Beyond Punishing Analysts

Floyd Norris has a fascinating article out this morning, titled “Stock Exchange Disciplines Analyst.” Its the story of an analyst who made a good call on the stock of SBC Communications in 2001 — he said the earnings were concoted exaggerations — only to chicken out publishing his critique in the face of withering pressure from SBC:

In the summer of 2001, the once-lofty stock price of SBC Communications was coming down, but the company still appeared strong. On July 25, it issued its second-quarter earnings report, boasting that “disciplined financial management” had driven its earnings higher despite the recession. Its stock rose 6.3 percent that day as investors took heart.

On Aug. 8, SBC filed its quarterly report with the Securities and Exchange Commission, and at least one Wall Street analyst concluded that there was less to SBC’s good earnings than there had appeared to be. Andrew Brian Hamerling, then 27, was the Banc of America Securities analyst covering the company, and he wrote a report concluding that the company “beat the street in the recent quarter through one-time stuff,” as an e-mail message written by one of his bosses put it at the time.

That research report was never published, however. SBC was given a copy of the report before it was issued, according to that same message, which was quoted yesterday by NASD in a disciplinary action against Mr. Hamerling. “The company has threatened,” the e-mail message continued, to pull out of a Banc of America investment conference scheduled for the next month and to “pull potential corp fin business if he publishes it.” Presumably that meant corporate finance, or underwriting, business.

There is no doubt that the analyst was at fault for simultaneously presenting two diametrically opposed stories to different clientele. Perhaps kudos is due Bank of America, for leaving the publication option to the analyst. One imagines there may have been other subtle pressures at play — I have to wonder why a firm such as BofA would give the subject of a report (such as SBC) a “review copy” prior to publication.

But what really stands out from the piece, however, is the lack of negative consequences or accountability to SBC. Much of the analyst scandal that hit Merrill Lynch, Morgan Stanley et. al. last year was provoked by the behavior of public companies. They ran roughshod over the system, with little in the way of repurcussions for their ill behavior.

The simple way to resolve this would be for the exchanges — and in particular, the NYSE — to show some backbone. Listing requirements should include granting equal access to all analysts, regardless of firm size, investment banking relations, or prior negative reports. Reg FD should have provided for much of this, but there still seems to be holes in the regulations. In the event of this sort of threat to the anaylst community, the exchange should fine the offending company — preferably, an amount substantial enough to dissuade the behavior in the future.

Stock Exchange Disciplines Analyst
Floyd Norris
NYTimes, December 10, 2003

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