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The Coming Wall Street ScandalIs it sleazy fraud or inadvertent error? You be the judge.

By Daniel Gross
Posted Tuesday, March 6, 2007, at 6:04 PM ET

(Continued from page 1)

Thomson's response? The authors misunderstood the data, said Joe Christinat, director of media relations for Thomson Financial. "The research was based on multiple sets of data," he said. "And if you analyze them all together, all of the data these authors claim is missing is present and accessible. If they had compiled and searched and analyzed the database correctly, they wouldn't have had any basis for this report." Christinat also told me, "We offered to guide the authors through the database, but they declined the offer."

Ljungqvist is unconvinced. "We just don't know what they think happened in a way that makes sense to us, at least."

Meanwhile, others are making the dire accusations that the authors have avoided. Perhaps Thomson mishandled the data it gathers and sells, and is now somehow covering up major errors. Or, worse, perhaps the database is susceptible to manipulation by powerful Wall Street firms, an argument Bill Alpert made in Barron's last weekend (subscription required). When the Journal compiles the "Best on the Street" rankings, Alpert noted, "analysts are allowed to see the underlying data on a special Thomson Website and request changes of inaccurate information." What's more, he notes: "A former Thomson executive with knowledge of the I/B/E/S database told me he was skeptical that Thomson's validation procedures could prevent a concerted effort by Wall Street to retouch its track record. The Thomson data are maintained by overworked, inexperienced clerks, said the former executive."

It's hard to know what to conclude. Most of my fellow financial journalists and I aren't competent to judge the methodology of the academics. Most of my fellow financial journalists and I also routinely, and uncritically, rely on Thomson Financial for data we use in articles.

Wall Street executives—stock analysts among them—have shown that there's virtually nothing they won't do, and nobody they won't corrupt, to advance their own careers and portfolios. Until a few years ago, people would have thought it impossible that a telecom analyst would offer to swap favorable stock recommendations for help in getting a child into preschool. Or that mutual funds would let certain investors trade in and out of their funds after the market closed for guaranteed profits. Or that well-known companies would mislead investors by backdating options for CEOs ensure that compensation that is supposed to be at risk would be guaranteed. And yet, here we are.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
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