What Chinese Wall?

The SEC hopes curbing selective disclosures makes analysts more honest.

Do the research  and underwriting arms of securities firms collude to generate corporate finance business? Do analysts pull their punches to foster and preserve investment banking deals? After all, 70 percent of analyst reports carry a buy rating, but only 1 percent a sell. Or consider that analysts at firms with investment banking ties have 6 percent higher earnings forecasts and nearly 25 percent more buy recommendations than analysts at firms without such ties.

Concern about such collusion has reached the point where institutional investors now feel they need to beef up their own research capabilities. “All of us feel differently today about most analyst recommendations,” says Art Zimmer, a portfolio manager at Denver’s OppenheimerFunds and a former sell- sider. One finance executive who requested anonymity says he gets many more calls directly from the buy-side, because today “they’re having difficulty determining whether a recommendation is the result of a deal or of bona fide research.”

The complaints are often directed at such all-star analysts as Salomon Smith Barney’s Jack Grubman, a telecommunications specialist with an annual pay package reportedly worth as much as $25 million, much of it based on the amount of underwriting business his research helps generate from companies he covers. But the sniping is also aimed at executives who seek kid-glove treatment by making selective disclosures to favored analysts and who blackball the bearish analysts.

“The day you put a sell on a stock is the day you become a pariah,” says Stephen Jacobs, an analyst at U.S. Bancorp Piper Jaffray, who would not name the company that recently retaliated against him. “The CFO called me and said what I was writing was unfair and inaccurate. The next time there was a press release, it took a few weeks of constant effort to get a call back.” Last year, Sunrise Technologies International retaliated with a defamation lawsuit against two firms that put out negative reports.

“The CFOs themselves are part of the problem,” says A. Gary Shilling, an economic consultant who was once fired as chief economist at Merrill Lynch for his downbeat forecasts. “Freezing analysts out of the game is standard practice.” Shilling cites more than a dozen recent instances in which companies froze out analysts who issued negative reports.

As for CFOs, many may have reason to believe that Wall Street is reneging on a deal by turning bearish on their stocks. “I’ve seen banking-side guys say, ‘We’ll assign one of our top analysts to follow you and start to put out reports,’ when we didn’t have someone doing that before,” recalls one executive who asked not to be identified. “That’s pretty blatant. They were trying to get our business. I’d like to see more people follow us, but under those conditions it’s crazy. The implication was that I would get positive research, and then I’d be party to a collusion to press our stock up.”

Four years ago, says Washington Post Co. CFO John Morse, one top analyst told him point-blank that he was going to stop following the media company because his firm saw no opportunities for investment banking business.


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