Investors Can Blame Selves for Scandals, $8 Trill. Loss: AIMR

Retail investors deserve their share of the blame for the stock hysteria that eventually deteriorated into a rash of corporate scandals on Wall Street. That was the frank opinion put forth by the securities analysts, fund and pension executives and public officials who spoke at last Tuesday's webcast, sponsored by the Association for Investment Management and Research from its headquarters here.

Although panel members were careful not to shift the blame entirely to individual investors, and they conceded that institutional investors, analysts and regulators could do more to curb the problems, they said investors far-too-readily participated in the hype that drove stocks to soaring levels, causing the entire investment community to overlook malfeasance within many publicly traded companies.

"Individual investors bear a great deal of responsibility," said Bill Mann, senior investing editor of the Motley Fool. "We are stewards of our own money. Pro forma accounting wouldn't have become invasive if people didn't believe it without question."

During the boom times of the late 1990's, executives said there were efforts to expose shifty accounting and bloated stock values, but much of them went ignored. For example, Mann said that his Web site had written stories about corporate governance, but readers paid little attention until the recent corporate implosions and the estimated $8 trillion in profits that the bear market has swiped from investors' hands.

"We might as well have been writing in Bulgarian for all the response we would get," he said.

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Vicki Hearing, the public information officer for the State of Wisconsin Investment Board, said that while some investors were working to hold companies accountable for their earnings statements, "there wasn't any big outcry. Investors should have been thinking as a whole what was going on behind companies."

"If you read the headlines for the last decade, you see all the warning signs there," added Gus Sauter, managing director of the Vanguard's quantitative equity unit. "There was fraud. But nobody really responded because they were getting rich the whole time."

"It does come back to greed," Sauter continued. "We, as investors, do have to bear some responsibility for not being more vigilant."

Still, executives said that many disclosure documents are too complicated and lengthy to expect the average investor will wade through them.

"You do have institutional investors and analysts who can go through that information and raise questions about whether that company's disclosure is truthful and meaningful," said Chuck Tschampion, pension fund manager for General Motors Investment Management.


But the problem, of course, is that those analysts are now notorious - and in many cases in legal trouble - for allegedly boosting stock ratings in an effort to woo investment banking business.

Tschampion said, "The analyst has become lazy. We've got to get the analysts back to doing their work."

Institutional investors should pressure public companies to adopt sound corporate governance practices, others maintained. "I believe it's our responsibility, all of us, to keep the pressure on and continually demand that companies are acting in our best interests as owners of that company," Sauter said, adding that Vanguard has organized a "proxy oversight board" that reviews proposals with corporate executives.

Vanguard has voted against 66% of the proxy initiatives in which it has had a say over the most recent reporting period, he said, not because the company is stalwart, but because it is vigilant about ensuring that the companies in which it invests make decisions that serve investors.

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