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Common Sense: Following a Herd of Bulls on Apple’s Stock

February 8, 2013 by Leave a Comment

By November, with Apple stock in the midst of a precipitous decline, they were still bullish. Fifty of 57 analysts rated it a buy or strong buy; only two rated it a sell. Apple shares continued their plunge, and this week were trading at just over $450, down 36 percent from their peak.

How could professional analysts have gotten it so wrong?

It wasn’t supposed to be this way. A decade ago, Congressional hearings and an investigation by Eliot Spitzer, then the New York attorney general, exposed a maze of conflicts of interest afflicting Wall Street research. There were some notorious examples of analysts who curried favor with investment banking clients and potential clients by producing favorable research, and then were paid huge bonuses out of investment banking fees. Many investors and regulators blamed analysts’ overly bullish forecasts for helping to inflate the dot-com bubble that burst in 2000.

After a global settlement of Mr. Spitzer’s investigation by major investment banks and the Sarbanes-Oxley reform legislation in 2002, investment banking and research operations were segregated. Conflicts had to be disclosed, and research and analyst pay was detached from investment banking revenues, among other measures.

These reforms seem to have worked — but only up to a point. Other conflicts have come to the fore, especially at large brokerage firms and investment banks. And studies have shown that analysts are prone to other influences — like following the herd — that can undermine their judgments. “The reforms didn’t necessarily make analysts better at their jobs,” said Stuart C. Gilson, a professor of finance at Harvard Business School.

It may be no coincidence that the only analyst who even came close to calling the peak in Apple’s stock runs his own firm and is compensated based on the accuracy of his calls. Carlo R. Besenius, founder and chief executive of Creative Global Investments, downgraded Apple to sell last Oct. 3, with shares trading at $685. In December, he lowered his price target to $420, and this week he told me he may drop it even further, to $320.

Mr. Besenius founded his firm a decade ago after spending many years in research at Merrill Lynch and Lehman Brothers. “I saw so many conflicts of interest in trading, investment banking and research, so I started a conflict-free company,” he said this week from Luxembourg, where he was born and now lives. “Wall Street is full of conflicts. It still is and always will be. It’s incompetent at picking stocks.”

Since the passage of Sarbanes-Oxley, several studies have documented a decline in the percentage of analysts’ buy recommendations, albeit a modest one, while sell recommendations have increased. “Before 2002, analyst recommendations were tilted toward optimistic at an extreme rate,” Ohad Kadan, a professor of finance at Washington University in St. Louis, and co-author of one of the studies, told me this week. “That’s still true today, but it’s not as extreme. It’s a little more balanced.”

While investment banking conflicts have been addressed, “the most obvious conflict now is that research is funded through the trading desks,” Professor Gilson said. “If you’re an analyst and one way your report brings in revenue is through increased trading, a buy recommendation will do this more than a sell. For a sell, you have to already own the stock to generate a trade. But anybody can potentially buy a stock. That’s one hypothesis about why you still see a disproportionate number of buy recommendations.” That may be especially true for heavily traded stocks like Apple, which generate huge commissions for Wall Street.

Article source: http://www.nytimes.com/2013/02/09/business/following-a-herd-of-bulls-on-apples-stock.html?partner=rss&emc=rss

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Bucks Blog: How Banks Limit Your Options in a Dispute

November 29, 2012 by Leave a Comment

Ninety percent of Americans use checking accounts, but they are often unaware that agreements with their bank limit their legal options if there is a disagreement, a new report from an arm of the Pew Charitable Trusts finds.

The report studied 92 large financial institutions and found most (64 percent) limit consumer options for resolving complaints about checking accounts in some way, like through the use of “mandatory binding arbitration” clauses. The clauses require customers to submit complaints to an outside arbitrator — usually chosen by the bank — instead of to a court.

