Morgan Stanley Top Picks

Brokerage firms employ analysts who publish research on stocks. This research can influence investors to buy a brokerage firm’s “top pick.” But do these picks have the investor’s best interests at heart?

Morgan Stanley recently identified Salesforce shares as “overweight,” meaning that analysts believe that the share price will increase. This was a self-fulfilling prophecy, as the announcement led to a 1% boost in Salesforce share prices.

Since a brokerage firm can affect share prices, investors should be wary of potential conflicts of interest.

Morgan Stanley and Alleged Conflicts of Interest

In 2010, the Financial Industry Regulatory Authority (FINRA) ordered Morgan Stanley to pay an $800,000 fine following allegations that the firm failed to disclose conflicts of interest in thousands of stock research reports, dating back to 2006. According to the Wall Street Journal, the firm allegedly failed to disclose essential information concerning more than 6,500 equity research reports. This information allegedly included the personal stock holdings of an analyst or a member of an analyst’s household. FINRA’s acting enforcement chief at the time characterized these failures as “sloppy and negligent” rather than “willful.” In 2014, securities regulators fined 10 securities firms $43.5 million after they allegedly provided favorable stock research as part of their bids to serve as underwriters for the Toys “R” Us initial public offering.

Large financial institutions like Morgan Stanley have parent companies and subsidiaries that serve different types of clients. Morgan Stanley & Co. works with ordinary retail investors, while Morgan Stanley is an investment bank that works with institutional clients, i.e. public companies with stocks to sell. These business relationships can easily create conflicts of interest.

For example, in 2002, luxury goods purveyor LVMH sued a Morgan Stanley analyst, alleging that the analyst had published negative reports about LVMH due to a conflict of interest with luxury brand titan Gucci. Gucci was an investment banking client of Morgan Stanley at a time when Gucci and LVMH had their own legal disputes. Morgan Stanley also allegedly did not disclose that the firm was managing the company’s stock offering. 

A Wall Street Journal article from 2003 highlights a $1.4 billion settlement between 10 leading securities firms and securities regulators following allegations that the firms had published overly optimistic reports to please their investment banking clients. The article also points out that certain securities firms base their analysts’ bonuses on their ability to arrange meetings between company executives and big-time investors, like hedge funds. There are also examples of analysts who allegedly refused to change their “buy” rating for a stock because they did not want to annoy their investment banking clients. 

FINRA Rule 2241: Research Analyst Conflicts of Interest

FINRA Rule 2241 states that firms must establish written policies and procedures designed to address conflicts of interest related to the preparation and distribution of research reports, as well as public appearances by research analysts. Firms must also manage conflicts of interest related to the interaction between research analysts and those outside of the research department, including investment banking sales and trading personnel.

Why Did Morgan Stanley Identify Salesforce as a “Top Pick”?

A Morgan Stanley analyst stated his analysis of the Salesforce business model concluded that the company’s massive amount of customer data will have robust applications with artificial intelligence. It stands to reason that the more data AI has to work with, the stronger its predictive powers will be. Investors should know that this is speculation on Morgan Stanley’s part, and the consensus is only a “moderate” buy rating.

Brokerage Firms’ Duties to their Customers

If an investor is paying an investment advisor for portfolio management, or relying on a broker for recommendations, the investor should be able to trust that their financial professional will give them personalized recommendations. Just because an investment is a “top pick” does not mean it is suitable for every investor. There are no one-size-fits-all investment recommendations.

For instance, financial professionals should help their investors maintain a well-balanced portfolio. While Salesforce stocks may look attractive based on Morgan Stanley’s analysis, they may not belong in an investor’s portfolio if that portfolio is already exposed to risk in the computer software sector. A lack of diversification is a violation of FINRA Rule 2111, which requires brokers to make recommendations that suit their investors’ financial needs and risk tolerance.

What if I Lost Money Following a Purchase of a “Top Pick”?

Investors may be able to recover money following the purchase of a “top pick” stock. Securities attorneys may be able to uncover a lack of due diligence or a conflict of interest at the root of their rating. Contact our team of investment fraud lawyers today if you have concerns – our attorneys only collect a fee if they win your case. Call (877) 600-0098 or email info@kurtalawfirm.com.