Subject: [NEXTEL-1] SEC Takes Aim at Companies That Retaliate Against Analystsm 'You Don't Like Our Stock?You Are Off the List'

From: [email-masked]
Date: Thu, 19 Jun 2003 15:26:53 -0400

SEC Takes Aim at Companies That Retaliate Against Analystsm 'You Don't Like Our
Stock?You Are Off the List'

By DEBORAH SOLOMON and ROBERT FRANK
Staff Reporters of THE WALL STREET JOURNAL

Federal securities regulators are launching a new front in their battle to lessen
conflicts involving stock analysts.

The Securities and Exchange Commission is taking aim at corporations that
retaliate against Wall Street research analysts who issue negative stock
recommendations, regulators say. In April, the SEC sent a letter to the New York
Stock Exchange, the Nasdaq Stock Market and the American Stock Exchange asking
them to consider crafting new standards to prevent corporations from pressuring
analysts.

The move highlights a widespread problem in the world of stock research, and one
that has fallen through the cracks of the regulatory reforms on Wall Street.
Securities regulators recently reached a $1.4 billion settlement with major
securities firms and instituted structural reforms to end stock-research
conflicts. Left out of the equation, however, was corporate retaliation, where
companies restrict information to analysts who issue negative reports.

Rather than launch an investigation, the SEC is asking the major stock exchanges
to consider rules to address the issue. In the letter, the SEC's director of
market regulation, Annette Nazareth, said listing standards "may provide the
simplest remedy for this problem" and asked for a response by the end of July.
Listing standards require issuers that list their shares on a stock market to
follow certain rules or face being bumped from trading on that exchange. The NYSE,
Nasdaq and Amex set their own listing standards but the SEC must approve them.

"It's an issue that's certainly been raised and there's some concern about it,"
Ms. Nazareth said. An NYSE spokesman said "we're reviewing the issue and will
respond to the SEC." A Nasdaq spokeswoman said its listing, hearing and review
council -- which creates and reviews listing standards -- will study the issue. An
Amex spokeswoman declined to comment.

The review promises to shine a spotlight on a hotly disputed issue on Wall Street.
Even as the guidelines for analysts have changed significantly in recent months,
little has changed at the companies they cover when it comes to research. Analysts
say companies still expect positive research from the "sell" side analysts, while
negative research is often met with retaliation.

Analysts who issue negative reports are at times cut off conference calls, left
out of management presentations and threatened by management. Regulators fear that
such retribution could result in overly bullish stock recommendations, while
companies say they are merely defending their stocks against negative attacks.

Some say recent new regulatory rules splitting investment banking from stock
research could even exacerbate the problem. The rules could help over time, but
"another potential result is that corporate pressure will just shift from,
perhaps, the more effective route of going to investment banking and their
employers to other kinds of retaliation," says Patricia Walters, senior vice
president of professional standards and advocacy at the Association for Investment
Management and Research, an analyst trade group.

At the core of the debate is access to information. To produce accurate research,
analysts need frequent access to the management of the companies they cover. By
cutting off an analyst from the information flow, or not returning calls,
companies can force an analyst to change coverage or drop the company from
research.

The practice, which has long been common on Wall Street, caught the SEC's
attention as the agency conducted its probe into Wall Street conflicts of
interest. In April, the SEC and other regulators settled charges with 10
securities firms accused of issuing overly optimistic research in a bid to secure
investment-banking business. The firms agreed to pay the $1.4 billion and separate
their analyst and investment-banking functions to avoid conflicts. During that
investigation, analysts told the SEC they routinely face corporate pressure to
issue positive stock recommendations.

The SEC lacks authority to address the problem directly because it is primarily a
disclosure and enforcement agency and doesn't issue rules governing corporate
behavior. Public companies are governed primarily by state law and standards set
by the markets where their shares are listed. The SEC's selective disclosure rules
prevent companies from giving information to just certain analysts or individuals.
But the rules don't prevent a company from more subtle forms of blackouts, such as
returning a call two weeks late or not inviting an analyst to "private" meetings
that may also include other analysts.