The bigger the bank, the report found, the more likely it is require arbitration or impose other restrictions. (The report says 43 percent of institutions use agreements with mandatory binding arbitration clauses, but that number rises to 47 percent when only banks are included, because none of the credit unions in the study use the clauses.)

“Consumers need to be educated about this,” said Cora Hume, project manager for Pew’s Safe Checking in the Electronic Age Project.

Banks favor mandatory binding arbitration as a faster, cheaper alternative to the courts. But consumer advocates worry that the process may limit an account holder’s options for appeal, and can pose conflicts of interest if a bank provides private arbitrators with repeat business.

For the report, “Banking on Arbitration,” Pew’s safe checking project examined checking account agreements at 92 of the country’s largest banks and credit unions, as measured by deposits. The report also includes results of a telephone survey of 603 customers.

Pew has created an interactive graphic to help consumers understand the difference between using arbitration and courts.

Jean Sternlight, a professor at the University of Nevada-Las Vegas law school, writes in an article to be published in The Southwestern Law Review that mandatory binding arbitration clauses, whether in banking or other consumer contracts, stymie the filing of consumer claims over all.

Despite millions of contracts covered by mandatory arbitration clauses, she says, few consumers actually file claims under them. That’s probably because simple complaints are often handled by companies’ own customer service processes, but consumers lack the knowledge or financing to pursue more difficult claims themselves. As a result of the United States Supreme Court’s decision last year in the ATT Mobility case, consumer class actions — which can provide an avenue for more complex cases — are now more limited, so legal options for consumers appear to be dwindling.

The Pew report found that consumers seem to like the general idea of arbitration as a simpler, less costly alternative to courts. But they overwhelmingly disapprove of specific components of mandatory arbitration. More than two-thirds of consumers said they should have a choice between taking their case to arbitration or to a court. And more than 90 percent of consumers said they thought it was “unacceptable” if consumers were required to pay a bank’s legal fees, even when the consumer wins the dispute.

Pew said it conducted the research in part to aid the Consumer Financial Protection Bureau’s inquiry into the use of mandatory arbitration clauses. The agency is required by the Dodd-Frank financial reform act to examine use of the clauses in financial products.

Have you ever brought a complaint against your bank using the arbitration process?

Article source: http://bucks.blogs.nytimes.com/2012/11/28/how-banks-limit-your-options-in-a-dispute/?partner=rss&emc=rss

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DealBook: Under Investigation, and Doing the Investigation

September 25, 2012 by Leave a Comment

Dongyun Lee

Whenever there is a report of corporate misconduct, a predictable response is that the company in question says it has hired a reputable law firm to conduct a thorough investigation, and it pledges to cooperate with the authorities to resolve the situation quickly.

Prosecutors usually announce their own investigation, if they say anything at all. In reality, the government often uses reports provided by the companies to decide how to resolve the case.

Yet this raises significant questions about conflicts of interest. Is it a good thing that much of the effort to police corporate misconduct seems to have been shifted to lawyers retained by the companies under investigation?

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A corporate investigation can easily cost a company millions of dollars, and sometimes much more. The German conglomerate Siemens paid over $1 billion in legal and accounting fees for its global inquiry into extensive bribery by employees.

Companies would prefer not to conduct an investigation at all. But having a law firm they hired overseeing the inquiry means they can maintain control over information, and minimize any surprises.

For the legal profession, conducting corporate investigations is a growth industry. Louis J. Freeh, the former F.B.I. director whose work includes an extensive report on the sex abuse scandal at Penn State, recently agreed to merge his firm into Pepper Hamilton — a sign that large firms want the cachet of a big name to attract more business.

For the government, waiting until the company’s investigation is complete means there is no significant commitment of taxpayer resources on a case that may not result in prosecution. And there are good reasons to defer to the company’s lawyers, at least at the early stages of a case.

If a company’s overseas conduct is at issue, government investigators must slog through numerous bureaucratic steps to gather evidence. Private lawyers do not have to follow the same rules, so they can often gather information more quickly.

