NEW YORK-If the overall stock market advance is to continue, securities analysts must recognize their right and discharge their duty to speak fully and frankly about companies they cover, according to one person who covers the high-tech industry.
“Analysts can say pretty damn near what they want to,” James C. Goodale said at a recent New York Society of Security Analysts presentation titled “The Rights of Analysts to Say What they Really Think.”
Goodale is a founding member of the 40-member media and communications group of Debevoise & Plimpton, a New York law firm. He also hosts “The Telecommunications and Information Revolution,” a weekly program airing on public TV in New York.
“I am not a bubble person, having worked in high-tech for many years, but as a matter of history, this market won’t last forever,” he said.
“One way to avoid a crash is to have lots of information out there, not just buy and hold recommendations. I see very few sell recommendations.
“If analysts don’t exercise the full extent of their freedoms, especially when stocks are so high … if analysts won’t do it, who will?”
Goodale was vice chairman and general counsel of The New York Times until 1980. During his tenure, the U.S. Supreme Court rendered its landmark 1963 libel ruling in the case of The New York Times v. Sullivan.
“The Supreme Court changed the rule of libel for reporters and others similarly situated, i.e. (securities) analysts, giving more rights, being more liberal in what reporters can get away with saying,” he said.
“In many cases, you don’t even have to ask the company. In order to be sued successfully for libel, you must have known beforehand or you were so intentionally careless or reckless that you should have known beforehand.”
Securities analysts are subject to rules imposed by stock exchanges and the Securities and Exchange Commission designed to prevent dissemination of misleading information.
However, securities analysts enjoy certain protections against libel lawsuits not accorded to reporters because “opinion is more insulated than statements of fact,” Goodale said.
Nevertheless, he added, “maybe we can tolerate some carelessness on the part of reporters, but we can’t on the part of financial analysts.”
Being right and enjoying libel lawsuit protection do not guarantee employment, however. One analyst for a California securities firm lost his job because he refused to retract his opinion that a casino would go bankrupt.
“He won $750,000 in arbitration because companies can’t force analysts to retract true statements,” Goodale said.
For their part, publicly traded companies have a legal obligation to disclose all material information to securities analysts.
“All analysts like the privacy of these calls. But I’m not sure the world would come to an end if these conference calls were open to the public,” Goodale said.
He was referring to an idea SEC Chairman Arthur Levitt presented last fall he is considering to implement-opening conference calls to those outside the analyst community.
Goodale also noted the SEC chairman’s “criticism of the connections (securities) analysts have to investment bankers,” who underwrite and sell stocks and bonds.
“I’ve concluded there may be some truth to this.”
Goodale credited the investment bank now known as Donaldson, Lufkin & Jenrette Securities Corp. with creating a “real revolution” through the introduction of carefully prepared analysts reports. Until this innovation, tips and other rumors were the primary information sources about companies.
The SEC prohibits company endorsements of analyst reports about them. However, not infrequently, analysts show their reports to companies prior to publication. The main differences typically are projections about earnings per share, Goodale said.
“I don’t see anything terribly wrong with fact checking, but I wouldn’t show the report to the company,” he advised.
