Should Raj Rajaratnam Be Under House Arrest Until Sentencing? Wall Street Strategies' Brian Sozzi Weighs In

Despite the guilty verdict, Raj Rajaratnam is somewhat of a free man, at least for the time being. He will be under house arrest with electronic surveillance until sentencing on July 29. Was this the appropriate punishment for the former hedge fund manager? “Well, it should have been more severe given that he was found guilty on every single count across the board,” answers Brian Sozzi, an analyst with Wall Street Strategies. Still, Sozzi believes that the verdict sends a strong message to the investment community that “behavior along these lines is not going to be tolerated.” Quality of Research While the long-term ramifications have yet to be seen, Sozzi is concerned that analysts will water down their research in the near-term to avoid making a risky call. “Well, going back to the Global Research Advisory Settlement that followed the Enron scandal, banks had used third-party research,” Sozzi said, adding that since that time, the quality of research has gone down. “I think there is [some concern] about where many analysts get their information and how it's acted upon. While you're trying to make a contrarian call on a stock, where maybe the market has mispriced it, you're worried about maybe the stock going up 10% and you've got [investors] asking where did you get the information from. “Now you might even be more worried about going against the grain, and I think the quality of the research product for the individual investor, which was, in my opinion, already boilerplate, might actually become more boilerplate.” Sozzi feels that this will have a negative impact not only on hedge fund performance but on individual investors as well. Normalcy is Out the Door When asked if things will ever go back to normal, Sozzi was not too optimistic. “Normalcy, I think, is out the door,” he said. “The world of research is a lot different from the way it was five, even 10 years ago. The news cycle is 24 hours. You have Twitter – I'm not sure who's monitoring it. The world of research is changing [and] the world of analysts is changing very, very quickly. I think we're finding a new normal within the world of research.” Social Media Monitoring Sozzi, who has spoken about Twitter and the SEC in the past, provided some additional comments on the matter. “It's an interesting area,” Sozzi said regarding investors who tweet and/or search Twitter for information. “It's one of the newfound grey areas within the market. You have many people tweeting sort of along the lines of stock recommendations, giving information out. “In my opinion, there should be some form of oversight on Twitter in an attempt at getting ahead of the curve before some kind of stock ticker has grown within Twitter fame. “The SEC, we all know, is very slow adopting to change. Whether they're understaffed, underfunded, whatever it is, they are just not up to snuff. I think when you have companies monitoring Twitter, they're [creating] a new era of technology.” But it's not just the new era of technology – it's the fact that more and more analysts and investors are coming to social media. “You have more analysts on there, you have more financial markets media people on there,” Sozzi adds. “You have just more people involved in the market on Twitter trying to promote their own agenda or just trying to pass along information. I think if you have a hedge fund, information and the timeliness of Twitter are two things that go hand-in-hand. So if you put those things together…you can make some very good calls.” The Risks Aren't Worth It “For me – and I'm sure there are many like me – credibility is of the utmost importance,” Sozzi said. “It's something you build up over time. To throw that away just to make a call on a stock, it just doesn't make any sense to me. Just to ruin your integrity is not a wise decision. “In terms of fixing it, I think it's going to be tough. We didn't fix it after the Enron scandal. I don't know if there is a way to fix it. Things are moving so fast. It's difficult. At least right now, I don't have any solutions. “I think you might see, again, is more watered down research reports. More watered down calls because analysts are afraid to make those contrarian or big calls out of fear.” Do Your Own Research While individual investors could be hit the hardest by the watered down reports, Sozzi recommends that they do their own research instead. “You may not be able to obtain five meetings with Wal-Mart's WMT chief supply chain officer,” Sozzi said. “But if you listen to the webcast for the conference call, read the financial statements, read the 10-K, and you're abreast of everything that's going on, I think you can make an educated decision.” Changes Ahead? “One thing I would like to track, if I have the time in the next six months, is if there's a change in analyst ratings,” Sozzi revealed. “Do analysts move more to a Hold rating? Do they decide not to upgrade a stock to Buy a couple days ahead of earnings? Or if they do, do they decide not to downgrade the stock a couple days ahead of earnings, because it may look suspicious? What do they know that the next person does not know?” “But in terms of long-term ramifications,” Sozzi concluded, “I am not too certain.”