Employees may be more forthcoming with the company’s representatives, whether out of a sense of loyalty or the misconception that they are not at risk for prosecution. Even if employees are told that information may be turned over to the government, there can be a sense of comfort from being a team player, regardless of whether the details implicate them.

Lawyers from outside firms also often gain a better understanding of a company’s culture and operations. In-house counsel can point out where to look for information and explain how decisions were made. That kind of inside knowledge usually would not be available to prosecutors because it could expose confidential information.

It may seem as if having a law firm oversee the investigation of corporate misconduct benefits both the prosecutors and the company in the inquiry. But there is a risk prosecutors may not be getting a picture of all wrongdoing, and the potential for the report to be slanted in a way to protect senior management.

The lawyers who conduct investigations are often former prosecutors or regulators themselves, sometimes coming back to negotiate with their old offices on behalf of new clients. This can create an interesting twist on the so-called revolving door, when lawyers leave private practice temporarily to take government jobs. Some have said that such lawyers may be more lenient on the companies they investigate in the hopes of getting a job later on.

Robert Khuzami, the enforcement director at the Securities and Exchange Commission, disputed that view, saying recently that staff lawyers “would not risk reputation and career and even jail by undermining an investigation for a possible future job prospect.”

The real problem, in my opinion, with the revolving door may be that former government lawyers are trusted because they developed reputations as tough prosecutors and regulators. Companies can use that reputation to their benefit when the lawyers return to their former offices to represent them.

In practice, the lawyers employed to conduct corporate investigations must draw conclusions about conduct that falls into gray areas. Unlike murder and robbery, white-collar violations are difficult to identify and often call for nuanced judgments about intent and knowledge.

When lawyers report their conclusions, are they free from bias about the company that is also paying their bills?

Certainly, questions have been raised about the value of such reports. Since the financial crisis hit, few senior managers have been identified as among those responsible for a violation.

Prosecutors relying on law firms to do the legwork for an investigation and report on potential violations may not be in a position to challenge their conclusions by conducting an independent inquiry. The Justice Department simply does not have the resources to investigate a company to the same degree as outside lawyers operating with seemingly unlimited resources.

One solution is to expand whistle-blower programs to reward those who report corporate violations directly to the government. The Internal Revenue Service recently awarded $104 million to a whistle-blower who provided information that helped bring down the wall of secrecy around Swiss banks.

Whistle-blowers offer a glimpse into a company that would not otherwise be available. The potential threat of a whistle-blower also can give prosecutors and regulators more leverage because information is no longer controlled by the lawyers who oversaw an investigation. As every investigator knows, it is far better to keep the target guessing about exactly what you know.

Companies do not care for whistle-blowing programs because they divert information from their internal compliance systems and instead give it directly to the government, meaning it is not filtered first by outside counsel. Maybe that is not such a bad idea.

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

Article source: http://dealbook.nytimes.com/2012/09/24/under-investigation-and-doing-the-investigation/?partner=rss&emc=rss

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You’re the Boss Blog: Can a Banker Think Like an Entrepreneur?

August 31, 2012 by Leave a Comment

She Owns It

Portraits of women entrepreneurs.

In a just-published New York Times article, I write about Jolyne Caruso, a Wall Street veteran who founded the Alberleen Group, a company that applies the incubator concept — ubiquitous in the world of tech start-ups — to investment banking. The Alberleen Group provides seasoned investment bankers with the infrastructure and working capital to start their own firms. In exchange, it takes a revenue share.

Ms. Caruso got the idea for her venture after observing that many bankers — and their clients — were disillusioned with the big banks. New regulations, altered compensation models, and (for clients) the potential for conflicts of interest contribute to the “misery factor,” she said. But for bankers looking to strike out on their own, the costs of starting a boutique investment bank can be prohibitively high and the connections needed to fund deals can be elusive. The Alberleen Group offers help with both. Every member of the incubator’s advisory board, which includes E. Stanley O’Neal, the former chief executive of Merrill Lynch, is also an investor in the company.

