By DAVID MOON, Moon Capital
January 23, 2005
In 2003, 10 large Wall Street firms agreed to set aside $1.4 billion as a
fine and compensatory damages for their misleading stock research.
Unbeknownst to many individuals, many of these purported research reports were
nothing more than sales pitches for the stocks the analysts were supposedly
researching. Analysts were recommending stocks to their clients while
describing the stocks as 'dogs' in internal emails. Part of the settlement
was supposed to compensate investors who lost money following the
recommendations of these firms. The Wall Street Journal reported this
week, however, that few investors are actually receiving any money from the
One law firm interviewed in the article lost all 800 cases it has filed
against Citigroup and Smith Barney. Another firm lost 275 cases against
Merrill Lynch. According the Wall Street Journal, a Merrill Lynch
spokesman says that the investors who have filed claims against Merrill 'did not
lose money because of research but because the market sharply declined.'
That defense is appalling.
I wonder if the Merrill spokesman has given any thought about the reasons why
the market sharply declined? The huge stock market price declines in 2000
and 2001 were precipitated and made possible by the irrational level of stock
prices in late 1999 and early 2000. And why were those stock prices at
stupidly high prices? Because those same Wall Street firms were touting
the companies that drove the market indices to those grossly overvalued
In early 2000, Wal-Mart was one of a handful of stocks that significantly
influenced the daily price fluctuations in the S&P 500. As Wal-Mart
went, so went the market. Even at $67 a share and a P/E of 50, analysts
continued to tout the shares as undervalued. Almost any analyst would now
tell you those prices were crazy. The stock was so overvalued in 2000,
that five years later, Wal-Mart's earnings are 68 percent higher, yet its stock
price is still almost 20 percent below its artificially supported price in
2000. The price was inflated because of faulty research that fed an
emotional and greedy mania.
Many other companies were similarly overpriced, ultimately causing the losses
experienced by many investors, including the people now losing cases against
their brokerage firms. But the brokerage firms were complicit conspirators
in creating the price bubble ' the condition necessary for the sharp price
I'm not a professional fan of plaintiffs' lawyers or their clients. But
in this case, the defendants are escaping responsibility because of conditions
that existed as a result of their own actions. Imagine a 20-year-old crack
dealer who gets doped up and robs a convenience store. In court, his
attorney argues that he shouldn't be convicted of the robbery because while
under the influence of the drugs his client wasn't capable of discerning right
from wrong and can't be held responsible for his actions.
Now imagine the crack dealer is wearing a $2,000 suit and is carrying a
briefcase full of stock research reports.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).