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Fighting Your Firm's Research Machine

Whom do you trust? That's what brokers are asking as they try to avoid the fate of fired UBS PaineWebber broker Chung Wu and still serve their clients.

Whom do you trust?

That's what brokers are asking as they try to avoid the fate of fired UBS PaineWebber broker Chung Wu and still serve their clients.

The firm fired Wu after he told clients via an unsanctioned e-mail to sell Enron stock. In late August, he sent an e-mail advising Enron holders to “take some money off the table” or “think about selling ‘call’ options.” But, he added ominously, “Time is value and waiting to make a decision would cost you a fortune.” PaineWebber was alerted to this by Enron officials and quickly rescinded Wu's note. Now, it's being sued by former clients, who claim that stifling Wu caused them to lose money.

Wu seems to have been in a classic Catch-22: PaineWebber policy, according to a document prepared for Congressman Henry Waxman by private client group head Mark Sutton, says reps have to disclose the analyst's recommendation if their own recommendation runs counter to it. However, it also says “because of the sell recommendation and attached material,” Wu's e-mail constituted a research report, which reps are not allowed to issue.

The ramifications for all reps are enormous as they try to feed management — and still act as financial advisors providing objective advice. “This is bad for all firms, not just for UBS,” says a Merrill Lynch rep on the West Coast. “When one company does something so bad, so immoral and so unprofessional, it reflects poorly on the entire industry. We'll all suffer the consequences.”

So, what's a broker to do? One PaineWebber producer has decided to stop using his firm's research, and instead spends over $10,000 a year on independent analysis. A colleague is talking about leaving the firm and taking his clients with him.

PaineWebber says reps desiring to go against an analyst rating need approval, and would have to discuss the matter with superiors. But the ability to make a strong suggestion for clients is limited — one is unable to provide additional information supporting one's beliefs, and in the case of Enron, forced to disclose the ‘strong buy’ recommendation analyst Ron Barone had on the stock, though this recommendation may not be suitable for all clients.

“The way this firm is now, if you get a strong buy on a stock and the firm wants you to load up on it, you have brokers laughing their heads off,” says a PaineWebber rep. “I've had clients ask me the last few days, ‘Why do you want me to buy this? Does it have a strong buy?’ The clients know it's a joke, too. The research department has no credibility whatsoever among brokers.”

Especially when considering the depth of the relationship between Enron and PaineWebber, which administered stock options for Enron and had an underwriting relationship with the Houston-based bankruptcy. As shown in publicly available documents on Waxman's Web site, Enron alerted PaineWebber to Wu's e-mails first. “This is extremely disturbing to me,” Enron employee Aaron Brown told PaineWebber. PaineWebber fired Wu and retracted his comments — but only after first telling Enron.

“We will get your approval prior to any retraction being sent,” says an e-mail from Houston branch manager Pat Mendenhall to Enron representatives.

“These people are saying Wu was to be disregarded, and the analyst has a strong buy, and the whole time they didn't tell them, ‘Oh, by the way, Enron looked at this beforehand,’” says Joe Hroch, associate attorney at Spencer & Associates in Houston, who is representing Wu's former clients as well as others in a class-action suit against PaineWebber. He also represents Wu in an ongoing NYSE investigation.

Wu, who now works for A.G. Edwards in Houston, declined to comment for this article.

Waxman's letter pointedly asks whether all financial consultants that didn't follow an analyst recommendation were fired, which PaineWebber says is of course not the case. Despite being alerted to the matter by Enron, PaineWebber says in its letter to Waxman that Wu's hunches weren't backed up by analysis, but providing said analysis seems to constitute a research report — which is a no-no.

What this means, then, is that a broker has a hard time contradicting an analyst report unless he does it in a clandestine manner. Which must be great news to those reading New York State Attorney General Eliot Spitzer's affidavit in his Merrill Lynch investigation, which includes transcripts of e-mails between analyst Henry Blodget and others referring to various stocks as a “piece of crap” and a “powder keg,” later threatening to start calling “them like we see them…no matter what the ancillary business consequences are.” (Merrill has agreed to disclose additional information about firms it issues research reports on.)

Of course, Wu called it like he saw it, and was fired.

The PaineWebber rep who's considering leaving, figuring it's one way to avoid Wu's fate, says “You tell the client, ‘I've tried to look after your best interests. Obviously, the firms aren't letting me do that. You've been a client for ‘X’ years. You might as well go with me.’”

10 Years ago in Registered Rep

“You get paid to be a broker, not an analyst,” said a Legg Mason broker. “Let them earn their $200,000 to do it.”

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