Latest Wall Street Lies Expose the Danger with Analyst Reports

Some Wall Street lies can harm individual investors much worse than others - this came to light again just last week...

That's when the Financial Industry Regulatory Authority (FINRA) slapped a $15 million fine on Citigroup Inc. (NYSE: C) for giving privileged clients a much different opinion of certain stocks than the bank published in its reports.

wall street lies in 2014FINRA said these special clients were invited to "idea dinners" where Citi analysts would offer their favorite and least favorite stock picks. That would have been fine, except what was said about those stocks frequently contradicted what Citi had said publicly.

What's more, the opinions expressed at the dinners rarely, if ever, were disclosed to the public.

While Citi agreed to pay the fine, it neither admitted nor denied doing anything wrong.

Assuming the Citi analysts gave their honest views to the folks at the dinners, that means they were playing all other investors for suckers.

And this latest Citi transgression is far from an isolated incident...

Citi's History of Wall Street Lies

Wall Street liesRegulators had fined Citi three previous times in the past three years for research-related violations. Citi analysts have been hosting idea dinners since at least 2010, but the bank only made half-hearted attempts to curb them.

Instances of analysts failing to provide research to all clients at the same time - as regulations require - goes back at least to 2005.

FINRA said the bank issued 100 internal warnings to analysts from January 2005 through this February for violating the policy. And yet they kept doing it.

And it wasn't just weak enforcement that drove this rule-breaking behavior...

Citi didn't try too hard to stop its analysts from giving preferred clients better, more accurate research because that's how you keep rich clients happy.

Clients with fat portfolios tend to trade a lot more than your average investor. They bring the investment bank more money. To ensure analysts keep these customers active, about half of analysts' pay at Citi is based on feedback from such clients.

FINRA explains: "This compensation structure ... created an incentive for [Citigroup] equity research analysts to engage in inappropriate communications with clients, including providing non-public research information to clients before the research was published."

Unfortunately for investors, avoiding the worst of Wall Street is not as easy as avoiding published Citi research reports...

FINRA's Wall Street Fine List

At least seven banks are currently in FINRA's sights for various research-related violations. In many of these cases, analysts are accused of inflating stock estimates to boost sales.

Banks expected to get hit with fines include JP Morgan Chase & Co. (NYSE: JPM), Goldman Sachs Group, Inc. (NYSE: GS), Bank of America Corp. (NYSE: BAC), Credit Suisse Corp. AG (NYSE ADR: CS), Deutsche Bank AG (NYSE: DB), and Wells Fargo & Co. (NYSE: WFC).

This will be repeat offense for Goldman. The firm paid a $22 million fine in 2012 for tipping preferred clients to upcoming research report changes. Like Citi's idea dinners, Goldman analysts held weekly "huddles" with select clients.

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To be sure, not all investment bank analysts tell these Wall Street lies. But you only need a few bad apples to wreck the credibility of the whole bunch...

The problem remains - and always has been - that regulators don't scare Wall Street out of telling lies. In the Wall Street world, risk is routine. The fines that come from defiance are just part of the cost of doing business.

That's why no regulator can stop big investment banks from treating the average investor like cannon fodder.

Consider this: Back during the dot-com boom, the investment banks got caught manipulating their research reports to curry favor with companies with which they did business, among other transgressions. After years of investigation, the U.S. Securities and Exchange Commission (SEC) imposed $1.4 billion in fines on 10 Wall Street banks and wrote several new rules.

Yet here we are, more than a decade later, and the Wall Street lies haven't stopped. True, the big banks have taken steps to avoid violating the letter of the 2003 rules. But the banksters are devilishly creative.

"Citi takes its regulatory compliance obligations seriously, and we believe that we have strong procedures and controls in place to address the issues that FINRA has raised," Citigroup said in a statement.

Well, Citigroup, you know what they say: Talk is cheap.

The Bottom Line: This is another reminder that investors need to look at investment bank research with a wary eye. Citi's latest fine proves how little the big banks care about publishing bad investment advice so they can curry favor with wealthier clients. That means investors can't trust stock research reports from these banks.

 

More on Banks Behaving Badly: The U.S. Senate conducted hearings last week on whether the big banks should be restricted from trading physical commodities such as oil and metals. The reason? The banks can't seem to resist manipulating these markets for their own gain. And now science can explain why they do such things...

Follow me on Twitter @DavidGZeiler.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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