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Stock Analysts Remain Deeply Conflicted

August 15, 2018 Blog

After the tech and telecom stock bubble burst in 2000, analysts at investment banks who hyped such failures as and WorldCom were proven to be major culprits.

Indeed, stock analysts at the time publicly praised tech and telecom companies in research reports, which brokers then used to sell shares to Mom and Pop investors. In private, the same analysts disparaged the companies, and in internal emails called them pieces of junk, or worse.

The disclosure in 2003 of these unsavory emails written by tech and telecom stock analysts led to a $1.4 billion global Wall Street regulatory settlement of stock research and new rules of conduct for analysts.

At firm after firm, according to prosecutors, analysts wittingly duped investors to curry favor with corporate clients,” The New York Times reported at the time. “Investment houses received secret payments from companies they gave strong recommendations to buy. And for top executives whose companies were clients, stock underwriters offered special access to hot initial public offerings.”

Alas, with the stock market currently cresting near record highs, it looks like Wall Street analysts are up to no good again. It appears that stock analysts are going easy on companies to generate investment banking business for their firms.

Exhibit A was a CBS earnings call at the start of August during which analysts refused to address the elephant in the room: CEO Les Moonves’s sexual harassment troubles. Instead, they were busy sucking up to management, or what Spencer Jakab from the Wall Street Journal dubbed the “great quarter guys” syndrome.

Mr. Jakab’s article took the Wall Street analysts to task over their feeble conduct regarding CBS on the earnings call.

“For anyone who owns shares of CBS or Viacom, both controlled by Shari Redstone’s National Amusements Inc., Mr. Moonves’s fate and that of the board many suspect of shielding him matter a lot,” he wrote. “Mr. Moonves has strongly resisted Ms. Redstone’s efforts to merge CBS with Viacom. The main reaction after the call was outrage that analysts didn’t raise the matter.”

Mr. Jakab then riffed on the true way Wall Street analysts function almost two decades after the so-called fix following the tech and telecom bubble.

“And what about the grating way analysts greet management—the ‘great quarter guys’ syndrome,” he asked. “Being chummy with executives serves two purposes. First, those executives decide which broker will get the next banking mandate, so manners count. Second, being on a first-name basis shows the investors on the call who might have the inside scoop from management on what is really going on at the company.”

The public needs to wise up and ask why stock analysts don’t ask management the tough questions.

“The basic truth here is that analysts are a cost center for the brokers who employ them,” according to Mr. Jakab. “While their hard work of dissecting a company’s business is of use to fund managers, analysts are primarily marketing machines for other departments. Occasionally it serves their image well to come out swinging against a company or to say something controversial. It is a great way to stand out from the crowd. But analysts have every incentive not to aggravate the companies they cover.”

The Securities and Exchange Commission has proposed a best interest rule that would require financial advisers and professionals to act in their customers’ best interest and to put those interests first. That sounds simple, but as readers of this blog know a similar rule by the Department of Labor was recently killed by the financial services industry.

Regardless. It’s high time the securities industry applied a best interest standard of care to analysts who tout stocks to retail investors. It would be folly not to.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.