Gene Marcial, the longtime writer of BusinessWeek’s “Inside Wall Street” column, is a business-press institution.
For more than two decades, week after week, Marcial has provided readers with a weekly diet of stock tips, invariably “buy” recommendations, delivered in a chatty, pun-filled style (Tootsie Roll Industries, he wrote last month, was a “takeover temptation”).
The stories almost always quote at least one Wall Street analyst, along with a peculiar disclaimer:
Unless otherwise noted, neither the sources in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking relationship or other financial relationship with them.
BusinessWeek’s disclaimer is unusual in U.S. business journalism. Trouble is, in many cases, it’s also untrue.
Marcial’s sources do have “investment banking or other financial relationships”—all sorts of them—with the “stocks under discussion” or, if they don’t now, they are pursuing one, according to reports issued by the analyst firms themselves and Securities and Exchange Commission disclosures by the companies under discussion.
In March, for instance, Marcial wrote about comScor, a Reston, Va., technology company—”Tech Biggies Rely on comScore,” the headline says— writing:
Scott Wieler, CEO of Signal Hill Capital Group, says ComScore’s core market is still underpenetrated, and he adds that ComScore is the way to play the Internet and its growth.
Jeetil Patel of Deutsche Bank also rates comScore, now trading at 10.45, a buy, with a stock price target of 35.
But both Signal Hill and Deutsche Bank served as underwriters for comScore, according to a comScore prospectus, filed with the SEC on November 11.
Wieler didn’t return a telephone call. A Deutsche Bank spokeswoman noted that the bank made the required disclosure in the report that Marcial cited.
Marcial says he made a mistake.
“Jesus Christ,” he says, “I missed that one.”
That one, and others, too.
In a piece last Nov. 12, headlined “Cheerful at Clinical Data,” Marcial says the Newton, Massachusetts, drugmaker is a takeover candidate, notes that its founder, Randal Kirk, has profitably sold previous companies he started, and quotes an analyst:
“Some expect Kirk will end up selling Clinical,” says Chystyna Bedrij of Griffin Securities, who rates it a buy, with a target of forty.
Clinical Data had paid Griffin Securities, a New York based brokerage and investment bank, for “financial consulting and strategic advisory services,” according to a Griffin research report on the company dated December 21, 2007, which added that it was going for more:
“Griffin Securities has received compensation from Clinical Data in the past 12 months for such services. Griffin Securities expects to receive, or intends to seek, compensation for investment banking services from the Company in the next three months.”
Bedrij didn’t return a phone call
Says Marcial: “Oh, I see. I missed that one, too. Jesus Christ.”
Unfortunately, there are a lot of them. An Audit check of the past year’s Marcial articles found more than a dozen instances in which sources whom BusinessWeek says are conflict-free actually do have financial relationships or say they intend to seek them.
In a May 26 column on Bidz.com, a Culver City, Calif., online auction company, Marcial cites Elizabeth Pierce of New York’s Roth Capital Partners: “She sees the company continuing to deliver strong results.”
In an interview, Pierce notes that Roth disclosed in a report on May 7, three weeks before the article, that it makes a market (buys and sells shares for third parties) in Bidz shares and “expects to receive or intends to seek compensation” for investment-banking or other services.
“It’s in our disclosure,” she says. “Whether he picks up on it or not .”
Marcial chalks it up to “human error.” “I really appreciate your telling me that,” he says. “In most cases it probably skips my mind.”
The issue of financial journalists quoting stock analysts has always been problematic. Eliot Spitzer’s high-profile investigation and settlement in 2002 exposed that even research of large brand-name companies by the biggest Wall Street firms was riven with conflicts of interest. Analysts paid indirectly by the firms they were rating frequently put “buy” recommendations on companies they privately derided, and which often crashed. Quoting analysts is even trickier when the discussion turns to small-company stocks, an investment area that is often a magnet for touts, hustlers, and frauds.
The Spitzer settlement separated research from investment banking, undercutting Wall Street research’s business model and sending the entire enterprise into decline. Meanwhile, Wall Street firms have tightened their disclosure, and reporters have cut back on quoting analysts altogether.
Marcial, though, is something of a special case because he relies heavily on analysts and is unusually influential in the small stock arena. A mention by Marcial often sends thinly traded small stocks bouncing up, only to settle back, a predictable volatility that creates an opportunity for mischief. Over the years unscrupulous traders have been caught trying to use Marcial’s columns to cheat. In 1988, traders paid off a worker at the plant worker where BusinessWeek was printed to get an early look at Marcia’s column; in 1999, traders paid off an employee of newsstand operator Hudson News Co. for advance copies of the magazine. A similar thing happened again three years ago, as recounted in this Fortune article.
None of those incidents have anything to do with analysts’ conflicts. Still, Marcial says the disclaimer was added even before the Spitzer settlement, mainly because his picks are so closely scrutinized because of the unrelated wrongdoing.
He says that in recent years new online chores have added to his workload, causing him to make mistakes. Besides the weekly column, which includes one longer item and two recommendations of shorter length, he also posts two online items a week.
“I’m alone in all of this,” he says.
Also the items are short, he says, leaving little space.
I got screwed up. It’s so easy to mention it but costs me a line or two. You see how small my space is. My space is so small. Of course it’s not deliberate The problem here is that because of deadlines, I miss things; I have to admit. There are things that I miss.
“I’m sorry I missed those,” he adds. “Thanks for telling me.”Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.