Inner dealings at Morningstar exposed in the cold light of day

Two former analysts say they were put under pressure to lower their estimates for stocks

IN THE dotcom era, analysts were lambasted for slapping "buy" ratings on hopeless technology companies they secretly sneered at.

If recent accusations at US research firm Morningstar are to be believed, the opposite is true these days, with management allegedly pressurising analysts to lower their estimates for stocks towards which they are privately bullish.

That's according to Ganesh Rameshrathinam and Rachael Barnard, two former analysts with the firm. In January, Rameshrathinam believed embattled financial giant Citigroup had a fair value of $53 (€33.98) a share. That was almost double the share price at the time and "my bosses didn't like that my estimates were high", Rameshrathinam told the Wall Street Journal. "They asked me to change my numbers and put my name on estimates for which there was no reasonable basis."

A similar conflict arose with mortgage issuer Countrywide, with the analysts maintaining their bullish stance even as the stock tanked before its takeover by Bank of America. "No matter how we looked at this stock, we felt it was worth a lot more than it was trading at," Barnard said.

"Morningstar wanted us to come up with something more in line with the market, but our data didn't back it up."

She left the firm in February, with Rameshrathinam departing last month.

The fact that the analysts turned out to be wrong on both companies is not the point, they say. "It is disingenuous for Morningstar to tarnish its reputation by publicly berating stocks that we privately believe to be terrific buying opportunities," Rameshrathinam complained, adding that the episodes represented "a grievous breakdown of ethical behaviour".

Morningstar dismissed the allegations, saying chaotic market conditions catalysed a "vigorous" debate about the firm's research methodology and that Rameshrathinam "confused that debate with internal pressure". Some analysts, they said, had "an unwillingness to incorporate new evidence".

Ironically, Morningstar was a beneficiary of an earlier scandal regarding Wall Street research. In 2003, allegations that some of the biggest firms were pumping up the prices of stocks they privately denigrated to win investment banking business led to a $1.4 billion settlement, including a $450 million provision for independent research firms like Morningstar.

The most famous case of conflicted analyst behaviour was that of Merrill Lynch's Henry Blodget, who privately dismissed various stocks as "a piece of crap", "junk" and a "powder keg" with a "bad smell" while publicly extolling their virtues in breathless terms.

The Morningstar allegations came less than a week after veteran analyst Dick Bove got into hot water for telling the truth, as he saw it. In the wake of the collapse of mortgage lender IndyMac, Bove wrote a report entitled Who is next?, in which he compiled a list of potentially vulnerable banks. One of those banks, BankAtlantic, fired back at the "supposed expert", blasting him for his "irresponsible defamation" and insisting that it would clear its name "in the courthouse". Ladenburg Thalmann, Bove's firm, dismissed "this meritless lawsuit".

Ironically, the bank was not even listed in what Bove called the "danger zone". In fact, prior to the lawsuit, the analyst sent out a follow-up report saying the bank took issue with his numbers. That didn't satisfy the bank, although the lawsuit will probably draw much more attention to its plight than the original report would have.

The Bove report does not appear to have done any damage to BankAtlantic's share price, which is well above prepublication levels.

However, it remains almost 90 per cent below its 2007 peak.