Re: 3/8/06 - [BVF/MTXX/OSTK] WSJ: Long & Short
LONG & SHORT By JESSE EISINGER THE WALL STREET JOURNAL
LONG & SHORT
By JESSE EISINGER
Why Independent Research Is Drying Up
March 8, 2006; Page C1
Independent stock researcher Mark Roberts last week received the greatest compliment someone in his business can get. A witness in the Enron trial recalled that, as defendant Jeffrey Skilling reviewed a report from Mr. Roberts's Off Wall Street that illuminated multiple questions about the company, he said: "They're on to us."
The testimony serves as a good reminder of how important gutsy independent research is. It's perennially in short supply and getting shorter.
That's exactly what was not supposed to happen. In 2003, all the big Wall Street firms agreed to reform a conflict-ridden system in which their analysts pumped the stocks of investment-banking clients. The changes separated the banking business from research and earmarked funds for independent-research firms that cater to retail clients.
Not unexpectedly, individual investors aren't snapping up the free stuff -- who has time for that?
More surprisingly, major institutions have proven unwilling to pony up the big bucks necessary for the really good reports from researchers who aim at a more sophisticated audience. These research outfits also find themselves vulnerable to harassment and intimidation for publishing negative reports, with companies attacking them and their hedge-fund clients. The serially litigious drug maker Biovail and the money-losing Internet retailer Overstock.com have both sued independent firm Gradient Analytics and a collection of hedge funds, claiming they coordinated unfair assaults, charges that the defendants deny.
Faced with all of this, some independents are getting out, and others are seeing their business decline.
Mr. Roberts says business is down about a quarter since an initial burst of interest from established institutional investors after the series of scandals that rocked corporations several years ago. Off Wall Street, the granddaddy of the indies, has been left with more or less its prescandal number of clients. The vast majority are hedge funds that pay tens of thousands of dollars each for an annual subscription.
The big institutional investors "were very, very interested in a contrary view, and that appears to have disappeared," Mr. Roberts says. "My bet is, the next market collapse, probably they are coming back."
Among other independent firms, tech-and-telecom firm Precursor is shuttering its research operations to focus on consulting. "There just isn't the growth or opportunity there used to be," says Scott Cleland, head of the firm. Part of the problem, he adds, is the regulatory crackdown on institutional investors funneling a cut of the brokerage commissions they generate to research firms -- paying for their work with so-called soft dollars instead of directly with cash.
Albert Meyer, who started a shop called Second Opinion Research three years ago, published his last report last month. Mr. Meyer says he wasn't pressured on his negative stock calls. Instead it was the brutal lifestyle.
He wrote up more than 100 companies in three years, putting monthly updates out on each one. He had built up to 40 clients and was earning a decent living, he says, but he was slaving away.
"Over the weekend, I wouldn't dream about anything else expect the next report," he says. "I hadn't taken a vacation in three years and money managers were off skiing in Vail. What's wrong with me?"
Now he wants to become one of those managers, having watched stocks move the way he had predicted without being able to take advantage. To avoid any appearance of conflicts, he didn't have a brokerage account and kept all of his money in bonds.
Tim Mulligan has a different story. A one-man research shop, he became overwhelmed by a lawsuit that isn't even against him.
A certified public accountant and former assistant U.S. attorney, Mr. Mulligan started a firm called Forensic Advisors back in 2001 to ferret out companies that use aggressive accounting. He put out his first catchy-titled "Eyeshade Report" in July of that year. Why did he start an independent-research firm? "I think I was dropped on my head too much as a child," he says ruefully.
This past November, he suspended publishing. He says he is too busy fighting a subpoena in a defamation lawsuit that a small company out of Phoenix, Matrixx Initiatives, filed against anonymous message-board posters.
He had written critically about the company, which makes the over-the-counter cold remedy called Zicam. One of the posters cited an Eyeshade Report, but Mr. Mulligan says that he never posted online and that he knows of no connection to people who did. Matrixx's subpoena demanded that Mr. Mulligan give up his client list and sources, and he refused to do so. He decided to represent himself and fight the subpoena. Eight public-interest groups, including the American Civil Liberties Union, signed a friend-of-the-court brief on his behalf.
"They are not attacking me directly but can do what they want to accomplish quite effectively indirectly," he says. A spokesman for Matrixx says Mr. Mulligan isn't its target, but the company wants to find out if anyone with an interest in seeing its stock fall was feeding him negative information.
Mr. Mulligan said legal expenses and time forced him to cut his report output in half and therefore to reduce what he charged his modest subscriber base. At the end of last year, he stopped publishing research altogether.
Asked if he will publish again, he says, "I want to do it, but it seems with the environment, I'm not sure it's a good business decision."
Maybe one doesn't well up with sympathy and outrage that some guy who knocked out reports on receivables in his PJs can't do it anymore. But it probably will let the next Jeff Skilling sleep a bit better at night.
Write to Jesse Eisinger at longandshort@wsj.com3
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