Stock Analysts Return to the Big Shill

Below is a recent article published by Securities Lawyer Jake Zamansky on Forbes.com - 04/24/12

The stock market has been raging since October, though the past couple of weeks have seen it come back down to earth a bit. But the market’s recent meteoric rise, with the S&P 500 returning 12% over the first quarter, begs a question. Is this the new normal, is the market really this strong, or are analysts overrating stocks to goose soaring prices?

We know the story of conflicted stock analysts too well from the wreckage of the tech bubble and bust. Analysts from once-esteemed ratings agencies responsible for rating mortgage-backed securities were in cahoots with-and were in fact paid by-the securities issuers, contributing mightily to the real estate bubble. And we know that analysts wrote dishonest reports in order to help their banks collect big fees for selling product.

Now, it looks like analysts could once again be playing an ugly, dishonest role. And Main Street investors who put their trust in Wall Street research are in harm’s way.

This is the disturbing conclusion of a recent report from Reuters. The takeaway? Stock analysts are as fearful as ever to buck the investment banks and underwriters who look to them to pump their product.

“More than a decade after regulators moved to clean up the stock research industry at investment banks, analysts across the globe are as hesitant as ever to issue negative research on companies they believe are destined to struggle,” the story begins. “While so-called ‘Chinese walls’ were set up after regulators and legal cases shed light on the role analysts and bankers played in inflating the 1990s technology bubble, research teams still appear conflicted between their conviction and their bank’s client list.”

Analysts at brokerages and investment banks are shilling like it’s 1999!

“Ten years ago, sell orders jumped to nearly 20% after a series of rules were put into place to wipe out banker-analysts conflicts,” the Reuters report noted. “It’s now back in the single digits, and in some cases headed to levels last seen in the 1990s.”

Reuters’ analysis is based on 120,029 recommendations banks and brokerages have issued on nearly 17,000 companies. It found that just 9% of recommendations across the globe are a “sell” right now.

Analysts who don’t like a stock simply keep their mouths closed and their pens capped. They are cowed by their investment banking bosses who want to do business with the firms the analysts are tasked with evaluating. It seems that in order to keep their bosses happy and to keep their own careers on track, they bite their tongues and keep rating weak companies as a “buy” or a “hold” rather than the “sell” they deserve.

And that’s the problem. Wall Street brokerages and investment banks often value relationships among executives more than they value their investor clients. An honest, negative rating of a potential investment banking client could, heaven forbid, damage those executives’ relationships. And when such precious-and lucrative-relationships hang in the balance, who cares about the client?

Disclosure: Zamansky & Associates are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions.

Read article by Securities Attorney Jake Zamansky on Forbes.com

Investors Beware: Securities Deregulation is Here Again, and It Will Hurt

Below is a recent article published by Securities Lawyer Jake Zamansky on Forbes.com - 03/27/12

Investors’ wounds from 2008 are still fresh, and many mom-and-pop investors remain terrified of jumping back into the stock market. As a result, investors have parked billions of dollars in money market funds, earning next to nothing in interest. That result leaves investors-especially retirees-desperate for some type of return.

This blog focuses on a new law Congress just passed-the so-called JOBS Act-which we think will harm investors. But first let’s back up to the global financial crisis of 2008 for a moment.

During that time, investors received precious little information about the excessive risks that Wall Street firms were taking with their money. The market crash that resulted from those undisclosed risks left huge holes in their retirement and college-education savings.

Surely if investors had understood that most banks were leveraged 40-to-1, or that shaky subprime-mortgage assets comprised the lion’s share of many banks’ balance sheets, they would have headed for the exits long before suffering their crushing losses.

But a strange thing is happening in Washington. Lawmakers there are doing their damndest to make sure that, once again, the financial services industry is allowed to push the American investing public back into an informational black hole.

You’d think the reverse would be true, but under the “JOBS” Act, or Jumpstart Our Business Startups Act, American investors are about to have LESS information about the companies in which they invest their life savings.

Yes, you read that right. Investors will have LESS information under the new law, not more.

Congress has passed a bill that many believe will harm small investors, many of whom are desperate for yield because of record-low interest rates that appear likely to last.

The JOBS Act is intended to increase job creation and economic growth by improving access to the public capital markets for emerging companies. The Senate passed the bill last week, and the House passed it earlier in March, with both chambers showing wide support of the bill.

Many experts believe the bill is incredibly dangerous. The Senate version gives small business the ability to raise money over the Internet and social media. Businesses will be entitled to raise up to $1 million through these “crowdfunding” techniques and sell up to $2 million in securities without registering with the Securities and Exchange Commission.

Just the antidote any financial doctor would prescribe after a crisis that brought the global economy to its knees. Let’s pass legislation to flood the market with high-risk, illiquid unregistered securities. Just what the American public needs.

All kidding aside, this is exactly what the public does NOT need right now. After the collapse of Wall Street, which was in large part caused by banks hiding off-balance-sheet transactions and burying information about leveraged derivatives, the nation’s lawmakers are going out of their way to give swindlers and con artists direct access to average Americans’ wallets and pocketbooks by way of the Internet.

State regulators, who have a solid track record of sniffing out the fraudsters likely to take advantage of these new fundraising loopholes, are aghast at the new law.

In a news release last week, the state regulators group, known as NASAA, stated: “Congress and the White House have sacrificed investor protection for politics and are in danger of repeating a legislative mistake that has allowed promoters of fraudulent securities offerings to steal millions of dollars from investors since 1996.”

NASAA’s point is this: the legislation needlessly exposes Main Street investors to greater risk of fraud by creating new jobs for promoters of Internet investment scams. The group believes that many investors may be harmed before this error is corrected, and by then it will be too late.

NASAA is right. This bill should never become law, but when both parties see a political winner in an election year, brace yourselves because common sense goes out the window, real-world consequences be damned.

Disclosure: Zamansky & Associates are securities attorneys representing investors in arbitration and federal and state litigation against financial institutions.

Read article by Securities Attorney Jake Zamansky on Forbes.com

Investors Beware: Falling Wall Street Pay Could Wind Up Hurting You!