Spitzer Roasts Stock Analysts at Awards Ceremony By IndexFunds.com Staff November 14, 2002

Imagine being invited to an award banquet only to find out later the main course is . . . you. That's exactly what happened to Wall Street analysts at the annual ceremony for Institutional Investor magazine's "All-Star Research Team" awards earlier this week.

Eliot Spitzer, the New York attorney general who is also on the short list of candidates to replace former SEC chairman Harvey Pitt, accused Wall Street firms of improperly publicizing the awards as a measure of stock-picking prowess in a speech at the ceremony. It was the latest move in his campaign to expose conflicts of interest in Wall Street research and analysts.

Spitzer cited a study conducted by Investars, an independent research group that monitors the performance of analyst stock ratings, that analyzed recommendations made by over 400 analysts ranked highly by Institutional Investor magazine. The study found that only two of over 150 analysts selected by the magazine ranked first in their industry sector in terms of performance of stock recommendations. Also, about 40% of "first team" analysts performed worse than the average analyst in his or her sector. Curiously, a significant portion of the "first team" analysts underperformed their peers who were rated below them by Institutional Investor.

Spitzer's beef is not with the awards themselves, but rather with the fact that investment banks use the awards to tout their analysts as superior when marketing to individual investors. According to Spitzer, the deception is compounded by the fact that analyst performance is not made available to the public.

"Banks use the Institutional Investor All-Star designations to improperly convey to individual investors that their stock picking has garnered awards," said Spitzer in his address.

Institutional Investor countered Spitzer's remarks by pointing out that stock selection is only one of several criteria used to judge top analysts, and that it can't control how the awards are used by recipients - in this case as sales tools.

To prevent potential individual investor confusion, Spitzer suggested that analyst recommendations should be made public after 90 days. Furthermore, he said historical recommendations should be available so investors can track analyst performance.