Learning to Trust an Analyst Again

Tim Mullaney

Tim Mahon is back on the sell side of the IPO market. If that name isn't familiar, Mahon's unintended legacy may be. At Credit Suisse First Boston, Mahon wrote an e-mail that became a kind of minor classic of the late-1990s genre of analysts hemming and hawing and finding any way available not to say nasty things about investment banking clients that happened to be bad investments. In a note to a colleague, Mahon urged the other analyst to consider doing what became known as "the Agilent two-step:" You put a buy recommendation on the banking client's stock in public, but in private you tell institutional trading clients to stay away.

Here's the punch line: Mahon's new job is at W.R. Hambrecht & Co., where he's supposed to become research director once he meets some licensing requirements. He started April 3 as a managing director. Yes, I mean that W.R. Hambrecht -- the bank that pioneered the auction-IPO process that enthusiasts thought would give us IPOs free of conflicts of interest between research and banking. The firm that would clean up the market has hooked up with an analyst who was at least a symbolic part of the problem. Is that a sign we have put the lessons of the bust behind us a little too soon?

Now, Mahon apparently is not a bad guy. His note was cited in a civil SEC complaint about Credit Suisse First Boston that was later settled, but he never faced any charges personally. Indeed, he was not even the analyst who covered Agilent or invented the two-step. Instead, his e-mail advised a colleague I'll call Analyst A to consult with a third CSFBer -- call him Analyst C -- who covered Agilent about how to keep clients on both sides of CSFB's business happy. Here's how the SEC described it:

"The [colleague] noted that he wanted to give one of the companies a neutral rating, but was 'wondering how to do this based on banking sensitivities.' The other analyst (this is Mahon) responded by suggesting that the analyst ask the analyst who covered Agilent about 'the Agilent Two-Step. That's where in writing you have a buy rating...but verbally everyone knows your position.'"

Even though Mahon never got in trouble, people have enough bad memories of the bust, and the role analysts played in setting up investors for a fall, that Mahon's return is worth briefly noting. There are two sides of the story. Here's part of a thoughtful e-mail to me from Hambrecht spokeswoman Sharon Smith:

"Tim Mahon has been completely honest and forthcoming about his background. We hired him because he has been on the buy side for the last few years in addition to his work as a sell side analyst. The combination of these experiences was central to our decision. Since institutional research is changing so much, we wanted someone who has been on both sides of the fence so that he can balance the cost and effectiveness of traditional research with the needs and expectations of the research consumers, which are increasingly hedge funds. It's not easy to find qualified people who can do that. Generally, we constantly strive to find qualified and experienced individuals and see no conflict that a lot -- most -- of them once worked for bulge bracket firms. People who work here believe in what we are trying to do and that perspective often comes from being at a traditional Wall Street firm. ...Tim ... has had no regulatory actions brought against him....We also feel that it would be misguided to make any broad assumptions about Tim (or anyone for that matter) based on one email, taken out of context, that has been widely reported on in the press."

Her question to me was, is Mahon's return news? I said yes, because the Agilent two-step is now prohibited. The standard research note from Wall Street now contains a section where the analyst attests that he or she really believes the advice the report gives. Mahon didn't invent the two-step, he just gave it a pungent name that drew attention to it and helped spur reform. I wouldn't ostracize him forever. But the rules requiring that every analyst take the seemingly obvious step of affirming that he or she really believes what she is saying will probably be Mahon's most important legacy, no matter how he does in his new job.

What do you think?

Before it's here, it's on the Bloomberg Terminal.