Stock analysts undergo scrutiny

Gannett News Services

WASHINGTON — A congressional panel investigating conflicts of interest among Wall Street analysts told the industry it must try harder to clean up or face new government regulations.

During the stock market boom of the 1990s, many consumers took advice from analysts who owned stock in the companies they covered or or whose pay was based on how much money their firm made.

Since then, stock market losses have piled up, and some say analysts are partly to blame.

"In a bull market, they appear to be brilliant," said Matt Winkler, editor in chief of the financial news service Bloomberg News. "When the market stumbles, they're scapegoats for every investment that soured."

But lawmakers say personal fortunes are at risk. And the stakes, already high, could climb higher still if Congress adopts President Bush's plan to privatize a portion of Social Security. Under that scenario, as many as 160 million customers — nearly a quarter functionally illiterate — could turn to the stock market to invest their retirement money, said Rep. Paul Kanjorski, D-Pa.

"What is at risk is a person's retirement and therefore a person's financial security and fortune," said John LaFalce, D-N.Y. "Like any profession that requires trust by the public, conflicts need to be minimized or eliminated, not simply disclosed."

LaFalce wrote to Laura Unger, acting chairwoman of the Securities and Exchange Commission, urging a ban on securities analysts' owning or having an interest in stocks they cover.

Testifying before the panel, Unger cited a recent SEC examination that showed 16 of the 57 analysts who were reviewed bought stock in companies they later covered before the initial public offering.

More troubling to some members of the panel was the SEC's finding that three of the analysts made profits ranging from $100,000 to $3.5 million by betting against their public opinion on the company.