On Wall Street, financial analysts are the exact opposite of traders. Where traders are aggressive and cocksure, financial analysts are generally docile and meek.
Analysts, unlike traders, are often paralyzed by a fear of retribution from the companies they cover if their stock research or commentary is too harsh. If they are too hard on a company, then maybe they won’t get access to executives, events, or information to help build financial models and provide accurate investment advice for their clients. Or worse, maybe the investment banking part of their firm — which is to say the part that brings in the money — won’t get any mandates.
“There’s some implicit pressure to not screw up the investment banking side at these firms by being too negative,” said Tom Brakke, a former financial analyst turned investment management consultant. “You’ve got a bunch of clients that don’t want to put a sell rating on anything because they own thousands of shares of it. There are a whole bunch of pressures that make sure analysts skew positive. You don’t want to be cut out of the information flow.”
Still, there are some analysts who aren’t afraid to speak their minds about the companies they cover. These “rogue” analysts come in three types: the brazen, the irresponsible, and the criminal. Below is a snapshot of each.
Back in 1999, banking sector analyst Mike Mayo made a bold call that won him more than a few enemies in the industry: he recommended selling all bank stocks. The call to sell any stock, let alone an entire sector’s worth, is rare among financial analysts — perhaps too rare given the vast universe of companies that have consistently underperformed quarter after quarter. In general, analysts seem to apply sell ratings sparingly, even in cases where it is merited.
Though Mayo’s call turned out to be accurate, he sparked the ire of many industry higher-ups, including those at his own firm, Credit Suisse First Boston, which actually fired him as a result.
“I try to do the job the way it’s supposed to be done. It’s the obligation of analysts when you’re looking after people’s money to ask the harder questions,” Mayo said.
This perspective has prompted many companies to put Mayo in the proverbial penalty box over the years. He’d make a bold call or write an extremely critical note about a bank and then, a week later, that bank wouldn’t return his calls, or worse, cease doing business with his firm altogether.
“I recognize that other people have called me brazen and brash and bold, but I don’t see it that way,” Mayo said.
Mayo has keet up the pressure on the companies he covers despite their best efforts to get him to tone it down. Now with CLSA Asia-Pacific Markets, an investment banking and asset management firm, Mayo recently made news for buying shares of bulge bracket bank stocks in order to attend annual shareholders meetings for J.P. Morgan, Morgan Stanley and Citigroup, among others. His sharp tongue got under the skin of JPMorgan CEO Jamie Dimon, who, at an investor event in February, dismissed Mayo by saying, “That’s why I’m richer than you.”
Over at BTIG, analyst Rich Greenfield has also earned himself a reputation for asking the tough questions that media and technology companies are less than thrilled to answer. Some of his analysis goes so far as to declare a giant like Facebook a loser and deeming broadcast television “curling for the poor.”
For the analyst prone to hyperbole, the danger is that they try to skew the math to support their overblown assertions. And in an industry where the accuracy of financial models provides the rationale for making buy or sell calls, inaccurate calculations are quickly uncovered and subject to a flurry of criticism.
Take Travis McCourt as an example. In January of last year, technology analyst McCourt, then of Morgan Keegan, was called out by some of his peers for widely overestimating how much the launch of Amazon’s Kindle Fire took out of Apple’s iPhone sales.
McCourt, son of ex-Dodgers owners Frank and Jamie McCourt, has since decamped for Goldman Sachs and has stayed relatively quiet.
Valuations and price targets can also land an analyst in hot water. Last year, analyst Michael King of Rodman & Renshaw, gave Amylin Pharmaceuticals an underperform rating and a $22 price target, calling the company’s assets “mediocre.” Then Bristol-Myers announced it would buy the company at $31 per share, losing King’s followers a lot of money.
Later, in a rare move for an analyst, King acknowledged that his call on Amylin was a bad one, telling the Wall Street Journal he was “admitting defeat and moving on.”
Some analysts cross from brazen into a territory whose legality is murky at best. Take Jack Grubman, a former tech analyst at Soloman Smith Barney and once the highest paid in his field on Wall Street. The SEC found that Grubman concealed information in the tech bubble of the early 2000s and misled investors. He was subsequently barred from the securities industry for life and required to pay a $15 million fine.
Then there’s the case of John Kinnucan, a tech analyst out of Portland, Ore., who received a 51-month prison sentence for securities fraud in January after admitting he sold inside information he gleaned from public companies to hedge funds and other money managers as if it was based on research.
Though authorities pleaded for his cooperation throughout their investigation, Kinnucan refused. Instead, authorities said he made about 25 calls to prosecutors, some with violent threats.
Others who have traveled the road from analyst to insider trading suspect have most recently included Sandeep Goyal, a former Dell employee who kept in close contact with colleagues and passed on tips about the stock to hedge funds and other investors, and Jon Horvath of Sigma Capital, a SAC Capital boutique, who took the stock tips on Dell and Nvidia Corporation.
For Some, Redemption Is Possible
Rogue analysts can sometime go “right,” as evidenced by Mayo. This year Citigroup invited Mayo, now at CLSA, to meet with CEO Mike Corbat ahead of its annual shareholder meeting, a rare invitation for a financial analyst.
“The bank managers say, ‘We have many people looking over our shoulder,’ and I’m like, let me meet those people,” Mayo said of his decision to attend the meetings. “My only regret is not having attended annual meetings before this year. This is a research field day; there aren’t a lot of other chances to talk to directors. If I’m the pioneer in brokerage analysts going to annual meeting and asking questions, I’ll happily accept that.”
Heck, even Grubman has been let out of the penalty box — he was on CNBC last week talking about how the SEC targeted the high profile analysts of his day. In other words, the analysts that were making waves on Wall Street.