The bloomberg coverage gives a bit of background on the analyst. Even though there is supposed to be a "Chinese wall" between analysts and the investment banking side there always has been, and continues to be, politics involved in what an analyst can say.
This is illustrated from this quote from the linked article:
> Despite those concerns, the agency said, he maintained his “buy” rating and told colleagues on an internal call that “we just had them in town, so it’s not kosher to downgrade on the heels of something like that.”
The tension has always been how to allow analysts to say what then mean about companies while at the same time keeping the company happy so that they can earn investment banking fees from the same company for things like debt raises or new issues.
Its very hard to convince a company to use your services while ignoring an negative rating by an analyst.
Unfortunately this leads to getting a lot of double speak form analysts where they might say one thing public ally but another thing privately to the buy side, after all its usually the end game of a good analyst is usually to get a job on the buy side. And you do that by creating a track record of being able to pick alpha long and shorts.
TL/DR Don't trust written reports by analysts. Trust slightly more what they tell you over the phone. Trust completely what they tell you in a job interview.
"The tension has always been how to allow analysts to say what then mean about companies while at the same time keeping the company happy so that they can earn investment banking fees from the same company for things like debt raises or new issues."
I don't see the difficulty. It's very easy, you avoid the conflict by don't pretending to be objective in an issue where the company that pay your salary have "skin in the game".
It's what people and companies do in the real world.
You don't ask divorce advice to your layer if he is also your brother in law. You call an external audit for your finances, don't allow the accounting department do the auditing (and even that doesn't work). You don't ask investment advice about a company to the guys that receive periodically money from that company.
So the reason why this doesn't happen the way it should - analysts being completely divorced from the "skin in the game" folks - is because there's a ton of money involved and the buy side people tend to baby deals along. My 1000 foot understanding is that companies are structured (on paper any way) such that a broker/sales guy sets up a deal, then passes it off to underwriters who take a good hard look at what's going on - basically making sure the deal is a) on the up and up and b) will preform as predicted. They rely on data from analysts. The problem is that many large banks own all the pieces - it's cheaper to have it all in house. This means the sales guy can cook something up, and follow it all the way through the pipes threatening, cajoling, and generally pushing it through. All these finance guys are rewarded for success, everyone is already biased to see the rosy side of things, and when you've got someone talking it up, it's a lot easier to ignore the bad numbers and only see the good.
Public company management teams consistently meet with sell-side analysts (that is the analyst's job in this case) and with mutual fund managers. When he said "we just had them in town" he very, very likely meant that management met with him and his other sell-side analysts. That has nothing to do with investment banking relationships or the "Chinese wall".
If a sell-side analyst throws a management team under a bus publicly, often times the management team won't visit the analyst. That makes it hard for the analyst to do his or her job since they cannot ask questions about the company.
It is a big issue, but not the issue you bring up.
I'm pretty sure it's the same rule that outlaws insider trading. If the analysts and investment bankers talked to each other they could potentially cook up some crazy schemes:
"Hey Joe, I just invested someone's money in company X. Can you upgrade them to a BUY rating?"
"Sure thing Bill, what's my cut?" "10% of the increase?" "Sure, sounds fair."
Or another scheme:
"Hey Joe, GM is a big client and is starting to get a little worried about TESLA. Can you downgrade them?"
"Sure thing Bill, let's put Elon in his place and keep our big clients happy."
For instance, the investment banker who gives merger advice to a company and is privy to their deal plans can't turn around and give info to the bank's traders...the research analyst primarily serves sales and trading and is client-facing to the buy side so is on the other side of the wall from investment banking.
I thought this was all fixed in 2002? I was at Citi when these issues first came up. We had to work like DOGS to get the necessary conflict of interest disclaimers added to all reports.
The problem here is that "analyst" is not a profession, with a body able to support anyone who steps out against their employer/other financial relationship.
This guy kept himself employed, and betrayed a trust.
If Deutsche had to go to as much effort to fire him as they would to fire a bank auditor, then he would be confident enough to say what he means. That's why it's hard to fire certain roles
Edit
Someone else makes the very good point - don't get advice on a company from people being paid by that company
This stuff used to happen a lot back in the first dot com bubble. The poster child at the time was Henry Blodget:
... Merrill Lynch e-mails in which Blodget gave
assessments about stocks which allegedly conflicted
with what was publicly published
Blodget agreed to a fine and a lifetime ban from the securities industry.[1]
But don't feel too sorry for Blodget. He later founded Silicon Alley Insider, which became Business Insider, which was eventually sold for over $343 million. Henry probably made out OK on that.[2]
You edited the headline to make it sound like some kind of thoughtcrime.
The analyst came out of a non-deal roadshow meeting, told his proprietary traders to sell everything, told his top hedge fund clients to sell, maintained the buy rating, told his colleagues he maintained the buy rating to keep the investment banking relationship.
