When Wall Street analysts were caught skewing stock ratings to win investment banking business for their firms in the late 1990s, regulations were put in place to try to stamp out the practice.
But a new case suggests the practice of analysts pumping up stock recommendations hasn’t been fully resolved. And it suggests there’s another possible motive for misconduct, with an analyst allegedly rigging ratings in hopes of maximizing his access to a company he covered.
On Wednesday, the US Securities & Exchange Commission pulled back the curtain on the practice and accused former Deutsche Bank analyst Charles Grom of “certifying a rating on a stock that was inconsistent with his personal view.”
Grom, who covered the discount chain Big Lots, grew pessimistic about the company’s prospects after hosting their executives at an event in March 2012, and passed along his views to hedge-fund managers, who subsequently dumped their shares, the SEC said. But the next day, Grom reiterated his public “Buy” rating on the shares.
The SEC statement reports:
“During an internal conference call with Deutsche Bank’s research and sales personnel within hours after the publication of his report, Grom said, among other things, that he had maintained a ‘Buy’ rating on Big Lots because we just had them in town so it’s not kosher to downgrade on the heels of something like that.”’
In an internal conference call, Grom later said he didn’t want to downgrade Big Lots in order to maintain his relationship with the company, the SEC said.
Deutsche Bank, which terminated Grom in 2013, declined to comment. Attempts by Quartz to reach Grom were unsuccessful. He didn’t admit or deny the SEC’s charges, but agreed to settle them by paying a $100,000 fine and being suspended from the securities industry for one year.
Of course, analysts have always seemed to go out of their way to avoid slapping a “Sell” rating on a stock. During the height of the internet bubble in 2000, sell recommendations made up only 2% of all recommendations, according to one analysis. After the Enron and MCI Worldcom accounting scandals led to a crackdown, the number of “Sells” soared to 17% in 2003. But over the years, they’ve fallen again, and an analysis of 11,539 ratings on S&P 500 companies in January by Factset showed just 5% of all ratings were “Sell.” Even in the battered energy sector, only 9% of the ratings were “Sell.”
Grom is hardly the first analyst to run afoul of regulators. In 2003, 10 investment banks paid almost $900 million to settle an investigation led by then-New York Attorney General Elliot Spitzer into shady practices by their research divisions.
Back then, poor behavior from analysts resulted in a number of high-profile cases. Among the most famous is Henry Blodget, who was fined $4 million and permanently barred from the securities industry for, in part, issuing positive public reports for companies he had a negative private view on. (Blodget went on to found Business Insider). Another analyst, Citi’s Jack Grubman, upgraded his rating on AT&T as a favor to Citigroup chairman Sandy Weill, in exchange for Weill using his influence to get Grubman’s children into an exclusive Manhattan preschool, according to the SEC.
The Sarbanes-Oxley Act of 2002 was intended to rein in these abuses by making analysts disclose any conflicts of interest.
But it’s not clear if their employers got the message: According to the SEC, nearly 10% of Grom’s performance review at Deutsche depended on how much access he had to the executives of the companies he rated.