The New York Times
September 23, 2005
S.E.C. Looks at Company's Retaliation on Analysts
By GRETCHEN MORGENSON

The Securities and Exchange Commission is investigating the Altera Corporation, a California chip maker, over its retaliation this year against Wall Street analysts who were less than bullish on the company's shares, the company said yesterday.

The informal inquiry, which is being conducted by the commission's San Francisco office, may indicate that the practice of companies blackballing analysts is of concern to Christopher Cox, the new S.E.C. chairman.

"Altera Corporation today announced that it has received a request from the S.E.C. asking the company to voluntarily provide information relating to the company's communications with equity analysts and their firms," said Anna del Rosario, a company spokeswoman. "The company is cooperating fully in this matter. And, as previously stated, Altera's policy is to grant access to all analysts who cover the company."

An analyst who follows Altera said he had been contacted by the S.E.C. this week and that the document request was intended to determine whether Altera violated securities laws by denying access to certain analysts. The analyst, who said he had experienced problems in his dealings with Altera, insisted on anonymity to reduce the likelihood of further difficulties with the company.

The regulatory scrutiny on Altera came almost two months after a public feud erupted between the company and Tad LaFountain, a longtime semiconductor stock analyst then working at Wells Fargo Securities. In late July, Mr. LaFountain dropped coverage of Altera because its management had stopped talking to him and would not let him ask questions during conference calls. He said that Altera had objected to his analysis that questioned whether the company's costly share buybacks, used to offset large stock option grants, were an appropriate use of shareholders' cash.

Chris Danely, a semiconductor analyst with J. P. Morgan Securities, was also subjected to Altera's displeasure. He received a letter dated last April 22 from Altera's chief financial officer, Nathan M. Sarkisian, that began: "Be advised that we do not intend further interaction or communication with you or your staff." Unlike Mr. LaFountain, Mr. Danely has not discussed his relations with Altera publicly.

After Mr. LaFountain blew the whistle on Altera, Mr. Sarkisian publicly apologized to him and said the company would no longer freeze out analysts. Wells Fargo subsequently shut its research operation and Mr. LaFountain was laid off.

The trouble between Mr. LaFountain and Altera began in March, when the analyst was speaking by telephone to Mr. Sarkisian and Scott Wylie, the company's vice president for investor relations. According to Mr. LaFountain, Mr. Sarkisian told him that "it was not in the shareholders' interest to facilitate my work." Four months later the analyst stopped covering Altera, saying that he planned to replace the company with a rival that "takes a more appropriate view of the role of independent investment research."

Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York, said regulators could be interested in determining whether Altera's actions had hindered the free flow of information to investors. "The S.E.C. may be looking to see whether or not the company was trying to mislead the investing public by controlling the flow of information through selected analysts who were adopting the company line," he said.

Analysts rarely go public when threatened by the companies they cover, but the cold shoulder approach from companies appears to be common. According to a 2005 study commissioned by IR magazine that involved a poll of which more than 4,000 analysts and portfolio managers, 38 percent of brokerage firm analysts said they had been punished by a company after they downgraded its shares.

Companies put analysts in the penalty box in different ways. The most common tactic, according to the study, is to respond slowly to an analyst's questions. Company officials can also curb analysts' participation on conference calls where quarterly earnings are discussed - refusing to take their questions, for example.

According to the study, 15 percent of analysts said that they were not allowed to ask questions on conference calls after a downgrade and 8 percent said that their access to management was restricted. Five percent said that they were subjected to "aggressive behavior" after reducing a rating and 6.4 percent of the analysts said that company officials threatened to suspend their investment banking relationship with the bank or brokerage firm that employed the analyst.

Samuel B. Jones, Jr., chief investment officer of Trillium Asset Management in Boston, said: "As long as there are companies that believe they can selectively deny access to analysts who are held in disfavor by preventing them from asking legitimate questions on conference calls or cutting them off entirely, the mere threat of possible cut-off creates a poisonous atmosphere."