MARKET FOCUS - FINANCIAL: Street cleaning - They're convenientwhipping boys for a country full of disgruntled investors, but the factremains that analysts have an image problem, says Robin Londner

Like a stinging slap delivered by an ex-lover across the face of a

protesting cad, Wall Street analysts have been turned upon by their

amours of yesteryear. Journalists and investors, compounded by the

general buzz on the Street, have turned nasty.

The breakup was in the works since last November, when economic

indicators turned sour; but the first "Dear Analyst" letter didn't turn

up until a month later, when The New York Times market reporter Gretchen

Morgenson penned her "Memo to Analysts: Thanks for Nothing" column. The

column informed analysts they were a "disgrace" who only reported happy

news and who, if it were up to disgruntled investors, would be out of a


Since Morgenson opened the floodgates for the complaints of those burned

by their quickie affair with the New Economy, analysts have taken their

lumps in other media (see sidebar). A three-part cover story in the May

21, 2001 issue of Fortune magazine (headlined 'Can we ever trust Wall

Street again?') focused on Morgan Stanley's Mary Meeker, the onetime

queen of Internet stocks, and accused analysts of losing their

objectivity and becoming media darlings. One supposed display of excess

was when the bank appointed a full-time PR staffer to field Meeker's

media calls.

The bad press continues. An article in the current (August) issue of

Vanity Fair calls Meeker and her cohorts "superstar analysts who were no

longer objective observers of the market: they were insiders with

inherent conflicts of interest."

And a CBS 60 Minutes II story quoted Tom Brown, a banking analyst turned

whistle-blower, as saying his former employer, Wall Street firm

Donaldson, Lufkin, and Jenrette (DLJ), instructed analysts to make

DLJ-issued stocks look good. Brown called the conflict of interest "less

than moral." The report also singled out Merrill Lynch celebrity analyst

Henry Blodget for continuing buy recommendations as stocks went into


And it's not just bad press. The value of Blodget's advice will be the

main feature of an arbitration case mounted against him and Merrill

Lynch by a disgruntled individual investor.

The analyst police

Bank trade bodies have attempted to salvage the image of their


But no one is very confident that their measures are going to help


The Securities Industry Association (SIA), the trade group for

investment houses, has issued toothless "best practices" guidelines for

brokerage firms. Fourteen major firms pledged to follow the guidelines,

which require analysts not to report to a business unit (such as

investment banking, which would compromise their integrity), but for

analysts to make transparent and consistent recommendations, and

disclose personal interests in securities.

The guidelines also call for analyst pay not to be linked to specific

investment banking transactions, sales, trading, or asset management


However, the SIA has no power to enforce the guidelines, and many firms

that agreed to the guidelines already claim to conform to the SIA best


The National Association of Securities Dealers (NASD) has made an even

more empty gesture: asking its members to comment by August 15 on a

proposed rule to require research analysts and brokerages to disclose

potential conflicts of interest in written reports and public


So, with the SIA and NASD making empty gestures to placate angry

governmental and media masses primed to designate analysts the weakest

link of a weak economy, what can analysts do to regain investor


Richard Wyler is the PR director for the Association for Investment

Management and Research (AIMR). With 2,500 sell-side analysts, 62.5% of

the nation's estimated 4,000 sell-side analysts are members of the

investment professionals organization.

Wyler says AIMR will create research objectivity standards. Unlike other

organizations, Wyler says AIMR will be able to enforce these standards

by revoking the membership of non-compliant analysts. But AIMR's members

are individuals, likely to find it tough to dictate standards to their


However, Wyler is hopeful that his efforts (together with those of his

PR agency Fleishman-Hillard) to communicate the standards to investors

via the media will pressure firms into adopting the association's


"Firms that use the standards should have a competitive advantage

because they can claim compliance in their marketing materials. This is

all geared to a free-market solution rather than a regulatory solution,"

Wyler adds.

The National Investor Relations Institute (NIRI) represents corporate

and agency IR practitioners that attempt to educate analysts about the

prospects of their own companies or clients' stocks. But Louis Thompson,

president and CEO of NIRI, thinks analysts will lose in their attempt at

self-regulation. When 99% of analysts showed their misplaced allegiance

to bank clients over investors by issuing "buy" ratings as the market

tanked, their duplicity, according to Thompson, cost analysts the trust

necessary for self-regulation.

"Congress is not going to let this go," says Thompson, who thinks the

government or a self-regulatory organization such as the New York Stock

Exchange or Nasdaq will force regulation on analysts. "I'm not sure they

can correct their credibility problem on their own without some club

over their heads."

David Levine, SEC chief of staff, confirmed to PRWeek that the SEC has

formed a panel to examine possible regulation. The panel is expected to

issue a report in a few months, but the SEC has already issued an

investor alert and sent out a press release cautioning investors on

analyst recommendations.

Pointing fingers

Some in the industry still cling to the belief that the analysts'

pummeling is unwarranted. Ted Pincus, chairman emeritus of the Financial

Relations Board (which has been hired by an AIMR chapter to help polish

the image of its analysts), believes the entire issue is a result of

media and investors spoiled by a ten-year bull market.

"Analysts have to fight back with numbers," says Pincus. "They have to

get as factual as possible, and remind people that people made money,

and viable companies continue on."

Pincus says analysts were guilty of the same sin as everyone else in

1999: they overestimated the power of e-commerce and the Internet in

general, running up dot-com, telecom, and fiber-optic stocks. "To err is

human," says Pincus. "They overestimated the growth demand for

e-commerce and the telecom industry. So did everyone else."

Of the six major brokerages contacted for this article, Lehman Brothers

held the position closest to Pincus' pragmatic view. Lehman SVP Bill

Ahearn admits that 1999 and 2000 were years of "hyperkinetic media

interest" in analysts, but he points out that of 100 analyst media calls

a day, around 98 of the callers still want to learn an analyst's views

on a particular stock or industry.

"The motion of the public relations surrounding analysts is no different

than it was five or 10 years ago," says Ahearn. "At the end of the day,

you want to promote the methodology and professionalism of your


Taking responsibility

Merrill Lynch has taken a more proactive approach. Earlier this month,

the brokerage announced it was banning its analysts from personally

buying shares in the companies Merrill Lynch covers. In addition, to

give greater transparency to the issue of corporate conflict of

interest, the investment bank is making efforts to explain the dual

nature of the bank's business activities. Reports bear the following:

"Merrill Lynch, as a full-service firm, has or may have business

relationships, including investment banking relationships, with

companies in this report."

But most brokerage houses and banks said their plans are to lay low to

avoid the media spotlight.

Peter Elkind, the Fortune senior writer who wrote about Mary Meeker as a

synecdoche for all corrupted analysts, says he thinks Meeker simply

"lost sight of her role. I think she's a symbol of Wall Street's

corruption of a process."

His solution to analyst image woes would be greater disclosure along the

lines of the SIA guidelines, but in the form of enforceable regulation

by an agency such as the SEC. In other words, analysts should be honest

about their paychecks, clients, and personal investment in a stock.

Honesty. Not exactly a new concept in trying to woo back former

paramours, but analysts just might try it if they want to be welcomed

back into the good graces of their former media, investor, and

government bedmates.


Analysts serve two masters. They issue straightforward stock advice to

private clients, but they are also often "encouraged" to keep their

bank's or brokerage's clients happy, either by recommending their

stocks, or by supporting the merchant bank's pitch for the account. The

Great Wall of China between these two sides has long since deteriorated,

but many believe that the analysts' independence went by the wayside

when tech stocks surged and analysts backed stocks that their banks (or

even they personally) had a stake in.

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