My Life and Times

November 15, 2004
Big-Name Wall St. Analysts Emerge From Scandal to Tout the MarketBy LANDON THOMAS Jr.
or the Internet analyst, happy days are here again. As the stock prices of companies like Google and eBay soared this year, two of the biggest cheerleaders on Wall Street, who four years ago were derided as false prophets too eager to put the commercial interests of their firms ahead of investors, are basking in a renewed glow.
Mary Meeker of Morgan Stanley - who was celebrated and then disparaged as the "queen of the Net" - is once more out on the stump, extolling the commercial opportunities of the Internet, churning out comprehensive reports and using her still considerable sway to help land Wall Street's biggest investment banking deals - like Google's public offering - for her firm.
Over at Goldman Sachs, Anthony J. Noto, who during the Internet boom became known for his aggressively optimistic research in support of now-bankrupt clients like eToys, Webvan and Planet Rx, was recently awarded perhaps the most coveted prize on Wall Street: a Goldman Sachs partnership. While it is too early to get a precise reading on what bonuses Ms. Meeker and Mr. Noto might receive for 2004, some of their fellow analysts estimate that each will be paid $3 million to $5 million.
That Ms. Meeker and Mr. Noto have again seen their careers prosper underlines how much Wall Street loves a second act, especially one that promises rich returns. Both analysts survived investigations by Attorney General Eliot Spitzer of New York into research abuses because they held stubbornly true to their beliefs, even as their stocks plunged in value.
That resilience is now paying off: the Internet stocks they follow are on the upswing, and the prospects for new investment banking deals have caused Mr. Noto's and Ms. Meeker's own stock to rise.
Their resurgence also demonstrates how Wall Street still values the influence of equity analysts, even after a $1.4 billion settlement growing out of federal and state investigations sought to seal them off from the banking business. Will Ms. Meeker and Mr. Noto be pitching deals to clients in Silicon Valley? Certainly not. Under the settlement's guidelines, research analysts are barred from soliciting investment banking deals or even from discussing transactions with their banking colleagues.
But there is no law that prevents analysts from developing relationships within companies, even those that their firms do business with. And in today's toned-down deal-making environment, investment bankers and analysts say, an analyst's influence can be implicitly leveraged by bankers without relying on the kind of crass quid pro quos that prevailed during the Internet bubble.
"These people are still bankers in analysts' clothing," said Andy Kessler, an author of books on Wall Street and a former hedge fund manager who once worked with Ms. Meeker at Morgan Stanley. "This quid pro quo is now just a wink and a nod. If these guys were truly independent, you would see hold ratings after big deals. But with Google, all we have seen are across-the-board buys."
Ms. Meeker, who declined to be interviewed for this article, has a friendly relationship with the founders of Google. And although she had no active role in bringing Google's business to Morgan Stanley, her positive rating a few weeks after the offering is likely to have helped an already rising stock price.
Mr. Noto has cultivated ties with perhaps the most influential investor in Internet and media stocks, Gordon Crawford of Capital Research and Management, who calls him "the most effective large-cap Internet analyst on Wall Street." And Mr. Noto has also become more discerning in his coverage, writing skeptical reports about companies like DoubleClick that have banking relationships with Goldman Sachs.
Asked about Mr. Noto's past support for companies like eToys and Webvan, Mr. Crawford said, "That's ancient history." Mr. Crawford, who gives Mr. Noto credit for his recommendations of Yahoo and eBay, added, "We all did stupid things in 2000."
Still, despite the better times of late, some legal and regulatory headaches linger for the firms of the two analysts.
Last month, Morgan Stanley disclosed in a regulatory filing that the Securities and Exchange Commission was still investigating its failure to adequately supervise its research analysts and investment bankers before the settlement, which was announced in April 2003. If an action is forthcoming, outside lawyers say, it would most likely be directed at current and former executives of Morgan Stanley who had supervisory roles over analysts like Ms. Meeker, rather than for Ms. Meeker herself.
