Analysts Sold Stock They Pushed, SEC Says
Peter, this is a very troubling report, but unfortunately, it is not totally surprising. Mark
Profits Ranged Up to $3.5 Million, Agency Finds in Probe for Conflicts
By Carol Vinzant
Washington Post Staff Writer
Wednesday, August 1, 2001; Page E01
The Securities and Exchange Commission has found that three of 57 stock analysts it reviewed sold shares they were telling the public to buy, reaping profits ranging from $100,000 to $3.5 million, SEC acting chairman Laura Unger testified to Congress yesterday.
The SEC, which is examining potential conflicts at nine securities firms, also found that 16 of the 57 analysts checked, or 28 percent, invested in companies they evaluate and report on before the stock was offered to the public.
Unger told the House Financial Services subcommittee on capital markets that such behavior raises questions about the quality of the recommendations that investors are getting.
"When you see an analyst recommending a stock and he's selling it, you kind of want to know why," Unger said later in an interview.
Most disturbing, she said, was the finding that one of the three analysts recommended a stock while selling it short -- a maneuver that makes money when the stock falls. "At the very least, that trading is unseemly," she said.
The SEC enforcement division is reviewing the three cases to see if they involved "an intentional manipulation or fraud," Unger said.
The hearings are part of a public backlash against analysts, who rated stocks highly throughout the 1990s bull market and even for most of last year, as the prices tumbled. The central issue is whether analysts tell investors to buy stock in companies to win more lucrative investment banking fees. With the blizzard of initial public offerings in recent years, securities firms competed aggressively for the business of taking a company public.
The SEC has not identified the firms or analysts involved in the ongoing SEC examination of potential conflicts, except to say they include eight of the top 12 underwriters.
Unger said analysts' individual trading was just one of the "myriad sources of conflicts of interest that threaten the objectivity of analyst recommendations."
The commission also found that analysts' pay is often closely tied to the health of the investment banking units at prominent Wall Street firms. At seven of the nine firms examined, analysts' bonuses were influenced by the successes of the firms' investment banking divisions, said Unger.
In addition, the SEC found that analysts often issue "booster-shot" research reports, confirming a bullish stance on a company, within a week of the end of the lockup period. After a company's lockup period ends, insiders and bankers are allowed to sell stock in the company. Unger said the rating "may generate buying interest in the stock and help increase the stock price while the firm, the firm's clients or the analysts sell their shares."
Ronald Glantz, former director of research at Paine Webber Group Inc., testified that analysts were faced with more conflicts as the source of their pay shifted from trading commissions to investment banking profits.
In 1997 a major investment banking firm offered him triple his take-home pay, then asked how quickly he could issue "buy" recommendations on a list of 15 banking clients.
"The prostitution of security analysts was completed during the Internet mania of the last few years," Glantz said.
Unger said that she is optimistic that the industry can enact rules that "coupled with vigilant enforcement" will allow the industry to "reduce or more effectively manage" conflicts of interest.
Rep. John J. LaFalce (N.Y.), the ranking Democrat on the Financial Services Committee, said that he wants the SEC to be more active, especially on analyst compensation.
"I urge the regulators to act quickly to eliminate these conflicts and restore confidence that some have apparently squandered," he said. "If they do not, we will."
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