Wednesday, April 9, 2008

The Case for Scrutinizing Analyst Opinions on Schering-Plough. . . .

I'll be back later, to explain why I think the following three pages, from Schering-Plough's most recent securities offerings, in August and September of 2007, are important, but suffice it to say, for the moment, that any unduly positive commentary, from any firm named on any of these three pages, relative to Schering-Plough, ought to be taken with a truckload of salt.

Okay, at the outset, and to be fair, an SEC rule called Regulation AC requires that brokers, dealers, and certain persons associated with a broker or dealer certify that any research analyst writing a report or analysis on any pubic company has accurately reflected his or her personal views, and he or she must disclose whether the analyst (or his or her firm) received compensation or other payments in connection with his or her specific recommendations or views. So, all of the below firms disclose, by footnote, that each has "done business" with Schering-Plough, and that each "expects to do business with" it, in the future.

However, nothing in SEC Regulation AC (or any other SEC rule) prohibits an analyst from also taking the interest of the banking firm that employs her or him into account, when she or he writes. Additionally, every analyst is keenly aware of the names on the lead tables set forth below -- as they appear inside the very same public documents the analysts use to formulate their opinions.

So, while I am certain that almost all analysts express their genuinely-held personal views in their research reports, I am equally certain that almost all of them factor their firm's interests into those genuinely-held personal views. Ever since the repeal of Glass-Stegal, this has been a problem of varying magnitude, dependent -- in large measure -- on the relative turbulence of the markets. Increased trubulence tends to lead to more superlative opinions, in my experience -- especially the opinions about companies for which that firm has recently put a good-sized chunk of its reputation (and client-base) on the line.

Somehow, saying a firm "does business" with Schering-Plough doesn't quite cover the idea that the firm may have close to $800 million (of its clients' money, and therefore, its own reputation) on the line, and may have each earned over $50 million in commissions, selling the same securites. "Doing business" seems a tad pale for those sorts of stakes (over $100 million, just in the original-issue commissions, to the group). But you take a look for yourself -- and then decide: Are these analysts really "independent"? That question is not, to my eye, resolved by simply answering that the analyst is offering his or her "genuinely-held" opinions.

In each case, click to enlarge the page:

One of the suits now under judicial review for consolidation with the rest of the MDL federal docket -- related to the putative Schering-Plough securities class actions -- names all of the above Wall Street firms as defendants in its Sections 11, and 12(a)(2) claims. See Akansas Teacher Retirement System, et al. v. SCHERING-PLOUGH CORPORATION, FRED HASSAN, ROBERT J. BERTOLINI, STEVEN H. KOEHLER, SUSAN ELLEN WOLF, HANS W. BECHERER, THOMAS J. COLLIGAN, C. ROBERT KIDDER, PHILIP LEDER, M.D., EUGENE R. MCGRATH, CARL E. MUNDY, JR., ANTONIO M. PEREZ, PATRICIA F. RUSSO, JACK L. STAHL, KATHRYN C. TURNER, ROBERT F.W. VAN OORDT, ARTHUR F. WEINBACH, GOLDMAN, SACHS & CO., BANC OF AMERICA SECURITIES LLC, BEAR, STEARNS & CO. INC., CITIGROUP GLOBAL MARKETS INC., MORGAN STANLEY & CO. INCORPORATED, BNP PARIBAS SECURITIES CORP., J.P. MORGAN SECURITIES INC., CREDIT SUISSE SECURITIES (USA) LLC, DAIWA SECURITIES AMERICA INC., SANTANDER INVESTMENT SECURITIES INC., UTENDAHL CAPITAL PARTNERS, L.P., THE WILLIAMS CAPITAL GROUP, L.P., BANCA IMI SPA, BBVA SECURITIES INC., ABN AMRO ROTHSCHILD LLC, BNY CAPITAL MARKETS, INC., ING FINANCIAL MARKETS LLC, AND MIZUHO SECURITIES USA INC., Case 2:08-cv-01720-DMC-MF (US Dist. Ct., NJ Dist. Filed April 9, 2008); Complaint also filed as Exhibit D, to Document 27, in Case No. 2:08-cv-00397-DMC-MF (US Dist. Ct., NJ Dist. Filed April 7, 2008). More on that case, shortly linked above.

Until then, be careful out there!

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