public offerings for IBM; Citicorp, now Citigroup; and AXA -- services for which Wall Street firms typically earn tens of millions of dollars.
Abby Joseph Cohen broke no hard and fast rules. Analysts are required to disclose such relationships in the written reports that they provide to investors, but when it comes to television appearances, the rules are far less clear. This has prompted Arthur Levitt, the Securities and Exchange Commission chairman, to launch a campaign to clarify the rules.
ARTHUR LEVITT: There are lots of these subtle and some not so subtle conflicts, and I think it's terribly important that the viewer understand what the hidden agenda may be.
TERENCE SMITH: When "The News Hour" looked at other financial news shows, examples were not hard to find.
Seeming conflicts, new standards
MARIA BARTIROMO: Give us your quick picks. What are the stocks to own for the week ahead?
MARY MEEKER: Maria, I thought you might ask that question.
TERENCE SMITH: On CNBC's "Market Week," anchor Maria Bartiromo interviewed top Internet analyst Mary Meeker from Morgan Stanley Dean Witter.
MARY MEEKER: The three focus names that Mark and I would focus on would be Yahoo!, Amazon, and Ebay.
TERENCE SMITH: She went on to mention others, including an Internet stock, Avenue A. What neither the host nor guest discussed was the fact that Morgan Stanley had handled public offerings for three of the four companies.
HOST: 10 stocks in very different sectors all got a big boost today. They have the distinction of being singled out by Lehman Brothers as its annual list of the 10 uncommon value stocks for the year.
TERENCE SMITH: On "Nightly Business Report" on PBS, Jeffrey Applegate, chief investment strategist at Lehman Brothers, talked about those stocks.
HOST: It looked like people were listening to you and buying on your list.
JEFFREY APPLEGATE: It had a pretty good day today. Yeah, it had a nice...
TERENCE SMITH: Once again, neither Applegate nor his host mentioned that his company had done public offerings for two of the ten companies. But "Nightly Business Report" thought it was important enough to include it on its website. And on CNN-FN, Scott Shevick, senior drug analyst at Bear Stearns recommended Pharmacia, a company his firm had helped merge with Monsanto.
SPOKESMAN: Pharmacia is another one you like. Tell me a little about that one.
TERENCE SMITH: With these seeming conflicts in mind, SEC Chairman Levitt has asked the markets to write new standards for analysts who appear on television.
ARTHUR LEVITT: We've asked the New York Stock Exchange and the NASD to go back and formalize these rules and see to it that analysts disclose to viewers any of these conflicts that may develop, may exist, may prejudice in some way or other, his reason for recommending these particular securities.
TERENCE SMITH: Why does someone need to know if the analyst's firm has done investment banking business with a company?
Competing for coverage
ARTHUR LEVITT: Well, I'll tell you how it works. This is a very competitive environment, and all investment banking firms are trying to get a limited amount of business that's out there. And one of the things they tell a company that they're soliciting is that they'll help give that company coverage.
TERENCE SMITH: Publicity, exposure.
ARTHUR LEVITT: Exposure. Believe me that they're not talking about negative coverage, and just think of the mindset of a company CEO that is awarded a multi-billion dollar investment banking piece of business to firm X, and several months after that underwriting takes place, an analyst does a report that lowers the rating of that company. How likely is the head of that company to retain that investment banker for the next piece of business?
HOWARD KURTZ: These analysts work for big Wall Street brokerage firms who often are doing banking business with the very corporations whose stock the analysts are analyzing. That is not always shared with the viewer.
TERENCE SMITH: Washington Post reporter Howard Kurtz is author of "The Fortune Tellers," a new book on what he calls, "The Wall Street Media Machine."
HOWARD KURTZ: It's the kind of thing you'd want to know in any other realm of life -- politics, sports, you name it. But in business news, the analysts get to tout stocks that their own companies have a financial relationship with in a way that makes me uncomfortable, in a way I think short changes viewers.
TERENCE SMITH: And there is another incentive for analysts to look favorably on certain stocks.
ARTHUR LEVITT: There are some firms which measure the bonus payments to analysts based upon the volume of business done in shares that he's writing about, that goes to the firm.
TERENCE SMITH: Arthur Levitt says the result is an industry-wide tendency towards rosy predictions.
ARTHUR LEVITT: Over 90 percent of all stock recommendations by analysts are buy recommendations. A sell recommendation is probably as infrequent as a Barbara Streisand concert.
TERENCE SMITH: In fact, First Call Corporation, which tracks analysts' ratings, reports that this year, of 28,000 analyst recommendations, less than 1 percent are sells or strong sells. Buys, but few sells
JASON ADER: Hi. Marion, it's Jason Ader from Bear Stearns. I was returning your phone call.
TERENCE SMITH: Jason Ader, an analyst who covers the hotel and gaming industries at Bear Stearns, concedes that there are a lot of buy recommendations on television.
JASON ADER: I think analysts tend to become cheerleaders more often than they should. If you're an analyst of a specific industry, you tend to get excited about it. It's very exciting.
TERENCE SMITH: Ader was on "Wall Street Week with Louis Rukeyser" in July.
JASON ADER: That's going to be a very exciting transaction for MGM Mirage. The synergy savings there are going to be incredible. I mean, early estimates were $100 million. I think it could be twice that much.
LOUIS RUKEYSER: Is that high on your list of ones to buy?
JASON ADER: I think it's really right up there as one of the top two or three investments in the casino industry.
LOUIS RUKEYSER: Well, you might as well give us the rest of the two or three.
TERENCE SMITH: Ader went on to mention Park Place Entertainment and Starwood Lodges. All three of those firms had done investment banking business with his firm -- once again, no mention by guest or host. Ader says his firm has done some investment banking business with 90 percent of the companies he covers, and like many of the analysts we talked to, he said it would be impractical and unnecessary to mention all the associations.
