Wall Street has changed the way it does business.
Former star analysts like Henry Blodget and Jack Grubman have been banned from Merrill Lynch and Smith Barney. New legal and financial walls separate investment banking and research departments.
But to the average investor, it may seem like business as usual.
“Investors are not better off because of this global settlement,” said Jacob Zamansky, a securities lawyer who represents individuals in nearly a dozen cases against the brokerage industry. “Not one dime has gone back from that fund to investors ripped off by fraudulent research. There's an investor education program out there that hasn't really done anything to educate investors. And frankly the research hasn't really changed.”
In fact, some critics say that, a year after the settlement, analysts are even more bullish. The number of “buy” ratings has crept up -- to 46 percent. “Sell” ratings have declined, according to Thomson Financial.
And the age of the celebrity analyst may be over, with firms like Merrill Lynch and UBS now tying analyst compensation to accuracy. But there are exceptions. Goldman Sachs, for instance, was in a bidding war to keep its top semiconductor analyst James Covello; $3 million kept him in house.
Meantime, investors haven't yet received any of the $1.5 billion earmarked for restitution under the settlement with New York Attorney General Eliot Spitzer. They probably won't get a dime until the end of this year, at the earliest. And proving their cases won't be easy.
“They've got to show that they either got a research report and made an investment decision, or the broker touted the research and that's why they bought it,” said Zamansky. “There are a lot of good cases out there, but a lot of people unfortunately won't be able to recover.”
Investors have lost in another way: Over the past 4 years, brokerages have slashed equity coverage by 20 percent on 1,100 mostly smaller cap stocks, according to Thomson Financial. Morgan Stanley cut stocks covered in North America by 26 percent and Merrill pared back by 30 percent.
“The problem arose from two sources,” said Frank Fernandez at the Securities Industry Association. “First, a doubling of legal and compliance costs that the research departments face in the last three years. At the same time, the source of their support: About 35 to 40 percent of a research budget previous to the settlement were funded by investment banking. They can no longer do that.”
A key part of the settlement mandates brokerages to provide research from "independent" firms, or firms with no investment banking ties, along with their own research. Firms must spend more than $400 million over 5 years.
“The problem is finding $432.5 million worth of independent research worth to spend money on, quite honestly,” said Fernandez.
There is one bright spot as Wall Street struggles to regain the confidence of investors. Starmine, a firm that rates analyst performance, finds that analysts have in fact become more accurate. Using a portfolio for each analyst in each industry, buying their buys and shorting their sells, and comparing them to an industry benchmark, Starmine found that analysts' return was 2.2 percent in 2003 -- versus a loss of one-tenth of a percent the year before.
Optimists might point to the settlement as one reason analysts have gotten more accurate. But cynics might say 2003 was a more momentum driven market, and that analysts tend to be trend followers.