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11 August 2010

Wall Street Research Cannot Be Trusted – Proof Point

In case you needed proof beyond the Global Research Settlement that Wall Street research cannot be trusted, Morgan Stanley delivers by admitting “inadequately disclosing conflicts of interest on the part of its research analysts.” As reported by Reuters, Morgan Stanley paid an $800,000 fine to FINRA for not disclosing the conflicts of interest:

“The Financial Industry Regulatory Authority fined Morgan Stanley $800,000 for inadequately disclosing conflicts of interest on the part of its research analysts.

The brokerage industry regulator found that from April 2006 to June 2010 Morgan Stanley’s disclosures did not provide accurate information about the company’s or analysts’ relationships with companies covered in its research reports.

The disclosures violated the 2003 Research Analyst Settlement. The agreement followed the Wall Street scandal a decade ago where some analysts provided favorable ratings to companies they covered without disclosing a conflict of interest to investors.

Morgan Stanley also sent out roughly 128,000 account statements between August 2007 and February 2008 that failed to disclose to customers that independent, third-party research was available.”

Interestingly, Reuters reported that Morgan Stanley self-reported the violations which means that the SEC was caught asleep at the switch…again.

And, as pointed out by my colleagues at Integrity Research in their blog post on this topic: “The violations indicate that there are still serious problems with the sell-side analyst research model as far as living within the rules … And … the fact that there were 6,836 deficient disclosures means one breach of Reg AC only costs about $117. Economically, it seems to be a lot cheaper to pay the fine than to fix the problem.”

The takeaway: beware of Wall Street research because Wall Street makes its money selling stocks not research.

Browse General Market Comments

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