As for Mr. Noto, his Pollyanna-like research reports in support of eToys, an online toy retailer that went bankrupt in 2001, two years after Goldman Sachs took it public, could again be on display this spring. EToys' creditors have sued Goldman Sachs, accusing the firm of having violated its fiduciary duty by underpricing the public offering. Goldman has vigorously disputed this, though in May it lost on a motion to dismiss the case and has appealed.
But Mr. Noto and Ms. Meeker can be comforted by the knowledge that they are genuine survivors. Henry Blodget, the former Merrill Lynch Internet analyst, is now reinventing himself as a journalist for Slate.com, and Holly Becker, once of Lehman Brothers, was recently cleared by the S.E.C. after an insider trading investigation and is now a full-time mother.
For the surviving analysts, life remains very much the same. Ms. Meeker still works at a flat-out pace, delivering her rousing big-picture speeches, often about her faith in Internet stocks.
"The enthusiasm was well placed; it just got ahead of itself in many respects," Ms. Meeker said at a conference earlier this month.
Mr. Noto, who was a star linebacker for West Point in 1990 and an Army Ranger, has worked relentlessly to restore his tattered reputation and this year was awarded a coveted No. 1 ranking in Institutional Investor magazine's yearly investor poll, beating Ms. Meeker by a significant margin. Both analysts' stock-picking skills have improved.
In the last three years, the stocks Mr. Noto recommended - which now include media and entertainment companies - have outpaced the indexes, going up 23 percent, according to Investars, a stock-performance tracking service. For the same period, Ms. Meeker's picks, which were not weighed down by laggards like Time Warner, are up 72 percent.
In the late 90's boom, Ms. Meeker's prowess as an analyst with a fervor to involve herself deeply in the work of Morgan Stanley bankers was well documented. But Mr. Noto's eagerness to tout the prospects of some of Goldman Sachs's more dubious investment banking clients is not as well known. To be sure, Mr. Noto did take his lumps for his unflagging support of Internet bombs like Homestore, Asford.com and eToys.
On CNBC, he was jokingly referred to as Anthony Don't-Know, a nickname that circulated within the ranks of Goldman's research department as well. In the charged environment of the Internet crash, such public ribbing is less than surprising.
While acknowledging that he has made some bad investment calls, Mr. Noto says that those mistakes were the result of faulty analysis and not pressure from investment bankers.
"My ratings and views on stock were based on my fundamental analysis and valuation conclusions," he said in an interview. "I recognize that I have made mistakes. I regret that and I have learned from them."
Some of those mistakes were noticed by Goldman Sachs's own technology bankers, who made tough-minded critiques of Mr. Noto in an evaluation of his work from August 1999 to July 2000, a period that included the early months of the Nasdaq collapse. In the evaluation, a managing director in Goldman's corporate finance division said that "Anthony undermines his credibility by appearing as more of an advocate/defender (or at worst a company spokesman) for his companies' success rather than as an unbiased analyst." Mr. Noto declined to comment on the evaluation.
The managing director said that Mr. Noto "has an upbeat spin no matter what the news" and added that "while supporting our issuer clients is obviously helpful, in these types of markets it tends to undermine GS' credibility."
In a recommendation for "actionable areas of development," another investment banker who had worked with Mr. Noto said that he "must sometimes push back on banking if he feels that some of his companies are not GS caliber."
Despite these stinging remarks, Mr. Noto's banking peers lauded his hard work, his "thought leadership" and his management skills. "He is always willing to share information with bankers," one banker said, before bestowing on Mr. Noto the ultimate Goldman accolade that foreshadowed his partnership stake: "strong culture carrier in this respect."
Partnerships at Goldman are given out every two years and are generally awarded to the firm's top income producers, who tend to be investment bankers or traders. Indeed, of the 99 partners named this year, only 3, including Mr. Noto, are working research analysts, and the two others have at least 10 years' experience at the firm. Mr. Noto joined Goldman in 1999, making his ascent to partner an unusually rapid one.
All the same, even his fans acknowledge that they have only recently been converted.
"Look, Anthony Noto was created by investment bankers," a prominent hedge fund manager who has closely followed Mr. Noto's career said, adding: "But give him credit. At some point, the light bulb went off, he got rid of all the dogs and now he has been doing the best analysis on the Street."
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