The Conflict of Interest Game
by Ulli G. Niemann
Disgruntled investors are going after Wall Street once
again, this time accusing one of investment bank Morgan-Stanley's high-tech
mutual funds of making biased stock picks.
Recent lawsuits allege the Morgan Stanley Technology fund
was influenced to buy and hold stocks of companies that delivered huge
investment banking fees – or could potentially bring big business – to the
investment bank.
According to the lawsuits, the Morgan Stanley fund
followed the biased recommendations of the firm’s analysts – decisions that
have cost shareholders millions of dollars since the portfolio’s October 2000
inception.
The fund lost 48 percent in 2001 and was down another 50
percent during the first nine months of 2002. While Morgan Stanley strongly
denied the allegations, I fail to see how the management of the fund is somehow
distinct from the other divisions of Morgan Stanley. Ultimately, they all work
for the same boss.
The suits further claim that the tech fund failed to
disclose that the firm had investment banking ties with a number of companies
whose stocks were part of the portfolio. They also failed to reveal that those
links could affect the fund’s buy or sell calls.
Why bring all this up? For one thing, it is interesting to
note that Morgan Stanley offered four of these types of funds in October 2000.
Just around the time when we sold all of our positions (Oct. 13, 2000) and it
became clear, at least to those of us who were tracking long-term trends, that a
major trend change had taken place.
More recently in the news it’s been Merrill Lynch who
had a questionable deal involving transactions with failed energy trader Enron.
Of course, the financial services industry regulates itself so well, that an $80
million payment to the SEC is sufficient to wrap up this case without admitting
or denying wrongdoing.
What’s the moral of this story? While it is impossible
to predict these alleged conflict of interest schemes, it is definitely possible
to follow a disciplined approach and be on the “right” side of the market so
you can avoid jumping aboard a sinking ship.
Copyright, Ulli G. Niemann
Ulli Niemann is an investment advisor and has
been writing about objective, methodical approaches to investing for over 10
years. He eluded the bear market of 2000 and has helped countless people make
better investment decisions. To find out more about his approach and his FREE
Newsletter, please visit: http://www.successful-investment.com.
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