Skirmishes between companies and investment analysts are nothing new. The dubious practice of blacklisting analysts who don’t furnish companies with favorable ratings – which involves telephone calls going unreturned and analysts being excluded from important presentations – still occurs.
But two recent events may conspire to take this kind of squabbling to a whole new level. In January a Paris court ruled Morgan Stanley had shown gross misconduct in its research into French luxury goods maker Louis Vuitton (LVMH). And management service provider Sodexho Alliance has announced it may seek damages from Citigroup Smith Barney over one of the bank’s reports.
LVMH had a number of grievances against the Morgan Stanley research which, it claimed, continually cast it in a bad light against its rival Gucci. The bias supposedly stems from Morgan Stanley’s role as advisor to Gucci in 1999, when Gucci was defending itself against an attempted takeover by LVMH.
During the court case, the judge placed much emphasis on New York attorney general Eliot Spitzer’s probe into the Chinese walls that separate banking and research – and Morgan Stanley’s subsequent settlement with Spitzer in April 2003.
‘What is absolutely fundamental for us is the question of Chinese walls,’ says a spokesman for LVMH. ‘We want to be followed only by analysts who are independent of corporate activity’. Morgan Stanley certainly won’t be following LVMH anymore – it suspended coverage soon after the ruling, stating that it was now impossible for it to express its true convictions.
Domino effect?
But the big question is whether the ruling will encourage other public companies, particularly in Europe, to take similar legal action. Immediately after the judgment, Sodexho approached the French regulator over an error in one of Citigroup Smith Barney’s research reports. The error was corrected in a subsequent report, but Sodexho says it reserves its right ‘to seek appropriate redress’ for the negative impact on its share price.
Both disputes relate to French companies under French law, so it is generally believed that neither will set a trend outside France. Matthew Saunders, litigation partner at British law firm DLA, believes a similar outcome would be unlikely in the UK, largely because the approach to defamation law is very different.
Saunders also considers arbitration to be a better option in most cases. Arbitrators can be experts on capital markets, disputes are resolved behind closed doors and the outcome is readily enforceable worldwide through global legal agreements.
His view is shared by the Association for Investment Management and Research, which says litigation should only be considered as a last resort. AIMR suggests a number of ways public companies can deal with inaccuracies in a research report, including speaking directly to the analyst, posting a rebuttal on the company web site, contacting the director of research of the firm, or going to the regulatory bodies.
Institutional concerns
The LVMH and Sodexho cases have already put European-based institutions on higher alert about the information they provide. According to some insiders, this may come at the expense of good analysis if analysts feel restricted in their ability to offer valid criticism and – in extreme cases – to blow the whistle on corrupt corporate practices.
Small wonder, then, that analysts are often reluctant to put sell recommendations on certain continental European firms, leaving money managers to read between the lines to ascertain their true stance.
‘It appears as though this decision might interfere with the proper working of the analytical process, and hence the market itself,’ says one unnamed supervisory analyst at a US investment bank. ‘If the decision is upheld and there are no special circumstances, Anglo-Saxon analysts will be very cautious in their analysis of French companies. Ultimately, French investors may not get the best research, and French stocks may be avoided.’
