By DAVID MOON, Moon Capital
August 17, 2003
When Elliott Spitzer, the Attorney General from New York, began
investigating Wall Street firms for using their research departments as salesmen
for their investment bankers, it was news to some people. When ten of
those firms agreed to pay fines exceeding a billion dollars for these practices,
it was on the front page of every newspaper business section in the country.
By contrast, when a billion-dollar settlement is announced surrounding the
initial public offerings (IPOs) of more than 300 technology companies, the press
yawned. I wonder why?
Fifty-five Wall Street firms still stand accused of manipulating prices and
using shares of these (then) popular IPOs as inducement to clients and others
with whom they would like to do business. It can be argued that since this
practice was well known and practiced on Wall Street, it deserved little fanfare
when officially "exposed." But the same argument can be made about the
research practices that cost those firms more than a billion dollars.
These practices were well known. But in the post-Enron environment, they
were fodder for an aggressive prosecuting attorney.
The Securities and Exchange Commission regulates many of the activities of
these firms. Some people in Washington are upset that an elected official
in New York, not the professional regulatory agency, is pursuing actions against
the investment houses. Some legislators are even considering banning state
attorneys general from the types of actions on which Elliot Spitzer seems to
thrive. Spitzer is now being mentioned as a possible candidate for New
York governor, so his motives are suspect.
But we ought to be concerned about doing the right things, not, as my
grandmother would say, "worrying about who shot John." Flashy reports with
graphs and technical-looking projections shouldn't masquerade as "research" if
it isn't. Firms should pretend that IPOs are available to all customers if
they're not. The answer isn't to ban these practices. The solution
is to require full and accurate disclosure. The front of a prospectus
should say something like, "these shares are being deliberately under priced,
but only our friends can buy at the low price. You will have to pay
more." Or a research report could have the following statement on the
front page: "Regardless of our positive recommendations in this report,
please note that this company sucks. But we hope you will buy some anyway,
so we can make a commission and maybe get some business from them, too."
Now that's disclosure. Not some fine print legalese printed on the
entire last page of the report.
The research and IPO "scandals" are not the last of the conflicts and
problems on Wall Street. We will continue to see more. Sales
incentives of many mutual fund and investment management companies are
next. If you want to pay higher fees than necessary for your mutual fund,
that's fine. But you need to know if the extra fees are used to send a
bunch of people to Jamaica each winter.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).