For reader who haven't followed i3 closely, earlier this week a CIMB analyst apparently published a report detailing Vivocom's 3Q results. The only problem with the report is,  the company has yet to released the results. The report was spotted by some before it was taken off the website and simply went viral, to the extent it appeared on the front page of StarBiz. From what we know so far, SC is investigating now and the analyst has been suspended.

 

From this debacle, there are a few things we may learn.

 

1. Some analysts' cosier than usual relationship with the company impairs their independence

 

It is clear from the incident that the analyst is so close to the company, even having access to insider information. Is it wrong to be close to the management of the company he covers? Actually no. Being close means management is more willing to meet you and share information with you which should help the analyst do their job better. But there's a strict line that you don't cross, which is insider information. It is the line between legal and illegal.

 

 

I have no personal vendetta against CIMB research but a few high profile cases have caught my attention. There are incidents like IFCA, SMRT (not rated report) and now Vivocom. All these have been classic pump and dump case, with CIMB the only, or the first research house to publish a report on them.

 

Of course, everyone can claim that it was an honest mistake and that early investors also made some good money. But share price movement cannot justify the poor research reports published by a supposedly reputable research house. Yes all those stocks above has a good run but if the investment case in those reports was riddled with holes, then you are either grossly incompetent or you are a simply speculative research house rather than a fundamental research house.

 

Why am I pointing towards CIMB research instead of just its analysts? Because the analysts cannot publish a report without their superior's approval. I am no expert but if even I can spot those glaring mistakes in those reports, then what is the head of research doing? Did he/she condone such actions because they also knew that the syndicates will be driving the stock price, at least for a while?

 

Even looking at the recent case of Felda. It is simply a toxic company and the price was hovering around RM1.30. Everyone knows it is a company full of problems which they can't rectify overnight. Then out of he blue, CIMB called a buy on Felda and promoted it. The stock price shot up like there's no tomorrow to RM2.50. Then again out of nowhere, there were some negative rumours like government wants to form a steering committee and CIMB promtly downgraded Felda to Hold based on such rumours. After that the price continued to fall until the latest horrible quarterly results and the fraud case in its associate. Is it a conincidence? Can CIMB be so powerful to push up Felda's price, a big cap company, without some help? And again is it coincidence after the slew of good news and reports, the bad news or rumours followed and CIMB avoided just in time?

 

I leave that to your own judgment, but all these trails lead to the possibility that maybe one of the biggest research house in our country is actively coordinating with syndicates to play a fool out of innocenet stock maket participants, which is a pretty scary idea.

 

3. Vivocom management can't just blame the analyst

 

It is natural for the company to shift the blame. After all, they are not the one who made such stupid mistake. But it is clear that at least someone senior, someone who has access to highly sensitive information is actively colluding with the analyst, which means there is something really wrong with their internal controls and governance structure. And from those comments from forumers where they knew contracts will be awarded even before it became official may just show that it is not an isolated incident.

 

4.  The analyst's career in the financial industry is probably over

 

Make no mistake, the incident brought huge shame to the CIMB name. It is community news when it is exposed in the forum, but when it's on the Star, it's national news. While many people may be aware of such practice, as long as there's no hard evidence incriminating the analyst or the research house, it's all mere allegations and everyone can just close an eye on it. 

 

But now that the secret's out, CIMB's top management can't just do nothing. The industry is so small and now every research house in town would have known about this. SC surely is planning to take action against the analyst, maybe stripping his license and if CIMB takes a soft stance, it would be seen as condoning such illegal actions. Even if such practice is widespread within CIMB, they will put all the blame on the analyst (which is not unreasonable considering that he was the one who made the mistake).

 

And no one would dare to hire him in similar industries with the reputation risk he carries. Nowadays all financial institutions are so afraid of getting embroiled in scandals, they probably will avoid hiring one. Maybe the analyst can now officially join the merry band of syndicates but without the CIMB name with him, just how useful he is to the syndicates will be doubtful...

 

Conclusion

 

When receiving information, never just swallow without digesting it first because most of the time you wouln't know the intention or capability of the person who gives you such information. Same thing when it comes to investing, buying a company just based on what an analyst said without even doing some basic cross-checking (which is so much simpler nowadays) and subject it to a logical/reasonableness test is never a good idea.