Wall Street Internet analysts may be liabilities
Posted at 1:25 p.m. PDT Saturday, Aug. 4, 2001
BY BRIAN KELLEHER
NEW YORK (Reuters) - At the peak of the dot-com bubble, securities analysts like Henry Blodget and Mary Meeker were the pin-up boys and girls who helped their Wall Street firms pull in big profits. Now they've become potential liabilities as irate investors say their research was biased, and line up to sue.
In the exuberance of a bull market, research from Merrill Lynch & Co. Inc.'s (MER.N) Blodget and Meeker of Morgan Stanley (MWD.N) moved Internet stocks as much as corporate press releases did about ever more customer Web traffic.
But in the aftermath of the tech crash, analysts like Blodget and Meeker are under attack by disgruntled investors.
``There will be more lawsuits, I guarantee it,'' said Marvin Roffman, a former securities analyst who now runs his own investment firm. ``They (the lawyers) are looking where the money is.''
Brokerages still are standing behind their analysts but are feeling the heat as litigation is expected to rise. The suits are likely to undermine Wall Street research credibility even more, and firms have taken steps to reduce public appearances by analysts. Firms may cut analysts' pay, and even someday have lawyers vet research reports before they go out to clients, experts say.
Investors claim Wall Street research is biased because analysts are afraid to publish negative reports that could anger a company and lose business for their investment banking colleagues. The legal actions essentially allege analysts and their firms defrauded investors by issuing bullish research to keep corporate clients happy and failing to disclose the links between research and banking.
The claims have little or no precedent, as analysts have never been held legally accountable by investors for their stock picks. Experts doubt most of them will stand up in court.
``It's hard for an investor to bring a claim based solely on undisclosed bias ... you have to have a problem with the substance of the report as well,'' said Joe McLaughlin, a securities lawyer at Sidley Austin Brown & Wood, which is not involved in the suits. ``I would be very skeptical.''
All the same, Merrill in July shelled out $400,000 to settle an arbitration case brought against the firm and Blodget. And investors on Wednesday sued Morgan Stanley and Meeker.
Merrill has admitted to no wrongdoing, and Morgan Stanley has said it will defend itself. The two largest U.S. brokerages by number of brokers tied for top stock research in the prestigious Institutional Investor magazine poll last October, and Blodget and Meeker were the top ranked Web analysts.
WALL STREET STANDS BY FADING STARS
The high-profile lawsuits and Congressional hearings on analyst objectivity will serve to discredit research ``to a point where nobody pays any attention'' to it, said Gary Shilling, president of his own investment advisory firm and a former economist at Merrill Lynch.
``If we go to a much calmer world of corporate finance activity ... you'll start to see a slow atrophy of the whole power -- and consequently, compensation -- of the Street analysts,'' he said.
The firms might welcome their stars' fading out of the spotlight. Merrill kept Blodget from appearing on TV while the case against him was going on. It is still evaluating whether he will return to the silver screen, even after the case has been settled, a spokesman said recently.
The plaintiff's lawyer claims he has more than 30 clients lined up to sue Blodget. So has Blodget become a liability for the well-known firm?
``No,'' Stanley O'Neal, Merrill's new president, said in a recent interview ``Henry's been put in a tough spot because he's trying to do a job and he happened to garner a certain profile.''
But Merrill has no choice but to support Blodget, market-watchers said.
``If they were to fire him right now, that would be an invitation for everyone in the country to say 'A-ha, now even Merrill admits that this guy was wrong,''' said Shilling. ``Now, with the legal action, they almost have to stand behind him. Otherwise, it's a mea culpa kind of problem.''
Meeker, once dubbed ``Queen of the Internet,'' also has the backing of her firm.
``Mary Meeker is one of the most respected analysts on Wall Street,'' Morgan Stanley said in a statement on Wednesday. ``The allegations are unfair, inaccurate, and cannot be supported in court.''
FIRED FOR BEING RIGHT,
Analysts who stick out their necks and make negative comments about companies sometimes find themselves out of a job. Roffman was an analyst at Philadelphia-based Janney Montgomery Scott in 1990 when he issued a hard-hitting report on real estate tycoon Donald Trump's Taj Mahal casino, which eventually filed for bankruptcy protection.
Trump was enraged by the report and called for Roffman's dismissal. Janney obliged. The reason for his termination was simple, Roffman said. He had angered a potential client.
``The research departments are not profit centers,'' he told Reuters. ``They are there to generate business for the corporate finance department. The analysts ... do not want to offend potential clients.''
That's one reason why research reports are so bullish, said Chuck Hill, director of research at market research firm Thomson Financial First Call. But Hill, a former technology analyst, also blames the inexperience of many analysts.
``The bigger problem with the Internet area was that there were too many rookies,'' Hill said ``Most of them came into the business after the '90-91 recession and everything only went in one direction.''
This inexperience, rather than a tendency to favor investment banking clients, caused investors to lose money, Hill said, adding a string of suits isn't going to fix that.
``In this business, you're making judgements, there are no right answers. No one is clairvoyant and can see the future,'' Hill said. ``To open the door to ambulance chaser type suits ... that would be a huge mess.'' |
