Sunday, April 02, 2006
Weekend Reading for the SEC
Now that the SEC has declared open season on journalists and research analysts at the apparent behest of an insecure CEO cleverly shifting the spotlight away from his own money-losing public company track record, it is worth looking back to a time when such brittle, blowhard CEOs were the norm, not the exception, to glean what lessons such eras might teach to investors and regulators alike.
The era of which I’m speaking is the roaring 1990’s—the last bubble period, when companies came public on not much more than a Cool Idea and a slick road show.
And anybody who wants to look back and see what happens when the SEC fails to rein in banking-happy analysts and rule-flaunting CEOs need look no further than “Confessions of a Wall Street Analyst,” a new book by former telecom analyst Dan Reingold.
Reingold’s book describes the arc of his career from MCI number-cruncher to Wall Street star to depressed and disillusioned retiree, and it is not a bad read.
I didn’t know Reingold when he was an Institutional Investor-rated analyst famous for his upgrade of the Baby Bell stocks just prior to their Clinton-era deregulation, but he comes across as earnest and well-meaning, if a little too dependant on “models” and “spreadsheets” for my taste: garbage in, garbage out, as they say.
And man did he hate Jack Grubman.
Although some book reviewers of “Confessions…” disliked the anti-Grubman theme, I think that angle actually gives the book depth and heft, and makes it far more readable than just your average sell-side story. After all, how many times can you read about secret negotiations in a plush Manhattan hotel room with a Wall Street firm trying to hire an analyst away from whatever firm he’d just joined?
Furthermore, it is the Grubman angle that brings back all the excesses of the 1990’s, and provides the lessons that I mistakenly thought we had all learned about how Wall Street analysts and public companies ought not to conduct themselves.
Aside from Grubman’s famous upgrade of AT&T just prior to the AT&T Wireless spin-off, Reingold gives chapter and verse on Grubman’s incestuous Worldcom relationship, especially instances when clients apparently heard takeover stories—and exact prices—from Grubman well before the public announcements.
But the chapter most relevant to today’s climate of fear and loathing in the press and among those who would speak skeptically of a public company is called “Crash and Burn,” in which Reingold describes how the whole house of telecom cards begins to crumble—kicked off in part by terrific research from a Reingold competitor, who knew to look not just at the numbers, but behind them.
Simon Flannery was Morgan Stanley’s telecom analyst, and he downgraded Qwest—once the hottest of the telecom hotties—in mid-2001 “on a bunch of arcane accounting concerns,” as Reingold puts it.
Reingold himself “studied the [Flannery] report carefully” but for whatever bizarre reason did nothing else about it. He didn’t pick up the phone and talk to accountants or industry people, didn’t get on a plane and sit down with the Qwest auditors—nothing but reiterate his “Strong Buy” on the stock and listen to a Qwest conference call in which Qwest CEO Joe Nacchio denounced the report.
On that call, Nacchio 1) claimed there were no accounting problems at Qwest, 2) attacked Flannery, 3) attacked Morgan Stanley, 4) attacked Morgan Stanley’s CEO, and 5) banned the analyst from visiting the company or asking questions on the call.
Nacchio, Reingold tells us, “was apoplectic—and determined to make this guy [Flannery] pay.”
Now, we all know that Flannery was right, and Nacchio was wrong; that Qwest ended badly, and Joe Nacchio’s career at Qwest ended badly.
(The SEC eventually charged Nacchio and others with “massive financial disclosure fraud”—three years after Nacchio resigned.)
But, at the time, Flannery was successfully made out to be the bad guy by a CEO eager to shift the spotlight away from the analysis itself.
It’s a story worth re-reading, to remind ourselves of what happens when CEOs attack the person asking the questions, instead of answering the questions and letting the business prove the skeptics wrong.
I Am Not Making This Up
© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.
Posted by Jeff Matthews at 11:08 AM