Good for Some, Good for All
The recent Facebook IPO has brought to the front pages an issue that many ordinary investors have been asking themselves for a long time: “Is the system fair?” In Facebook’s case, legitimate questions have arisen about why Morgan Stanley, Goldman Sachs, and J.P. Morgan, Facebook’s lead underwriters, all reduced their internal revenue estimates for that company prior to its IPO while investors outside of these three banks were told nothing about it. As Henry Blodget explains here, these circumstances raise serious questions about the practice on Wall Street of selective disclosure and the fairness of the overall system. In other words, were these banks (and subsequently their clients) told something that other investors were not?
This question, and an experience that happened to me this week, bring to mind another long-held practice on Wall Street that I think is equally questionable and seriously outdated. It’s the practice of banks holding private calls with company management teams for a select group of investors. Here is what happened:
This week, a website called theflyonthewall published an alert that Dendreon CEO John Johnson would be participating in a conference call hosted by J.P. Morgan as part of their “CEO/CFO Conference Call Series.” While I follow the company very closely, this was the first I had heard of this. I wasn’t even sure at that point if it was just a rumor or not. Subsequently, I learned that J.P. Morgan also previously distributed a schedule of such calls, presumably to their private clients.
Now before I go any further, let me make a few important disclosures. 1) I have been extremely critical of Dendreon’s management team and their disclosure practices in the past, so much so that I publicly lobbied for the ouster of its prior CEO and Chairman. 2) In this case, I do not mean to pick on Dendreon or its new CEO specifically because this is a practice that is rampant in the industry. Dendreon is just one of many companies who participate in these calls. In fact, I think Mr. Johnson is very honorable, ethical, and a breath of fresh air at Dendreon. I believe the company has a bright future with him at the helm. I only bring up this case for illustrative purposes because it specifically happened to me this week, and in light of the recent Facebook news. 3) J.P. Morgan is a great bank and they have a world-class biotech team. This is an industry problem, not a J.P. Morgan one.
After seeing this investor alert, I emailed Dendreon’s investor relations team, asked them if it was indeed true that the CEO would be holding an investor call and, if so, may I please have the dial-in number. Like many investors, I was interested in hearing what kind of updates or advice Mr. Johnson had to report. Dendreon Investor Relations replied with the following message, “Hi Brad, this is true, however the call is for clients of JPM and I’m not at liberty to provide the call info.” It does not get any more straightforward than that. Dendreon’s CEO had an hour of his time to give to investors, but apparently only investors who are clients of a specific institution. J.P. Morgan, by the way, has been either the lead or joint underwriter of multiple debt and equity offerings for Dendreon in the recent past.
Now let’s set Dendreon aside, because again, this is a practice that many, if not most companies participate in. As an individual investor, I believe these types of selective and private calls need to be opened up to all comers because otherwise they are blatantly unfair. In truth, it is impossible to know in advance if material information will arise during a call. It is one thing to hold a private call with an outside expert who has a relationship with the bank, but it is something entirely different to hold one directly with a company’s management team.
In fact, I believe it is so unfair that in my opinion even the banks themselves recognize this. For example, if you are ever awarded the “privilege” of being invited to one of these calls, you will notice the sleight of hand the banks sometimes use to cover their legal tracks. In the case of this J.P. Morgan event, during an opening legal remark they ask you to voluntarily jump off the call if you are not an “analyst.” However, clearly the call is for clients too because 1) Dendreon directly acknowledged that in their email to me and 2) the first thing the J.P. Morgan operator asks you upon calling in is, “Who is your J.P. Morgan salesperson?” They also forward you directly into the call after you have told them you are an investor. Why not just block “non-analysts” right from the start if it is so important?
Additionally, I would like to point out that other companies who have in the past participated in this same “CEO/CFO Conference Call Series” did see the value in full-disclosure and were motivated to put out a press release alerting everybody about it. For example, here is a link to a press release by Regeneron Pharmaceuticals. They were motivated to make sure that all of their investors could equally participate in their call. Bravo, Regeneron…this is the right thing to do. Unfortunately though, they are the exception, not the rule. In my opinion, other companies would be very wise to follow suit. Private meetings throughout the 1990s tech bubble led to so many material disclosures behind closed doors that it prompted the SEC to enact Regulation Fair Disclosure (FD) in 2000. The regulation is supposed to ensure all investors get material information at the same time.
The bottom line is that in this day and age, the practice of publicly-traded management teams holding private investor calls for only a select few should stop. All investors, no matter who they bank with or how much money they have, deserve as much of an equal footing in the market as possible…especially when it comes to information straight from a CEO’s mouth. This is not overly burdensome for the companies or the banks, and might actually even increase their business. All you would be doing is distributing the phone number of a call that is already happening in the first place, as Regeneron and others have done. A small investor’s money is just as good as the big guys, so they deserve to hear what is on a CEO’s mind as well.
Calls such as these are just one of the many reasons why so many individual investors feel that the system is unfair. Make no doubt, this is an important issue because it is this perceived unfairness that is keeping many people out of the market. At the end of the day, this hurts both trading volumes (which are at multi-year lows) and the veracity of our overall system. Let’s level the playing field. What is good for one set of investors should be good for all.