JP Morgan: Analysts must seek approval from companies and investment bankers before changing their recommendations on stocks

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Nothing like letting the fox rule the henhouse:

03/21 12:31 J.P. Morgan to Show Research to Clients, Bankers (Update2) By Stephanie Baker-Said

London, March 21 (Bloomberg) -- J.P. Morgan Chase & Co.'s head of European research told his analysts they must seek approval from companies and investment bankers before changing their recommendations on stocks.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOrjlhBOYSi5QLiBN ``Advance copies of the complete research note must be sent to both parties,'' Peter Houghton said in the memo. ``If the company requests changes to the research note, the analyst has a responsibility to either incorporate the changes requested or communicate clearly why the changes cannot be made.''

The standard policy of providing independent advice from analysts is under pressure at securities firms as investment bankers produce a growing share of profits. At many firms, bankers typically use analysts as salespeople to help win underwriting and mergers business. As a result, investors are calling into question the objectivity of their research.

``Most analysts aren't going to jeopardize their jobs'' by violating the rules of their firms, said Marvin Roffman, president of Roffman Miller Associates, a research company in Philadelphia.

The policy isn't designed to give bankers and companies the power to change research reports, said Nick O'Donohoe, head of European equities. The practice applies to J.P. Morgan analysts worldwide.

``The single biggest job we face is pushing back companies and sometimes bankers who try to influence our recommendations,'' O'Donohoe said in an interview. ``We never change a recommendation on the basis of a company's request or a banker's request.''

`Downgrade Note'

The policy isn't an ``approval process, but a communication process,'' according to the note, which was sent last week to European analysts and senior managers in investment banking and equity sales.

J.P. Morgan is requiring investment bankers to inform the managing editor of research, Barbara Pollock, that ``they've seen the copy of the downgrade note and have no issues with it,'' according to the memo, which was disclosed earlier by the Times of London. ``It is the analyst's responsibility to chase the banker to make sure this happens quickly.''

``From our perspective it appears there is a growing trend for analysts' recommendations to be driven by corporate objectives, rather than it being a matter of first giving best advice to institutions,'' said Nigel Lanning, who helps manage $38.6 billion at Dresdner RCM Global Investors in London.

Joseph Evangelisti, J.P. Morgan's spokesman in New York, referred questions related to the memo to officials in London.

O'Donohoe said the procedure is aimed at ensuring the bank communicates with clients. ``We don't want a situation where chief executives of companies learn about recommendation changes other than from us,'' he said. ``The right person to make that call is the banker who knows the CEO.''

Lost Jobs

J.P. Morgan's European research division ranked eighth in the 2001 survey of fund managers by Reuters and Tempest Consultants, down from sixth last year.

Reviewing research with companies and investment bankers is standard procedure at investment banks, said Alan Webborn, an analyst at Kelton International, an independent research firm owned by employees.

``Investment banks take care that they don't upset their clients,'' Webborn said.

Orange Plc, the wireless company, in December said it would only give financial information to independent analysts covering its initial public offering if they let the company view their research in advance of publication.

In the U.S., some analysts have lost their jobs over recommendations. Roffman was asked to leave Janney Montgomery Scott in 1990 after predicting that Donald Trump's Taj Mahal Casino would be overburdened by its debt. Roffman has started his own research firm in Philadelphia.

``Wall Street is the antithesis of how we operate,'' Roffman said in an interview. ``We set up our business so there is no conflict of interest.''

Few Sell Recommendations

Analysts rarely recommend investors sell a company's stock. Only 1.3 percent of the 26,600 recommendations tracked by Thomson Financial/First Call are ``sells'' or ``strong sells.'' By contrast, 31 percent are ``strong buys,'' 38 percent are ``buys'' and 30 percent are ``holds.''

Michael Mayo, a bank analyst at Credit Suisse First Boston ranked No. 2 last year by Institutional Investor magazine, was fired in October following the bank's purchase of Donaldson Lufkin & Jenrette Inc. Mayo drew attention when he put ``sell'' ratings on four banks in May 1999.

CSFB replaced him with Susan Roth, a DLJ analyst who ranked third in the survey. Mayo now works at Prudential Securities Inc. where he rates nine stocks as ``sell.'' Roth rates four stocks ``buy'' and has 10 ``hold'' ratings.

Victoria Harmon, a spokeswoman at CSFB, said it has no policy similar to what's being imposed at J.P. Morgan. Goldman Sachs Group Inc. spokesman Ed Canaday declined to comment.



-- Carl Jenkins (somewherepress@aol.com), March 21, 2001


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