The incubator’s success will depend, in part, on its ability to field teams of bankers who think — and operate — like entrepreneurs despite having spent careers at the much larger institutions that have long dominated the industry. “The jury is still out on us,” Ms. Caruso said.

But she added that it’s clear that the old model is no longer viable for many clients and bankers — which could make investment banking incubators as plentiful as their technology counterparts.

You can follow Adriana Gardella on Twitter.

Article source: http://boss.blogs.nytimes.com/2012/08/14/can-a-banker-think-like-an-entrepreneur/?partner=rss&emc=rss

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State Dept. Assigned Keystone XL Review to Company With Ties to TransCanada

October 8, 2011 by Leave a Comment

The department allowed TransCanada, the company seeking permission to build the 1,700-mile pipeline from the oil sands of northern Alberta to the Gulf Coast in Texas, to solicit and screen bids for the environmental study. At TransCanada’s recommendation, the department hired Cardno Entrix, an environmental contractor based in Houston, even though it had previously worked on projects with TransCanada and describes the pipeline company as a “major client” in its marketing materials.

While it is common for federal agencies to farm out environmental impact studies, legal experts said they were surprised the State Department was not more circumspect about the potential for real and perceived conflicts of interest on such a large and controversial project.

John D. Echeverria, an expert on environmental law, referred to the process as “outsourcing government responsibility.”

The subsequent study, released at the end of August, found that the massive pipeline would have “limited adverse environmental impacts” if operated according to regulations. That positive assessment removed one of the last hurdles for approval of the proposed pipeline.

Cardno Entrix also played a substantial role in organizing the public hearings on the project for the State Department, the last of which was held Friday in Washington. The proposal is open for public comment until midnight Sunday, and the department’s Web site directs comment to a Cardno Entrix e-mail address.

Environmental groups, as well as some citizens and public officials along the route, have opposed the project, citing the relatively high emissions created by extracting crude from oil sands and the spill threat posed to important aquifers by a pipeline filled with a potentially corrosive crude, among other concerns. The E.P.A. has criticized two prior draft environmental impact statements prepared by Cardno Entrix on Keystone XL as “inadequate” and providing “insufficient information,” but has not yet rendered an appraisal of the final study. The E.P.A.’s role is purely advisory.

Advocates for the project say that Keystone XL, which would carry 700,000 barrels of crude a day, would create thousands of jobs and help ensure a stable fuel supply from a friendly neighbor.

The State Department is the agency that approves transboundary pipelines by determining whether they are in the national interest. Its decision is expected by the end of the year.

The National Environmental Policy Act, which took effect in 1970, allows for agencies to hire outside contractors to perform its required environmental impact studies, but advises that contractors be chosen “solely by the lead agency” and should “execute a disclosure statement” specifying that they “have no financial or other interest in the outcome of the project.”

And yet legal experts said it had become common for companies applying to build government projects to be involved in assigning and paying for the impact analysis. Some say such arrangements are nearly inevitable because federal agencies typically lack the in-house resources or money to conduct these complex studies. “What’s normal is deplorable, and it’s NEPA’s dirty little secret,” said Mr. Echeverria, acting director of the Environmental Law Center at Vermont Law School, referring to the law. He said federal agencies are supposed to review the findings, but often lack the expertise to do so.

Oliver A. Houck, a law professor at Tulane University and an expert on NEPA, said Cardno Entrix should never have been selected to perform the environmental study on Keystone XL because of its relationship with TransCanada and the potential to garner more work involving the pipeline. The company provides a wide ranges of services, including assisting in oil spill response.

Cardno Entrix had a “financial interest in the outcome of the project,” Mr. Houck said, adding, “Their primary loyalty is getting this project through, in the way the client wants.”