16. On March 28, 2012, Grom and DBSI hosted Big Lots’ Chief Executive Officer and
Senior Vice President of Finance at a non-deal roadshow (“NDR”) at DBSI’s Boston office.
Beginning at about 7:30 a.m. and continuing until about 3:15 p.m., the Big Lots executives held
private meetings with DBSI clients. Grom attended all of these meetings.
17. Before the NDR, Grom was bullish on Big Lots: he believed the company’s first
quarter financial performance, particularly its first quarter comparable store sales, would be strong,
with comparable store sales “up four or five, maybe six percent.” At some point early during the
NDR, Grom’s view changed and he ultimately concluded that Big Lots’ first quarter comparable
stores sales would increase by only two to three percent, a significant shift in Grom’s view. Grom
believed, and his financial models reflected, that even a one percent change in Big Lots’
comparable store sales could significantly impact its earnings per share. Grom became particularly
concerned during the NDR when Big Lots’ executives made what Grom believed to be cautious
comments about Big Lots’ consumables business, which comprised approximately twenty-five to
thirty percent of Big Lots’ total sales at the time.
18. At 8:51 a.m. on March 28, 2012, shortly after the first NDR meeting had ended,
Grom called the DBSI trader responsible for trading Big Lots’ stock. At 9:31 a.m., within a minute
of the market opening, the trader placed an order to sell 25,000 shares of Big Lots’ stock, which he
had purchased the day before in a firm proprietary account.
19. In the early afternoon on the day of the NDR, Big Lots’ Chief Executive Officer
abruptly asked Grom whether he was going to downgrade Big Lots stock. At 1:23 p.m., Grom
emailed one of his junior analysts back in New York, simply stating, “this is gonna be hard.”
Three minutes later, the junior analyst responded, “uh oh.” At 1:26 p.m., Grom sent the junior
analyst another email, stating, “[p]retty clear that biz is just ok.”
20. Beginning within minutes after the NDR had ended, Grom communicated with
several DBSI clients, including Hedge Fund A, Hedge Fund B, Hedge Fund C, and Hedge Fund D.
After talking to Grom, all four of these DBSI clients subsequently sold their entire positions in Big Lots stock
[details of sales omitted]
22. On March 29, 2012, Grom issued a research report on Big Lots entitled “Not All Is
Good In Buckeye Land,” in which he reiterated his BUY rating. As required by Regulation AC of
the Exchange Act, Grom signed an Analyst Certification that was included at the end of the report,
which stated: “The views expressed in this report accurately reflect the personal views of the
undersigned lead analyst(s) about the subject issuer and the securities of the issuer.”
23. On March 29, 2012, at 7:30 a.m., roughly two hours after his Big Lots research
report had been publicly disseminated, Grom spoke about Big Lots on the DBSI morning
conference call with firm research and sales personnel. Grom said that he had maintained a BUY
rating on Big Lots because “obviously that we just had them in town so it’s not kosher to
downgrade on the heels of something like that.” Grom also said, “[B]ut more importantly than
that, I think there’s obviously time left in the quarter” and that he and his team was “gonna do our
homework on it” and “gonna be in front of ‘em.”
24. Less than a month later, Grom repeated his assertion that he had not downgraded
Big Lots on March 29, 2012 because he wanted to maintain his relationship with Big Lots’
management.
Yep. Or at least say "they charged the analyst with saying something he was himself thinking not true" - if you really don't want to use the quite clear headline that SEC provides: SEC: Deutsche Bank Analyst Issued Stock Rating Inconsistent With Personal View
In colloquial use, we would say the analyst was fired for lying.
If your job is making predictions, then surely your performance can easily be measured by the outcomes of those predictions. That way, not saying what you think would hurt your bonus or your company's reputation through poor performance. Perhaps that's only effective at combating widespread dishonesty and an isolated case like this wouldn't affect his overall accuracy much.
This is illustrated from this quote from the linked article:
> Despite those concerns, the agency said, he maintained his “buy” rating and told colleagues on an internal call that “we just had them in town, so it’s not kosher to downgrade on the heels of something like that.”
The tension has always been how to allow analysts to say what then mean about companies while at the same time keeping the company happy so that they can earn investment banking fees from the same company for things like debt raises or new issues.
Its very hard to convince a company to use your services while ignoring an negative rating by an analyst.
Unfortunately this leads to getting a lot of double speak form analysts where they might say one thing public ally but another thing privately to the buy side, after all its usually the end game of a good analyst is usually to get a job on the buy side. And you do that by creating a track record of being able to pick alpha long and shorts.
http://www.bloomberg.com/news/articles/2016-02-17/ex-deutsch...
TL/DR Don't trust written reports by analysts. Trust slightly more what they tell you over the phone. Trust completely what they tell you in a job interview.