Longbow Analyst: Bullish or Bull-Sh*t?

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Longbow Research Execs Asleep at the Wheel?

aka  Can You Spell C-O-N-F-L-I-C-T-E-D?

Call it the “I Gotcha Moment” courtesy of NYT reporter Gretchen Morgenson via her Fair Game column and weekend spotlight on “independent research” firm Longbow Research. Just when you thought Henry Blodget‘s experience promoting dot com companies while at Merrill and at the same time, sharing with cohorts that his buy recommendations were bull-sh*t,  which led to his being permanently banned from the Industry would not be repeatable by others, the notion of conflicted research still runs rampant. For those who fear losing sleep over another story about conflicted research, this report re: Tempur Sealy coverage is not for you..

Here’s the opening extract of Gretchen’s article:

File this column under: Why It Pays to Read the Footnotes.

longbow-researchOn Tuesday, Longbow Research, an independent institutional research and brokerage firm with offices in New York, San Francisco and Independence, Ohio, published a report recommending that its clients buy shares in Tempur Sealy International, the mattress maker (NYSE:TPX).

That’s not unusual. Wall Street research analysts put out buy recommendations every day. Probably too often, in fact.

But Longbow’s report was atypical in one way: Mark Rupe, the analyst who wrote it, recently left Tempur Sealy as head of its investor relations unit. Investors didn’t learn that, though, unless they read a disclosure on the penultimate page of the 17-page report, which said that Mr. Rupe or a member of his family owned stock and options in Tempur Sealy.

The amount of the holding wasn’t disclosed, but it appears to have resulted from Mr. Rupe’s employment at the bedding maker. The report also noted that Mr. Rupe stood to receive additional incentive compensation from Tempur Sealy over the next two years if the company met certain performance hurdles.

So, an analyst who is supposed to offer unbiased opinions on a company owns a position in it that could benefit from his bullishness. What gives?

This is just the kind of conflict of interest that brought the wrath of regulators down on Wall Street research a dozen or so years ago. Except in those days, analysts’ conflicts weren’t disclosed. At least close readers of the Tempur Sealy report were armed with the information and could base their decisions on it.

Still, it’s hard to imagine that Mr. Rupe’s stake in Tempur Sealy and his close relationship with the company won’t color his view. The question is, why would Longbow, a firm that appears to pride itself on independent research, want to open itself up to this kind of criticism?

I tried to ask this of David MacGregor, Longbow’s chief executive and research director. Neither he nor Mr. Rupe responded to my emails seeking comment.

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Private Equity Deals: Don’t Forget About The Fees; BrokerDealer.com Snapshot

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Extract courtesy of May 25  Sunday New York Times/Gretchen Morgenson

Private equity has become $3.5 trillion piece of the $64 trillion asset management industry.

There was joy on Park Avenue as the news arrived from Warsaw, a small Indiana city.

Two companies, twin pillars of Warsaw’s economy, had decided to merge. It was the biggest business story to hit the town in decades; an area newspaper, The Elkhart Truth, called the deal nothing short of an “earthquake.”

Back in New York, in the Midtown headquarters of the Blackstone Group, the tie-up meant a handsome payday for Blackstone and a handful of other private equity specialists. Together, they had bought one of the Warsaw companies, Biomet, in 2007. Now they had agreed to sell it for $13.4 billion, or $2 billion more than they paid.

 Such is the way of private equity, a signature Wall Street business of the past two decades. The sale — Biomet was bought by Zimmer Holdings, creating a leading orthopedics company — meant a nice return for everyone, including public pension funds that had invested their money in the private equity partnerships that owned Biomet.

But for Blackstone and the other private-equity partnerships in the deal — overseen by Goldman Sachs, Kohlberg Kravis Roberts and TPG Capital — this deal will be a gift that keeps giving. That’s because, beyond the profits they share with their clients, they will be paid millions more in fees — for work that they are never going to do.

For the complete story from the NY Times, please click here