Streetwise

Lauren Rudd

Sunday, September 19, 2010

Running Roughshod Over An Investment Analyst's Independence

The recent end to a two-year legal saga during which Wall Street bank analyst Richard Bove was forced to defend his right to publish what he believed to be independent and unbiased investment research, hit a sensitive nerve.

When someone runs roughshod over an investment analyst’s independence, it compromises the integrity of the securities 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.

Going back to April 1, 1990, there was the firing of gaming industry analyst, Marvin Roffman, by his employer Janney Montgomery Scott, a Philadelphia brokerage house. Roffman wrote that Donald Trump's Taj Mahal casino would not make it. The market just was not there. Trump called Roffman's statements an outrage and threatened a major lawsuit against Janney unless Roffman recanted or Janney fired him.

Roffman was terminated. 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.

A similar issue arose 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.” It came as no surprise that Paribas had an investment banking relationship with Enron.

In August of 2005, there was another egregious attempt to manipulate investment research. Tad LaFountain III, a research analyst at Wells Fargo, wrote 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.

In June 2008, several analysts again found themselves as popular as a Norwegian brown rat as they were thwarted in their efforts to remain independent. This time the credit-rating firms were at the crux of the controversy. Both Moody’s Investor Services and Fitch Ratings acknowledge switching rating analysts at the request of banks or bond issuers.

Now we come to the saddest tale of all. As detailed in a recent lengthy New York Times article, Richard Bove has been fighting for his independence for two years after BankAtlantic; a Florida bank sued him, accusing him of defamation after he wrote a report about the banking industry in July, 2008, just as the financial crisis was getting underway.

The case settled recently and Bove did not pay BankAtlantic a dime. However, his legal bill he says is about $800,000. Did his employer pick up the tab? No, they fired him. Did any of the associations that represent Wall Street analysts help out? You guessed it, the answer is no. Moreover, Alan Levan, the Chairman and CEO of BankAtlantic Bancorp, has often clashed with investors and critics during his 40-year career in Florida real estate and banking.

So where does all this leave you, the individual investor? Can you believe any of the Street’s recommendations, good or bad, or are analysts merely puppets, destined to write what serves the best interest of their masters? 

You could try to protect yourself from Wall Street’s more egregious behavior by looking for a consensus of opinion on a company, although analysts have a tendency to stick together, not wanting to deviate from their compatriots lest they be wrong.