Jonathan Cohen: The Analyst

In August 2001, two weeks after Enron chief executive Jeffrey Skilling suddenly quit, Daniel Scotto, a utilities analyst at BNP Paribas SA, issued a report lowering his rating on the energy company from "buy" to "neutral" -- Wall Street parlance for "ditch this turkey."

In his report, titled "Enron: All Stressed up and No Place to Go," Scotto wrote, "For investors looking for 'performance' bonds, Enron may not be the ideal choice."

Scott's superiors at the firm were not amused. Three days later, at a meeting with Paribas's executives, which Scotto described as "heated," Scotto was put on a 12-week family leave and told to "cool down." On the day his family leave expired, Scotto was fired.

Scotto told NBC's Matt Lauer that he was terminated because his negative rating of Enron made it difficult for Paribas to go after the energy company's investment-banking business. In a statement, officials at BNP Paribas insist that Scott's leaving was unrelated to his Enron report: "Mr. Scotto's departure from BNP Paribas was related to issues with his performance and effectiveness as a Co-Head of the research group and his reaction to the change in his managerial responsibilities. Any inference that his departure from BNP Paribas was related to his August 2001 Enron research report is false."

But if Scotto sensed something rotten at Enron, Congress wants to know why analysts at other Wall Street firms continued to pump the stock even as the company unraveled. Was it that the firms' investment-banking divisions would have lost deals with Enron had their analysts downgraded the stock?

The Case of the Controversial Report

The Scotto incident was not the first time an analyst has been gutsy enough to deliver the bad news on a popular company. But the practice is so rare -- and the ramifications often so dire -- that few on Wall Street are willing to risk their jobs or reputations to say that the emperor isn't wearing any clothes.

Back in 1998, Jonathan Cohen did, and while he wasn't canned like Scotto, he was pummeled in the press for his apparent cluelessness about the new rules of the new economy.

In early September of that year, Cohen, a tech-sector securities analyst at Merrill Lynch, issued a report on Amazon.com suggesting that the Internet industry's darling was overvalued by several billion dollars. Cohen's rating was so unprecedented that it perplexed the clerical staff in the firm's publishing department.

"The report was supposed to have a salmon-colored cover" -- the Merrill Lynch designation for "get out while the getting's good" -- Cohen says, recalling the moment from the offices of JHC Capital Management LLC, the private hedge fund he now runs, around the corner from a Ferrari dealership in Greenwich, Connecticut.

"A woman in the publishing department called me to find out if there had been a mistake. In 10 years, she had never seen a 'sell' cover before."

Cohen assured her the cover was correct; he had, indeed, intended to break ranks with his fellow analysts and say that Amazon, the Internet firmament's hottest stock, faced a risky future.

"Amazon's basic premise was very simple," he says. "It was a commodity vendor in a commodity business with low margins. It's a business that had some economic value, but to suggest that it had, at the time, billions of dollars of economic value was patently absurd."

The Rise of Dotcom Mania

As it turns out, Cohen was right. Trouble was, valuing stocks by rational formulas was an unfashionable, even radically uncool position to take circa 1998. It took nearly a year for the market to come around to Cohen's way of thinking.

By December 15, 1998, Amazon had rocketed to $242.75, up 1000%. Then came the analyst report that would live in infamy. Henry Blodget of CIBC Oppenheimer, Cohen's friend and CNBC debating partner, said that $400 was a reasonable price target for the stock. Cohen followed up the next day, suggesting $50 as a more accurate estimate.

The media response was incredulous. Dale Wettlaufer, a columnist on the Motley Fool, a financial-education Web site, excoriated Cohen in his "Holiday Rants" column on December 24, 1998, writing, "Psst. Just because you can't figure out Amazon.com doesn't mean everyone else is incorrect. $50 a price target? Right. That's about as good a call as your calls on America Online when you were at Smith Barney."

Like Scotto, Cohen also found himself at odds with other members of his firm. Cohen concedes that his truculently bearish stance on Amazon surprised his superiors at Merrill, but he insists that they never pressured him to be more positive. "It got a lot of attention inside the firm, but the response was fairly measured," he says. "It was a fairly easy position to defend. Suggesting that Amazon might be worth less than $300 a share wasn't too difficult, even circa 1998."