Piper's Pickers

How Piper Changed

A graduate of the University of St. Thomas, Peterson joined Piper as a securities analyst in 1993 at age 25, and for the next seven years, followed consumer software stocks and for-profit education businesses. In 2000—at the very peak of the stock market—he was named head of Piper’s research department.

While the “do anything, say anything to get the banking business” culture existed long before Peterson took over as research director, he was nonetheless the guy in charge of a department whose modus operandi earned Piper a place in the global settlement’s Gang of 10. The SEC’s final complaint cataloguing the firm’s offenses included instances of “failure to supervise,” failure in the firm’s research to reflect negative developments at covered companies, research “lacking a reasonable basis,” research that was “imbalanced,” and under-the-table payments to and from Piper for coverage of investment banking clients. Much of this happened under Peterson’s watch.

His research department was also in the hot seat in November of 2002, when the firm had to write a check for $1.65 million to settle charges that it had deleted archived analyst e-mails in violation of an SEC mandate requiring their retention for three years. Just five months before that, Piper was ordered to pay a $300,000 fine after one of the firm’s analysts dropped coverage of a biotech company in apparent retaliation when Piper wasn’t chosen to lead a secondary offering of stock. That incident landed Piper on the front page of the Journal. The company, New York City–based Antegenics, filed a complaint with the SEC, the NASD, and the U.S. House of Representatives subcommittee that covers capital markets.

In the end, Peterson argues that the types of practices Piper was punished for were rampant with all Wall Street firms. “The stress was more on the perception side versus the day-to-day activity,” he says. “The institutional clients knew which [firms] were quality and which were not quality. They knew exactly what was going on—they were the ones who were creating it. They wanted more product [i.e., new-issue stock], and the stocks were going up.”

Still, for a firm its size, Piper seemed to accumulate far more than its share of bad publicity and regulatory difficulties. Down-the-street competitor RBC Dain Rauscher and comparably sized regional firms such as Robert W. Baird based in Milwaukee, A.G. Edwards in St. Louis, Chicago’s William Blair, and Florida’s Raymond James all avoided earning any negative press.

Given the problems that Piper’s research department had under Peterson’s watch (though many occurred before he took charge), it might seem strange that the firm put him in charge of cleaning things up. But perhaps because of his long experience with Piper, that’s exactly what happened. And so far, it’s working. Peterson appears to have divined a formula that has led to the transformation of Piper’s research from public relations for investment banking clients to considerably more useful equity analysis. Piper also has formulated a new compensation model in an industry still trying to figure that out.

In 2000, while managing the research department through Piper’s regulatory troubles, Peterson began putting into place a new system for hiring and managing securities analysts. The system was designed with the help of Timothy Follick, president of Consulting Psychologists, Inc., in Minneapolis. Follick helped Piper develop a profile of an ideal analyst. That template, which incorporates an exhaustive checklist of qualities, has been applied to both existing and new hires. The qualities range from somewhat fuzzy attributes such as “the ability to take ownership of [their] business,” to the more concrete, such as “high-impact research calls,” meaning research that makes people buy or sell a stock. The new profile has helped increase analyst productivity, particularly in regard to institutional investors.

The template has resulted not only in a significant improvement in the quality of the firm’s equity research, but a concomitant restaffing of almost the entire department. Besides Munster, only six of Piper’s 35 senior analysts have more than five years’ tenure at the firm.

Now that analysts’ income is no longer tied to investment banking, they need to find other ways to sell. In the tech space, that means finding what’s hot now. Munster and associate Michael Olson have been transformed into self-described “fearless dumpster divers,” constantly poking around for tidbits about the 26 technology companies they track—information from suppliers and distributors, consumer reactions to new products, the latest dope from trade analysts.

“What Wall Street wants is more nuance and data points,” Munster says. That might mean a writeup about a product whose sales, based on calls to dozens of retailers, may be slowing or taking off; about a design glitch in a new gaming platform that the high-end users don’t like; or about a new group of buyers for a certain type of technology.

In the old days, Munster typically published 100 or so research “notes” in a given 12-month period. In 2004, he and Olson have published 440. At the peak of the bubble, he visited about 100 institutional investors a year to talk about the companies he follows. Last year: 230. The long, thoughtful research report that focuses on broad trends in a company or industry? A thing of the past in Munster’s area of expertise. “In my space, they want to know what’s hot, what’s selling, and what’s next,” he says.

Key to Piper’s reform efforts was the recruitment of Mike Ott, a U.S. Air Force Academy grad and civil engineer who succeeded Peterson as head of equity research in April 2003, the same month the global settlement was announced. Ott is a former Piper institutional salesman, whose job was to present investment ideas to institutional investors. He took over the task of building out Piper’s research, hiring many of the analysts who now work for the firm, and supervising the arduous employee evaluation system that Peterson put in place. Peterson, meanwhile, was promoted to oversee all of Piper’s investment research; last March, he became the head of the firm’s retail brokerage operation.

The system has clearly paid off, as Piper’s analysts’ awards suggests. Munster, who follows such technology behemoths as Apple Computer and Microsoft, ranked fifth in The Wall Street Journal’s “Best of the Street” survey, which ranked 213 analysts out of a universe of more than 4,000. Eric Larson, who follows food and drug stocks, ranked third in his category; Brett Manderfeld, who follows Internet and computer services companies, was listed in second place; Steve Hamill, who follows medical equipment stocks, placed second in his space.

What’s more, the department has lost only a handful of its analysts to larger firms. This, said Ott in an interview in September, was his greatest worry: “Takeaway bids for our key people.”

Ironically, a little more than a week after that discussion, Ott announced that he was leaving the firm to join Minneapolis-based Somerset Asset Management, a division of investment firm Dougherty & Company. His destination: The buy side.