No Sign Morningstar Strong Armed Analysts


New York, NY – In the past, a number of Wall Street analysts have cried foul, saying that their company’s management tried to get them to raise their stock ratings, fearing that the negative research would hurt other parts of the firm’s business.

In fact, Merrill Lynch was recently accused of just such a maneuver regarding a negative report published by their credit research department on Auction Rate Securities.  However, independent research firm, Morningstar, was recently accused of “strong arming” research analysts to change their opinion on various stocks – by lowering what research management thought were overly optimistic ratings.

According to a Wall Street Journal article published on July 26th, one former Morningstar banking analyst, Ganesh Rameshrathinam, accused executives at the company of pressuring him and other analysts to lower their ratings on some financial stocks earlier this year – a practice that Mr. Rameshrathinam claims was common “even if there was no reasonable basis for the request.”  Morningstar management denied any wrongdoing.

Part of the problem sprung from the fact that Morningstar has traditionally tried to focus its research on the long-term value of companies, making a “fair value” estimate of what they think the shares should be worth.

Unfortunately, Morningstar’s analytical approach didn’t work well when applied to the volatility seen in the financial sector over the past year and a half.  For example, Morningstar’s banking analysts held extremely bullish views on companies like Countrywide or Citibank, even as these firms were caught up in the midst of the credit crisis.

However, Mr. Rameshrathinam, and his manager at the time Rachel Bernard, said that Morningstar management were not comfortable with their ratings.  Ms. Bernard says that she was told to make her “fair value” estimate for Countrywide more in-line with what the market was saying, versus the much more optimistic views her model was coming up with.  Mr. Rameshrathinam says that management also asked him to lower his estimates for Citigroup.

Morningstar management counters these accusations by saying that the turmoil in the markets resulted in a vigorous debate at the firm about the validity of their research process.  And while they deny they ever “strong armed” their analysts to change their recommendations, the firm’s management did say that Mr. Rameshrathinam was unwilling to consider the signs that Citigroup would post huge losses – a development that would require the firm to raise huge amounts of capital, thereby pushing the price of the stock lower.  Of course, this eventually took place.

Company officials also explain that Mr. Rameshrathinam, who left the firm at the end of June, demanded that Morningstar pay him to keep from going to the press with his accusations.  Mr.  Rameshrathinam denied this as “a blatant lie.”  Morningstar has acknowledged that they hired a law firm to investigate Mr. Rameshrathinam’s complaints.  They explained that the law firm found no violations of the company’s code of ethics.

It is interesting to note that earlier this year, Morningstar issued new analyst guidelines to include the impact that short-term developments might have on the long-term value of a company and its stock.

Our Take

It is a little surprising to the team at Integrity that Mr. Rameshrathinam’s accusations have gotten as much publicity as they seem to have received.  It is clear that Morningstar’s concerns about their banking analysts’ optimistic recommendations did not reflect conflicts of interest, but rather a vigorous internal dialogue about the problems their existing research process was having to assess the value of financial services companies.  Unfortunately, Mr. Rameshrathinam felt that Morningstar had no right to question his recommendations, even if market conditions suggested that his (and the company’s) analytical process was flawed.


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