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Investor warning: Disclosure daze ahead

With all the covering-thy-posterior verbiage contained in Wall Street research these days, CNET's Larry Dignan wonders what's a perplexed investor to do?

Disclosure: This writer may be slightly grumpy. He has spent a more than a few hours reading recent Wall Street research reports and all the accompanying disclosure statements. He may be afflicted with disclosure daze.

Now that this minor disclosure is out of the way, we can start discussing--you guessed it--disclosure statements.

We've had Congress, the Securities and Exchange Commission and everybody else taking pot shots at Wall Street and its business practices. Finally, investment banks--especially ones catering to individual investors--are disclosing all their various conflicts of interest.

Some of these disclosure statements are the same boilerplate mantras tacked on the bottom of research reports for years. (You know, the ones you never bother to read). Other firms are spending so much time disclosing various business relationships that it's hard to read the actual research.

In either case, it can't be good for Wall Street's self-esteem to actually read these disclosures. Is everyone on the take?

For instance, Merrill Lynch recently gave its view on the Sanmina-SCI Systems merger. The report was 1,741 words, and 690 of them were spent disclosing stuff.

About 20 words into the Sanmina opus, Merrill, which has been making a few highly publicized moves to regain its research department's reputation, tells investors that as a full-service firm it "has or may have business relationships, including investment banking relationships, with the companies in this report."

Fair enough.

But 300 words after the first disclosure, Merrill drops in a "we interrupt this research report" version of its disclosure. In that disclosure--marked with a few asterisks--Merrill tells us it was an adviser to Sanmina with its proposed acquisition of SCI.

"Sanmina has agreed to pay a fee to Merrill Lynch for its financial advisory services, a significant portion of which is contingent upon the consummation of the proposed transaction," Merrill says.

Translation: It'll benefit Merrill greatly if the firm says good things about the merger, so it can be consummated and the investment bank will get paid.

But don't worry, Merrill says the research report isn't intended to influence shareholders or serve as an endorsement. It also doesn't want investors to think Merrill is providing them with voting advice. Sure it isn't.

After that 120-word disclosure ditty, Merrill's analyst gets on with the rest of his report.

Once Merrill gives its upbeat outlook for the merger, it discloses that it has managed securities offerings for Celestica and Solectron, rivals of Sanmina. It also tells folks about how its research is distributed in Hong Kong and Australia.

Although that disclosure at the top, middle and bottom of Merrill's report is a tad annoying at least it's there. Every firm is different. In fact, the pattern seems to be that investment banks that deal with a lot of individual investors--Merrill and Prudential for instance--are the most upfront with disclosures.

In a recent research report, Prudential disclosed that Internet analyst Mark Rowen owns a "material position" in eBay, but doesn't own a material position in, Digital River, Expedia,, Priceline and five other companies he covers. At the bottom, Prudential discloses that a material position is one that's $10,000 or greater.

Other brokerage houses are a bit skittish with the disclosures. On many reports, Goldman Sachs notes that its important disclosures are available on request or are attached. If Goldman does disclose anything it's often with goofy codes that few folks understand--CS, SP1 and SP2. That disclosure sounds like sunblock to most investors.

As with most Wall Street tales, this one from Morgan Stanley comes down to "buyer beware":

"Morgan Stanley and others associated with it may make markets or specialize in, have positions in and effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies...No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned...The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary."

Now that's a disclosure worth remembering.