Despite law, Wall Street analysts nudge, CEOs wink

The Wall Street sign is seen in front of the New York Stock Exchange January 22, 2008.

NEW YORK (Reuters) - Access is still the name of the game if you are a Wall Street analyst.

Critics of the relationship between analysts and the companies they cover are drawing that conclusion from recent cases when companies blocked access to analysts who wrote negative reports about the companies.

The cases illustrate a big problem for retail investors: selective disclosure to deep-pocketed investors and friendly analysts, technically banned a decade ago, is alive and well.

"Wink-wink, nudge-nudge between analysts and company management shouldn't happen, but it absolutely does happen," said David Maris, an analyst at CLSA Asia Pacific-Markets who said he was recently denied access to a company after publishing a critical note.

The craving for access and a longstanding desire to win investment banking business means companies can still wield influence on research, and brokerage reports are unlikely to be as objective as they could be.

"Analysts are biased, and they'll always be, in their reports." said Charles Elson, corporate governance professor at the University of Delaware.

Mike Mayo, an analyst at CLSA who covers Citigroup Inc, recently accused the bank of shutting him out after he criticized the company.

And last month, two pharmaceutical analysts -- Maris of CLSA and John Newman of Oppenheimer -- said Forest Laboratories Inc's management cut them off after warning of possible risks in investing in the drug maker.

In theory, analysts should rely on publicly available information from companies such as earnings reports and conference calls, without additional data from management.

But in practice, analysts at brokerages and investment firms said talking to company management is an important way of gathering information not readily apparent from the numbers.

"This is a serious problem that is very prevalent on Wall Street," Maris said. "Analysts think they're handling it fine, but they're not."

TRADING STICKS FOR CARROTS

U.S. securities rules have limited the ability of companies to hand out information selectively to analysts if that information could affect the company's share price.

But investors say the rule still gives companies leeway.

A company can give analysts big-picture information that would not necessarily move shares, but help them understand the company's outlook. Or it can steer analysts toward publicly available information as a hint to where earnings are going.

Meeting managers also can reveal other less quantifiable qualities.

"You can get a sense of how uncomfortable someone is -- are they lying? Do they not know the answer? That's crucial information," said a hedge fund analyst.

Many analysts feel that access to management is crucial to distinguish yourself from competition and attract more investors, as they especially value those who can put them in touch with the company's decision makers.

Some analysts may feel pressure to mute criticism.

"You take into consideration the ramifications of putting a 'sell' rating on a company," said one Wall Street research analyst. "You know you're going to piss off management. They're probably not going to be as forthcoming with you."

Mayo believes that Citigroup locked him out after he said the bank may not be investing enough in its computer systems and should write down its deferred tax assets.

"That's a red flag to a very closed culture that's not very receptive to criticism," Mayo said.

Besides refusing to talk, companies have other punishments they can mete out, such as shunning critical analysts' banks' conferences -- events that are crucial to their bottom lines because they lure investors who may then buy products.

"Those are the events that get you paid," said a second Wall Street analyst, who added that friendly companies could later choose an analyst's bank for issuing debt or shares.

Both analysts spoke on condition of anonymity because they were not authorized to talk to reporters.

INTRICATE DANCE

The sway that management can have over research is evident from the overall distribution of research calls.

On 4,117 stocks tracked by the Thomson Reuters StarMine analytics database, the predominant call was a neutral "hold," totaling 13,747, but "buys" overwhelmed "sells" almost seven-fold: 1,222 "sells" and 7,791 "buys."

Presumably, if research were fully objective, there would be more "sell" ratings.

"What used to be defined as conflict now is being defined as synergy," said Eliot Spitzer, the former New York attorney general who became known as "Sheriff of Wall Street" for his fights against Wall Street conflicts of interest.

The Securities and Exchange Commission hoped to tame these conflicts with Regulation Fair Disclosure rule. "RegFD" was adopted in 2000, and requires companies to disclose information through press releases and other publicly accessible means. The idea was to prevent giving some market players access to market-moving information ahead of others.

Spitzer, who held the attorney general post when "Reg FD" was passed, ultimately settled with the 10 largest Wall Street brokerages for $1.4 billion and a pledge to make independent research available to customers.

Almost a decade later, the culture has budged, but not by much. Observers say investors have long assumed a level of bias when making decisions based on analysts' stock evaluations -- and the culture may be incorrigible.

"On Wall Street, as anywhere else, knowledge is power, so it's obvious there's going to be a conflict," said Robert Daines, a Stanford University professor of law and business.

"It's kind of like the Starbucks coffee mugs: Everyone knows 'large' means 'medium,' and pretty soon you adjust."

(Reporting by Alina Selyukh. Editing by Robert MacMillan)