/www.bloomberg.com/ By Andrew Ward
Ann Arbor, Michigan (Bloomberg) -- The University of Michigan ordered a researcher to stop trading in shares of companies that form the basis of a consumer satisfaction survey before the results are made public.
The university acted after Claes Fornell, 55, an economist and head of the university's National Quality Research Center, said he traded in stocks of companies included in the center's American Customer Satisfaction Index before releasing the data.
``I have instructed anyone affiliated with the ACSI not to make personal use'' of information gathered in producing the quarterly index before its release, Robert Dolan, dean of the university's School of Business, said in a statement. ``We will continue further review of this situation,'' he said.
The university's action doesn't address its widely followed consumer-confidence index, a $4,650-a-year subscription service that can move markets. The university offers this monthly index to so-called sponsors, brokerages or companies that can trade on the information before the survey is made public.
Some investors and lawyers say the state university gives clients privileged access to market-sensitive information. ``Not only is that unfair, it's completely inappropriate for a public university,'' said Mercer Bullard, a former assistant chief counsel at the U.S. Securities and Exchange Commission.
Trading on Data
Nancy Connell, a university spokeswoman, declined to list the university's policies governing stock-trading by faculty. ``There are a variety of university policies that govern research and faculty relationships to the research,'' she said.
Researchers involved with the consumer-confidence index don't trade in stocks or bonds affected by its release, said Richard Curtin, the survey's director.
The university's quality research center polls 70,000 customers a year to gauge how 200 companies and government agencies are faring with consumers. The index, which has been compiled since 1994, includes such companies as Wal-Mart Stores Inc., Wells Fargo & Co. and McDonald's Corp.
Trading on the index's data before its release ``sounds pretty dodgy to me,'' said Peter Petas, managing director of CreditSights Inc., an economic research company in New York. ``I bet there's a lot of money managers who would love the chance.''
Sponsors of the survey, such as Verizon Communications Inc., Wachovia Corp. and Home Depot Inc., pay $30,000 to $48,000 a year for data and confidential reports, according to Diane Swanbrow, a university spokeswoman.
Unfair Advantage?
The reports provide information that lets companies assess the loyalty of customers or what upsets them. The survey's annual budget is about $2 million a year, according to the university.
Since 1999, the university has given the Wall Street Journal an advance copy of its quarterly satisfaction index with the understanding the survey will be published on the morning of its release, said Nancy Connell, a university spokeswoman.
The Journal first reported that Fornell was trading in shares of companies in the survey ahead of its release.
Fornell said he didn't get an unfair advantage over other investors. He sold shares in Home Depot and McDonald's, which he aimed to buy back later at a lower price, and bought stock in Yum! Brands Inc. and Costco Wholesale Corp. as the data were being compiled, he said.
``The stocks did not move in a predictable fashion relative to the index'' after the data were released, said Fornell in an interview. He said he has now agreed to stop trading before releasing research findings.
Legal Questions
Whether any laws were broken is another matter. Securities lawyers said the legality of such trades hinges in part on whether promises were made that research would be kept confidential until it was published.
Without such an express obligation, ``it would be hard for the SEC to put together a sustained insider trading case,'' said Brad Bennett, a partner with Baker Botts LLP in Washington and former lawyer with the SEC.
Proving any illegality ``would be an uphill struggle,'' said Karl Groskaufmanis, a partner at Fried, Frank Harris, Shriver & Jacobson in Washington. ``The fact that in one survey, consumers are happy or unhappy with a consumer product is informative but by itself it's not necessarily material to the company's stock price.''
Legal or not, the practice needs to be looked at more closely, said Bullard, now a law professor at the University of Mississippi. ``The SEC should regulate this quasi-public information because it falls through insider-trading cracks.''