Telling Congress About the Rigged Research Game

Editor's note: TheStreet.com columnist Adam Lashinsky is testifying today before the House of Representatives Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. The committee is investigating the quality of equity research and reporting available to the average U.S. investor. We are running Lashinsky's testimony in full and in three parts. This is the first part.

---

When I first started covering financial news and set out to write about publicly traded companies, I was told to look for sources in Nelson's Directory of Investment Research. All I knew about the "analysts" listed in Nelson's, the pre-Internet Bible on Wall Street coverage, was that the people listed followed the companies I was investigating. If I needed a quote on, say, Caterpillar, I'd flip to the Caterpillar page in Nelson's and start dialing, hoping to find an analyst who'd return my phone call and say something germane on the record.

I knew nothing about the firm where the analyst worked, nothing about the investment-banking ties the analyst may or may not have had, nothing about the difference between a "sell-side" and "buy-side" analyst, and almost nothing about which analysts were better than others. (A star next to an analyst's name meant she was a member of the all-star research team chosen by Institutional Investor magazine, a distinction whose methodology I didn't understand.) All I knew was that an analyst who returned my phone call was more valuable than one who didn't. Nobody explained it to me in any greater detail.

Nobody Explained the Game to the New Players

...