Will Analyst's Stiff Fine Silence Others?

The New York Stock Exchange's decision to punish former banking analyst Tom Hanley for aggressively spreading a merger rumor has left other outspoken stock analysts wondering just how far they can go when communicating market chatter to the public and their clients.

Some research comrades believe that Hanley went too far when he circulated a potentially market-moving rumor in September 1997 about a possible Travelers' takeover of Bankers Trust. While few analysts see the same fate befalling them, they agreed the NYSE's move got their attention. (A recent TSC story looked at the evolving role of and pressures faced by analysts.)

The NYSE's action "does make you pause a bit. You must be careful. But, then again, I've always known that I have to be careful," says Claire Percarpio, banks analyst at Janney Montgomery Scott in Philadelphia.

The NYSE fined Hanley $75,000 and censured him for the remarks, which the Big Board called "sensational in character" and said "lacked a reasonable basis." It also fined his firm, now known as UBS Warburg, $60,000 and censured it for failing to prevent the analyst's alleged actions.

Some analysts say the NYSE's decision won't make them clam up. "What [Hanley] did and what others do when discussing merger activity are unrelated," says Larry Cohn, banks analyst at Ryan Beck. Hanley's claim that the two banks were about to get hitched was made using unusually strong language, according to the NYSE findings.

The exchange also points out that Hanley insisted to UBS salespeople and the media that the tie-up was going to take place even after Bankers Trust had denied a deal was imminent.

Others think the exchange's actions may be excessive, however, adding that such punishments could cause analysts to tone down their opinions about merger activity concerning the companies they follow.

"It's definitely weird," says Daniel Davila, who covers the casino industry for Hibernia Southcoast Capital. While rumors shouldn't be presented as fact, he says, "analysts are engaging in the wholesale transport of rumors. I would defy the NYSE to find one stock where there's absolutely no rumor."

In fact, in published remarks justifying the punishments, the NYSE may have been selective in how it presented remarks made to UBS staff by Hanley, known at the time as "Takeover Tom" for his often successful attempts to predict bank deals. Giving the impression that Hanley was emphatic about the deal taking place, the NYSE quotes Hanley saying on Sept. 18, 1997, over the firm's intercom that Bankers Trust "is indeed gone."

However, one person who claims to have seen a full transcript of the intercom remarks says Hanley made it clear he was passing on chatter. According to this source, Hanley actually said: "What I am hearing is that Bankers Trust is indeed gone." The NYSE declined to share a full transcript of Hanley's remarks, and a spokesman added, "The facts are accurate."

In addition, Hanley's suggestion that Travelers was on the verge of snagging Bankers Trust -- which he made over the firm's intercom, in a research note to clients and in interviews with the media -- may also have had a reasonable basis at the time.

Of course, Travelers didn't acquire Bankers Trust, which ended up being bought by Deutsche Bank in 1998. But Travelers did acquire Salomon Brothers the following week.

However, a Wall Street Journal story in the week after Hanley's remarks contained the following passage: "In some ways, Salomon was a fallback for [Travelers' chairman Sanford] Mr. Weill. ... Mr. Weill made an informal overture to Bankers Trust New York Corp., according to others familiar with the situation. But the overture didn't go far, allowing Bankers Trust to issue a statement saying the two hadn't held talks after its stock surged last week."

Hanley didn't admit or deny guilt and declined to comment beyond a basic statement. "I decided to settle this matter to avoid the distraction and expense associated with a protracted and drawn out legal proceeding," he says. "Having opinions is the job of a research analyst. I look forward to continuing to provide clients with well-reasoned research."

Hanley left UBS earlier this year and has yet to join another firm as an analyst.

Mike Mayo, banks analyst at Credit Suisse First Boston, doesn't see a need to change his ways after this decision. He says the guidelines that apply to chartered financial analysts would most probably rule out the sort of assertions made by Hanley.

"Analysts have to be given a certain amount of latitude and along with that comes a certain amount of responsibility," he says.

Others see this as a unique decision by the exchange. John Olson, a senior attorney at Gibson Dunn & Crutcher in Washington, doesn't believe the Big Board is on some sort of jihad against more opinionated analysts. The actions were "highly unusual, but I am sure that the exchange thought long and hard about it," Olson says.

Still, some analysts get nervous when they see one of their own singled out. One Wall Street banks analyst who requested anonymity stresses that investors should never rely on one analyst's views. "If people end up believing a false rumor, that's their problem," he says.