Kerri-Ann Jones, the assistant secretary of state for oceans and international environmental and scientific affairs, in an interview, said the State Department followed all federal regulations and had closely managed and supervised the company’s work, adding, “We have final say.”

She said that TransCanada had managed the bidding process and recommended three candidates with Cardno Entrix topping the list. The department vetted Cardno Entrix by consulting with other agencies like the Bureau of Land Management. TransCanada pays the consultant directly, but would not reveal the amount.

Article source: http://feeds.nytimes.com/click.phdo?i=f25d65d8ff0b2d8f140eeac31226b7bc

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Michael Arrington, TechCrunch Blogger, to Invest in Start-Ups

September 2, 2011 by Leave a Comment

SAN FRANCISCO — Michael Arrington, whose influential TechCrunch blog covers Silicon Valley, has started a venture capital fund to invest in start-ups, including some that he and his staff write about.

The $20 million CrunchFund is the latest example of Mr. Arrington’s casting aside one of traditional journalism’s cardinal rules — that reporters should avoid conflicts of interest by maintaining distance from the people, organizations and issues they cover — and raises questions about whether industry bloggers are journalists.

Like most news providers, AOL, which reportedly paid $30 million to acquire TechCrunch last year, prohibits reporters at its media sites, including those at The Huffington Post, from investing in the companies they cover.

But AOL has made an exception for Mr. Arrington, who has been the site’s editor. He will take a backseat role at TechCrunch, which is hiring a new managing editor. He will continue to report to Arianna Huffington, who runs AOL’s media properties.

“TechCrunch is a different property and they have different standards,” Tim Armstrong, chief executive of AOL, said in an interview.

“We have a traditional understanding of journalism with the exception of TechCrunch, which is different but is transparent about it.” Not only has AOL approved the fund, it is financing it. AOL invested about $10 million in the CrunchFund, which will operate separately from AOL Ventures, the venture capital fund that AOL brought back to life last year.

Mr. Arrington said that his investments would never influence TechCrunch’s coverage, and that he would continue to disclose that he had invested in start-ups across the site, including on each post about the start-ups.

The fund’s contract with its investors says that Mr. Arrington can continue to publish critical or negative posts or disclose confidential information about the investors or the companies in which they have invested.

“I don’t claim to be a journalist,” Mr. Arrington said, though he breaks news and writes prolifically. “I hold myself to higher standards of transparency and disclosure.”

He argues that his investments would produce less of a conflict of interest than the other conflicts that all journalists have as human beings, because their views are shaped by friendships, romances and personal opinions.

“Friendships and marriage are far more potent than financial conflicts,” he said. “I firmly believe that the reason we are a popular site is because we have built reader trust, and the only way to build reader trust is not to trick them. That’s the most important thing to me.”

The arrangement immediately raised ethical questions. “Journalists write with the principle of public illumination,” said Edward Wasserman, the Knight professor of journalism ethics at Washington and Lee University. “If it’s helping a group of investors make decisions or advancing one’s own portfolio, you’re not really in the journalism business. You’re in the private enrichment business.”

Many of the top firms in venture capital, which Mr. Arrington also covers on TechCrunch — including Sequoia Capital, Kleiner Perkins Caufield Byers and Greylock Partners — have invested in Mr. Arrington’s fund. Accel, Benchmark Capital and Andreessen Horowitz have also invested.

The CrunchFund will generally invest $25,000 to $500,000 in young start-ups. The fund, which is fully subscribed and not accepting new investors , will invest only alongside other venture capitalists, Mr. Arrington said. He will run the fund along with Patrick Gallagher, his college friend and an investor at VantagePoint Venture Partners.

Mr. Arrington, a former Silicon Valley lawyer, started TechCrunch in 2005 and rapidly turned it into one of the most-read blogs in the tech world. It had 3.6 million visitors in July, according to comScore.

