Imagine this scene: You're a buyer. You have a buyer broker. You look at a number of homes. One is especially recommended by the broker. You buy it at the suggestion of your adviser. At closing you find that the property is owned by your broker.

Would you do business with this broker again? Recommend him or her? And what do you think state regulators would say?

Curiously, though, when this happens on Wall Street such matters as common sense, conflicts of interest, and the regulatory requirement to protect the public interest are brushed aside.

Laura S. Unger, Acting Chair of the U.S. Securities & Exchange Commission offered written testimony on Capitol Hill that when her agency looked at stock analysts -- those folks so often in the news with careful predictions of future stock values -- they found:

• "Sixteen of 57 analysts reviewed had made pre-IPO investments in a company they later covered. Subsequently, the analysts' firms took the company public and the analyst initiated research coverage with a 'buy' recommendation."

• "Examiners found that three of these analysts executed trades for their personal accounts that were contrary to their recommendations in their research reports."

• "These analysts generated profits of between $100,000 and $3.5 million by selling their shares while continuing to maintain a "buy" recommendation."

• "One analyst sold securities 'short' while maintaining a buy recommendation on the subject company."

• "In 308 of 317 IPOs examined," says the agency, "the firm that underwrote the security also provided research coverage."

• "Six firms stated that at times analysts provide investment bankers and client management with advance notice of a pending change in the analyst's recommendations."

• "The staff reviewed the lock-ups of 97 companies in which the firm that underwrote the IPO, or an analyst employed by that firm, owned stock in the company. In 26 of these instances, the analyst issued a "buy recommendation" within a week of the expiration of the lock-up period. "Booster shot" reports may generate buying interest in the stock and help increase the stock price while the firm, the firm's clients, or the analysts sell their shares."

"At a minimum," says the SEC of itself, the agency "should continue to promote both clear, meaningful, and prominent disclosure, as well as effective investor education, so that investors may weigh for themselves the significance of any conflicts."

Fat chance. The SEC has produced the perfect Washington study. It is nicely researched, well written, has quotable facts, and it's entirely worthless.

The testimony doesn't identify the analysts who sold stock they were telling you to buy. It doesn't say which analysts had holdings in stock which they later recommended. It doesn't identify the firms where such events took place. It doesn't say which stocks were recommended even as analysts sold. It doesn't say which analysts gave firms a "heads up" before telling you to buy or sell. It surely does not name the analyst who was selling short while you were being advised to buy.

Why do we need the SEC if it argues for "clear, meaningful, and prominent disclosure" and then hides the very facts people need to make informed investment decisions?

Is it a fact or is it not a fact that an analyst sold stock he or she was recommending? How can anyone know unless the analyst, the analyst's firm and the stock are identified?

What about the 41 analysts who did not buy early, did not sell when telling others to buy, and did not sell short? They are apparently in the majority. This would be re-assuring except -- of course -- we don't know which analysts followed their own recommendations. And which didn't.

For more articles by Peter G. Miller, please press here.

Published: August 10, 2001

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