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The Conflict of Interest Game
Copyright © 2006, Ulli G. Niemann
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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.
© Ulli G. Niemann
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Writer's Resource Box:
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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