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Wall Street Research Cannot Be Trusted – Proof Point

Wednesday, August 11th, 2010

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.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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