Streetwise
Lauren Rudd
Sunday, June 1,
2008
Firms Runs Roughshod Over Analysts
When a Wall Street firm runs roughshod over an investment
analyst’s independence, it compromises the integrity of the industry and
violates the fiduciary responsibility to which the industry has been entrusted.
Unfortunately, ostracizing a forthright analyst is nothing new. I have been
writing about it for years and each time I hope it will be the last...but it
never is.
On April 1, 1990, I described the firing of gaming industry
analyst, Marvin Roffman, by his employer Janney Montgomery Scott, a Philadelphia
brokerage house.
Why was Roffman fired?
Roffman wrote that when Donald Trump's Taj Mahal casino
opened, Trump will have had so much free publicity that he will break every
record in the books during the period between April and July. However, when the
cold winds blow from October to February, the casino will not make it. The
market just is not there.
Trump called Roffman's statements an outrage and threatened a
major lawsuit against Janney unless Roffman recanted with a major public
apology, or Janney dismissed him.
Given the choice between writing a degrading apology letter
to Trump, or face termination from the firm, Roffman chose the latter. As it
turned out, Roffman was correct in his analysis, the casino did file for
bankruptcy. Roffman also subsequently sued Janney and received a settlement of
over $700,000.
I discussed a similar issue 12 years later in February, 2002.
It seems that Daniel Scotto, a bond analyst who worked for BNP Paribas, stated
publicly that Paribas fired him for telling the firm’s clients back in August of
2001, that Enron’s securities “Should be sold at all costs and sold now.”
After a conference call in which he was even more emphatic, a
call that was tape recorded because it took place on the floor of the NYSE,
Scotto says Paribas told him, “You are demoted. We do not think it was a good
recommendation or a reasonable one.” Paribas put Scotto on leave and
subsequently sent him a termination letter. It came as no surprise that Paribas
had an investment banking relationship with Enron.
In August of 2005, I described another egregious attempt to
manipulate research. Tad LaFountain III, a research analyst at Wells Fargo,
wrote in a research note on July 26 of that year that Altera Corporation ignored
his calls and prohibited his asking questions on conference calls, due a
negative stance on the stock.
Altera did issue an apology as a result of the ensuing
negative publicity. However, if Altera's retreat was a victory for unbiased
research, the moment was fleeting. Just five days after Altera's apology, Wells
Fargo Securities dropped its equity research program, citing "financial
considerations and marketplace changes."
Now once again some analysts find themselves as popular as the
average Norwegian rat as they are thwarted in their efforts to remain
independent. This time the credit-rating firms are at the crux of the
controversy. Given the recent meltdown in the credit markets, that has an odious
ring to it. Both Moody’s Investor Services and Fitch Ratings acknowledge
switching rating analysts at the request of banks or bond issuers. It seems that
an “analyst does not always get the message,” Bill May, Moody’s managing
director was quoted by the Wall Street Journal as saying.
Apparently some customers wanted an analyst that raised fewer
questions about certain deals. At one point a Moody’s official agreed with an
investment banker’s opinion that the analyst was “too fussy” a person.
Meanwhile, Moody’s is trying to deal with reports it tried to cover up a bug in
its computer models that caused it to “overrate” securities known as
constant-proportion debt obligations.
To protect yourself from Wall Street’s more egregious behavior, understand what
you are investing in and why. Do not take the word of others as gospel. Conduct
your own due diligence and do not invest in esoteric instruments that fly in the
face of common sense.
