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Lots of Talk, Not Much Disclosure

Financial TV's best-known pundits say they'll reveal conflicts of interest -- when they're forced to.

SAN FRANCISCO -- The findings of a recent study by

may surprise investors who've come to believe that advice from Wall Street always comes with strings attached.

A review of more than 1,000 transcripts of television appearances by a dozen Wall Street market commentators in the past two years uncovered few examples of pundits recommending stocks in which their employers have a financial interest -- without disclosing the fact. Certainly, no one matched the track record of C.E. Unterberg Towbin's Brian Finnerty, who has consistently recommended stocks in which his company has an interest.

That's the good news.

The bad news is that strategists are unlikely to make disclosure a standard practice unless they are forced to do so, in much the same way the industry didn't get serious about analysts' disclosure until Congress opened hearings on the matter. Despite all the hoopla, multiple interviews suggest that strategists and traders are neither highly conscious of, nor terribly concerned about, the disclosure of conflicts of interest.

"I view

disclosure as a nuisance but understand the rationale behind it," Bill Meehan, chief market analyst for Cantor Fitzgerald, said via email late last week. "Since the only money that I run is mine, and because Cantor has very few investment banking relationships, it's not much of a problem."

For the record, we found no disclosure lapses for Meehan or fellow

contributor Tony Dwyer, chief market strategist of Kirlin Securities.

Absent disclosure of conflicts, the average investor cannot know for sure whether pundits are recommending a stock because they really like it, or because they are trying to promote their employers' underwriting clients or holdings.

Accountability Hurts

Most troubling is that even those few strategists who claim to support increased disclosure haven't practiced what they preach.

Richard Cripps, chief market strategist at Legg Mason in Baltimore, steadfastly denied ever recommending a stock in which he knew a conflict existed: "It's not worth it to even go down that road," he said in a recent interview.

But on Feb. 21, Cripps recommended

Citizens Communications

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TheStreet Recommends


(formerly Citizens Utility) and


(CTL) - Get CTL Report

on public television's "Nightly Business Report." He reiterated the recommendations in another appearance there on June 16.

Legg Mason has previously served as an underwriter for both Citizens and Century, which was not revealed in either appearance. The irony is that "NBR" has strict disclosure guidelines, and asks its guests to sign a policy that they will disclose "items with material impact," including personal ownership and their employers' investment banking relationships, according to Linda O'Bryon, the show's executive editor.

Other financial news outlets have similar policies. But past discussions with television executives and producers have revealed that, in practice, they basically put the onus on their guests to make voluntary disclosures. Because most guests we spoke to believe it's up to the interviewers to raise the issue, disclosure often gets lost in the shuffle.

Cripps said "NBR's" more intent focus on the issue makes him more conscious about disclosing conflicts than when he's on other financial television outlets.

But it wasn't enough for him to reveal in the June appearance that Legg Mason Wood Walker participated in the underwriting syndicate for Citizens Utility's secondary offering of nearly 22 million shares, which priced on June 13.

Because the offering closed prior to his NBR appearance, the stock would not have been on Legg Mason's internal restricted list, Cripps said. But he was very much aware of the inference one could draw from him recommending the stock just days after the deal went down -- that he was doing so to help the firm move any unsold merchandise.

"What you have raised is before I go on I had better make sure I am staying off anything on the restricted list," he said. "We have to be very transparent

and have to be accountable."

But, again, Cripps' rhetoric and actions haven't matched. On


on April 16 and


"Squawk Box" on April 11, he recommended

Marsh & McLennan

(MMC) - Get Marsh & McLennan Companies Inc. Report

. Left unmentioned in both cases was that Ray Groves, chairman of Legg Mason Merchant Banking, sits on Marsh & McLennan's board of directors.

Including the above, Cripps also frequently mentioned stocks in which Legg Mason's asset management arm owns a stake, without disclosing the relationship. On


on Aug. 23, he recommended

Xcel Energy

(XEL) - Get Xcel Energy Inc. Report

, which was formed last year when Northern States Power bought New Century Energies. Legg Mason owned 1.8 million shares of Xcel as of June 30, making it one of the top 20 institutional holders, according to

Xcel may not be a familiar name to many investors, but the electric power provider has a market cap of $9.5 billion. It's unlikely Cripps' recommendation could have materially moved the stock. The potential for harm comes when small-cap names are mentioned, and the inclusion of a "no-name" stock in conjunction with several big-cap "household" names is a red flag to possible disclosure abuse.

Cripps' other recommendations this year include



, which has a market cap of $443.5 million, and

Trex Cos.


and Boston Communications Group


, both of which have market caps of around $300 million. Small and mid caps have outperformed this year, but Legg Mason's ownership of those stocks was not disclosed.

Legg Mason was a net buyer in the second quarter of each of the aforementioned. But the firm sold its stake in

Erie Indemnity

(ERIE) - Get Erie Indemnity Company Report

some time in the second quarter, according to Cripps recommended the stock on


on May 16.

Cripps claimed to be ignorant of Legg Mason's stock holdings, and the firm does file 13-F forms with the

Securities and Exchange Commission

on behalf of nine money management subsidiaries. But Cripps could have uncovered the ownership relationship had he chosen to inquire.

The strategist conceded his "sensitivity of

the disclosure issue has to increase," but defended the Erie Indemnity recommendation, noting its strong performance since May 16.

Still, it's disingenuous to say failing to disclose conflicts is acceptable if a pick makes money but unacceptable if it doesn't. Citizens Communications, for example, is down more than 20% since Cripps' recommendation in February.

Everybody Else Is Doing It, So Why Can't We?

In fairness, several of Cripps' statements echoed Finnerty's defense, although the latter was dismissive of questions regarding disclosure while Cripps dubbed them "fair game."

The similarities between the two raised the issue of whether this laissez-faire attitude about disclosure is standard. Interviews with various traders and strategists suggest it is, even among those who have better track records.

"Folks on my side of the business should be able to carry on what they do in blissful ignorance as to what sensitive negotiations are occurring on a different side of a firm," said Thomas McManus, equity portfolio strategist at Banc of America Securities, for whom we found no disclosure lapses. "The media has been too cynical when it comes to the correlation between recommendations and

underwriting business. This is not a quid pro quo."

Joseph Battipaglia, chairman of investment policy at Gruntal, for whom we found just two disclosure lapses in more than 200 broadcast appearances, said he's "acting and behaving as I've always acted -- giving advice for better or worse."

For better or worse, he recommended

Caliper Technologies


in June on both


and "NBR," and



in July 2000 on


. Undisclosed was that Gruntal has done underwriting for both firms.

"I'm more than happy to do specific things," Battipaglia said of proposed regulatory changes. "But do you blaze a new path by doing this straight away? Not really."

Certainly, there is growing sensitivity about the issue at some firms. Strategists at both Merrill Lynch and U.S. Bancorp Piper Jaffray deferred to their firm's respective media relations departments, whose message was essentially the same: If and when regulations change, every effort at compliance will be made.

A NASD spokesman declined to offer any timetable regarding a final ruling on the proposed tightening of rules governing public appearances by brokerage firm employees.

Barring such regulatory initiatives, don't expect Wall Street to voluntarily change its approach.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.