Still, securities regulators believe the problem is widespread, said people
familiar with the matter. While the agency's concern wasn't prompted by any
particular company's behavior, there have been some high-profile instances of
retaliation that may have helped catapult the issue. Last year, an executive of
Qwest Communications International Inc. testified before a Congressional committee
that Qwest began to shut out Morgan Stanley after two of its analysts issued a
bruising report that questioned Qwest's accounting. Robin Szeliga, Qwest's finance
chief when the report was issued, testified that after the report, Qwest wouldn't
consider Morgan Stanley for significant investment-banking work. Qwest's former
chief executive, Joseph Nacchio, also publicly derided the analysts and questioned
the integrity of their work. Morgan Stanley's analysts continued to downgrade
Qwest's stock and put a "sell" rating on the company as its accounting came under
SEC scrutiny and its revenue fell. The firm hasn't gotten any financing business
from the telecom concern since its report.

Some cases are more blatant. Heather Jones, an analyst with BB&T Corp.'s BB&T
Capital Markets, downgraded Fresh Del Monte Produce Inc., a produce company. Ms.
Jones cited risks from litigation against the company as well as weakness in some
of the company's core businesses. On the day of her downgrade, the company's stock
fell more than 10%.

In a February 2003 conference call with the company, Ms. Jones asked a question
about pricing, and the company chief executive, Mohammad Abu-Ghazaleh, said: "Let
me tell you Heather, one thing please. You are covering us without our will and we
would not like you to ask questions on this conference call, if you may,"
according to a transcript.

Ms. Jones asked why, and Mr. Abu-Ghazaleh said: "We don't want you to ask
questions. You can make your own conclusion. You can cover us the way you want,
but you have not been covering us in any objective way and we thank you for being
on this call, but we don't like to answer your question," according to the
transcript of the call.

Ms. Jones said she was "surprised" by the action. She said she was even more
surprised, however, when Fresh Del Monte named her in a lawsuit a month later. A
part of a complicated dispute with the company's former owners, Del Monte Fresh
filed a suit in State Supreme Court in New York in March, charging that certain
businesspeople were part of a "conspiracy" that caused the company's stock to drop
precipitously.

Ms. Jones is not named as a defendant. Yet in its complaint, the company alleges
that Ms. Jones and other businesspeople "have been acting in concert in a
calculated effort to reduce the market value of [the company's] stock" by
publicizing an earlier lawsuit against the company.

A spokesman for Del Monte confirms the transcript of the conference call but
declined further comment. The company also declined further comment on the lawsuit
naming Ms. Jones.

BB&T said it is "very pleased with the professional research that Heather Jones
does with BB&T Capital markets. We stand behind her 100%. To the best of our
knowledge, Heather does not know and has never met or talked with any of the
people named as co-conspirators in the lawsuit."

The pressure can take different forms. Last fall, Thomas J. Lee, a J.P. Morgan
Chase & Co. telecommunications analyst, released a report examining, among other
issues, how Nextel Communications Inc. was accounting for the number of customers
leaving its service and questioning whether the nation's fifth-largest wireless
carrier was low-balling its bad-debt expenses. Within hours, Nextel's chief
financial officer, Paul Saleh, was on the phone to Mr. Lee's boss, the head of
J.P. Morgan's North American research, accusing the analyst of faulty work.

Nextel's general counsel, Leonard Kennedy, meanwhile, called Bill McDavid, J.P.
Morgan's general counsel, accusing Mr. Lee of leaking the contents of his report
to select investors before the report was published and released to all J.P.
Morgan research subscribers. A Nextel official said all analysts are entitled to
their opinions and "that's healthy." The company said it "only has objections to
reports that are based on inaccurate facts and therefore are negatively skewed."

Write to Deborah Solomon at [email-masked] and Robert Frank at
[email-masked]
Updated June 19, 2003

http://online.wsj.com/article_email/0,,SB105597155452146700,00.html?

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