JASON ADER: An investment banking relationship that your firm may have really doesn't influence equity research, if you want to be an equity research analyst for a long period of time. If you're an analyst who is just making recommendations for the hope of getting investment banking business, your career will be very short. No investor would really care to hear what you have to say. There's no credibility in what you do.
TERENCE SMITH: And not all of Ader's recommendations are rosy.
JASON ADER: Our firm has a long standing relationship with Donald Trump and the Trump organization. I've had a sell rating on the stock for a long time. I mean, it doesn't have an impact on the high quality analysts work.
TERENCE SMITH: SEC Chairman Arthur Levitt:
ARTHUR LEVITT: I have no doubt that a very large percentage of analysts making recommendations have a basic conviction about those recommendations have done a great deal of work to justify that and are people of integrity. But the perception of an investor who buys a stock from an analyst that did not reveal that conflict, who then experiences that stock going down, and then learns that there was a conflict, has got to be negative and has got to corrupt the stage as far as that's concerned for all future analysts having undisclosed relationships.
The credibility factor
THOMAS BROWN: Does he really not believe that, like, there's no other bank analyst at the firm at the time?
TERENCE SMITH: Thomas Brown, a former analyst who covered the banking industry for Donaldson Lufkin Jenrette, now heads his own company. He says Wall Street firms have become so focused on luring lucrative investment banking business that it has corrupted their recommendations.
THOMAS BROWN: In terms of individual recommendations, Wall Street's credibility is at the lowest it's ever been. So they may be good information providers, but in terms of actual recommendations, it's totally driven by the investment banking business.
TERENCE SMITH: Brown experienced this firsthand. He says he was fired because he was negative on some companies at a time when his firm was looking to expand its investment banking business.
THOMAS BROWN: I was negative on what a small group of companies were paying to grow through acquisition. Of course, those companies, because they were acquiring so many firms, were generating a lot of investment banking fees. And so to cut that off, to have those companies not want to do business with my firm was a real negative.
TERENCE SMITH: Critic Howard Kurtz says the responsibility for bringing these relationships to light does not rest solely with Wall Street.
HOWARD KURTZ: If the analysts don't want to do it, refuse to do it, are wary of doing it, I think it's a fundamental responsibility of journalists to say, well, now, wait a minute. Didn't your company do a bond issue for AOL? Aren't you trying to get business from Microsoft or Yahoo? And why journalists shy away from this, and why they seem to think this is kind of a back- burner issue is very difficult to understand, because to me, it goes to the essence of what journalism is, which is holding people accountable.
TERENCE SMITH: But some television producers disagree. "Wall Street Week's" executive producer Rich Dubroff declined to be interviewed on camera, but said this over the phone: "It should be the responsibility of the firms and the SEC if they think they should make these relationships known…The viewers should research all their investment decisions very carefully and if they make those decisions carefully, they will make them on the merits of the investment." The host, Louis Rukeyser, declined repeated requests to discuss the issue.
BRUNO COHEN: If somebody's picking a stock or recommending a security, we think that the point of view of the person making that recommendation ought to be crystal clear to the people getting the information.
TERENCE SMITH: Bruno Cohen, senior vice president of CNBC, the financial news channel, says his network wants analysts to disclose their involvement with stocks they recommend. Accordingly, CNBC added this provision in July to a letter given to guests who appear on its broadcasts. "If you are an analyst, you will disclose any current or recent (previous year) investment banking relationship between your firm and those companies whose securities are discussed during your appearance." But despite the new rule, "The NewsHour" found some recommendations slipping through the cracks. Analyst Anthony Noto from Goldman Sachs appeared on CNBC in December recommending stocks.
HOST: Let's move on to your second pick, Ebay.
TERENCE SMITH: His firm did a public offering for Ebay.
HOST: Let's move onto your third, and that would be 1-800-flowers.com.
ANTHONY NOTO: 1-800-flowers.com is a company we've had on the recommendation list all year, and it really...
TERENCE SMITH: And the same was true for 1-800-flowers.com, but no mention of either was made by host or guest.
BILL GRIFFITH: It's time for our inside track segment here on "Power Lunch," our weekly look at legal insider trading activity.
TERENCE SMITH: Bill Griffith, host of CNBC's popular investor show "Power Lunch" says he tries to spell out any relationship between an analyst and the stocks they recommend.
BILL GRIFFITH: I have to say at some point, does your company, your brokerage firm, your investment bank have a working relationship with this company that would obviously benefit from your analysis right now? That's my job, and it also is vital information for any viewer who's watching who might become a shareholder in that company. The research is there, and we'll find out if that relationship exists, and we'll put it out there.
TERENCE SMITH: Griffith prefers fund managers as guests as opposed to analysts.
BILL GRIFFITH: You know why? I want somebody who puts their money where their mouth is. If they are telling me that they like this company, I want to know that they would actually invest some of their shareholders' money in that company at the same time.
TERENCE SMITH: Policies at other financial news broadcasts vary. At "Nightly Business Report" and CNN-FN, analysts receive a letter asking them to disclose any conflicts of interest, but nothing specifically addresses investment banking relationships. At Bloomberg, there is no formal agreement. The network says it attempts to establish such relationships and disclose them.
HOST: Richard, back to your picks quickly for today. Among them...
TERENCE SMITH: New industry-wide guidelines for analysts on financial news broadcasts could emerge soon. The National Association of Securities Dealers, the body that regulates the NASDAQ Exchange, and the New York Stock Exchange have recently agreed to devise new rules regarding analyst appearances on television. In the meantime, says Arthur Levitt, "Investors beware." |