Article source: http://feeds.nytimes.com/click.phdo?i=eef2184876584e1bdcb09ba7b0127f7a

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DealBook: Rating Agencies Face Crackdown

May 18, 2011 by Leave a Comment

S.E.C. chairwoman Mary SchapiroAlex Wong/Getty ImagesMary Schapiro, the Securities and Exchange Commission chairman.

Securities regulators are out to tame the credit rating agencies, crucial Wall Street players at the center of the financial crisis.

The Securities and Exchange Commission proposed sweeping new rules on Wednesday to overhaul the rating business – regulations that would force tougher internal controls, potentially curb conflicts of interest and even mandate that the agencies periodically test the competence of their employees.

“These rules are intended to help investors and other users of credit ratings better understand and assess the ratings,” Mary L. Schapiro, chairman of the S.E.C., said at a public meeting on Wednesday. “It is a massive proposal,” she said of the plan, which spans more than 500 pages.

The S.E.C.’s five commissioners unanimously agreed to advance the proposals, which are now open for public comment for 60 days.

The agency’s Republican commissioners indicated, however, that they would push for some changes. The proposals “could be life threatening” to small rating agencies,” Kathleen L. Casey, a Republican commissioner, said at the public meeting.

A rating agency, for instance, would have to take on the costs of periodically administering performance exams that would “test its credit analysts on the credit rating procedures and methodologies it uses,” according to a summary of the proposal.

The proposals stem from the Dodd-Frank Act, the financial overhaul law enacted last year. The S.E.C. has already proposed new policies under Dodd-Frank that would strip references to credit ratings from rules that govern securities offerings.

The rating agencies in recent years became a target in Washington, as regulators and lawmakers blamed them for feeding the mortgage bubble by awarding top grades to bonds backed by subprime mortgages. The investments later soured, driving the economy to the brink.

A Congressional panel that chronicled the crisis called the largest rating agencies — Standard Poor’s, Moody’s Investors Service and Fitch Ratings — “essential cogs in the wheel of financial destruction.”

The problems, critics say, stem from an inherent conflict of interest plaguing the rating agencies’ business model.

Banks and corporations that issue debt must pay the rating agencies to assign their bonds a letter grade. In the lead up to the crisis, the rating agencies had a heavy hand in the mortgage bond business, as they advised big banks how to earn a top triple-A grade. In a quest for profits, the critics say, the agencies compromised the integrity of their ratings.

The S.E.C.’s proposal intends to mitigate some of those conflicts that have long hurt the industry’s reputation.

The plan would prohibit analysts from issuing a rating if they also marketed their rating agency’s products or services. Small rating agencies can apply for an exemption from this rule.

The proposal also takes aim at the revolving door between the rating agencies and Wall Street firms that seek the grades.

Under the plan, the rating agencies would have to examine whether their former analysts awarded overly rosy ratings to a firm that later hired that person. In such cases, the rating agencies would have to “promptly determine whether the credit rating must be revised.”

Ms. Casey warned that this proposal “threatened to cross the line” into dictating the substance of credit ratings. “I am concerned that this is such a slippery slope,” she said.

Still, the proposals do not go as far as some had expected.

In the final days of negotiations over Dodd-Frank, lawmakers stopped short of eliminating the so-called issuer pays model that causes potential conflicts of interest. Instead, lawmakers opted for a compromise. The S.E.C. must now study whether to create an independent body that will randomly assign ratings to different agencies.

The rating agencies fiercely oppose this plan, among other Dodd-Frank rules. Some rating agencies also may target an S.E.C. proposal that would require the industry to disclose how well their ratings have performed over time.

“One significant concern is whether the S.E.C. will follow up on this rule-making by actively pushing back at rating agencies if these attempts at mandating greater rating agency transparency turn out to produce opaque or formalistic disclosures in practice,” said Jeffrey Manns, a professor at George Washington University law school, who is an expert in credit rating agencies.

Article source: http://feeds.nytimes.com/click.phdo?i=432ae6d1927313586bdbd2fcdf5298c7

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