Mean Street: An Autopsy on Wall Street’s Lemmings

How many times must it be said?

You can never be too cynical about Wall Street.

Just ask all the lemmings who drove Legg Mason’s shares up as much as 22% on Wednesday and Thursday based on a market rumor.

A curious thing – these rumors – the SEC never seems to get to the bottom of them. But it should. Here’s our attempt at our own autopsy.

Tuesday, June 23

Legg Mason shares trade more or less in line with the market. The shares close at $22.04.

Wednesday, June 24

9:30 a.m.: LM shares open up 1.4% at $22.35 in a good opening for financial stocks (the XLF, the financial ETF, is up 1.1%).

10:15 a.m.: LM shares bounce to $23 – a rise of 4.4% on higher than usual but not extraordinary volumes.

10:15 a.m. – 1:35 p.m.: LM trades at elevated levels but in line with the XLF.

1:36 p.m.: Ben Harrington, a reporter from the London-based Telegraph, publishes an on-line market wrap piece headlined “FTSE rises 1.2 pc as activist Nelson Peltz targets Legg Mason.”

Harrington reports “talk that US-based corporate raider Nelson Peltz is set to launch a vicious activist campaign against the company…”

Harrington goes on to refer to “market players”, “well-placed sources” and “some sources” to anchor the fact that Peltz apparently “believes Legg Mason could be worth up to $40 a share.”

1:36 p.m. - 2:28 p.m.: LM shares spike and peak at $24.89 up about 8% after the publication of the Telegraph piece.

4:00 p.m.: LM shares close at $24.48 – up 11.1% on the day on volume of 11.4 million shares, almost three times its average volume. LM is the best performing financial stock on the New York Stock Exchange.

6:00 p.m.: CNBC Fast Money commentator Jon Najarian mentions unusual options activity in Legg Mason.

11:48 p.m.: A Banc of America Merrill Lynch analyst upgrades LM from underperform to hold on “potential catalyst.”

Thursday, June 25

12:42 a.m.: A Deutsche Bank analyst upgrades LM from sell to hold.

9:00 a.m.: A Buckingham Research analyst raises target on LM as “activism pressure builds” with a detailed analysis of Nelson Peltz’s options for LM.

9:30 a.m.: LM shares open up a bit higher at $24.62 and then climb steadily on heavy volume.

11:04 a.m.: A Stifel Nicolaus analyst publishes piece “Activist Investor Takes a Stake” but sticks with his hold rating.

12:08 p.m.: LM shares peak at $26.74 just before the WSJ’s Dennis Berman reports that Nelson Peltz’s position in LM remains around “1%.” Shares quickly plummet over 9% on the news.

4:00 p.m.: LM shares close at $24.57 on volume of 18.9 million shares.

Today, LM shares are trading just over $25 on average volume. Someone besides Mr. Peltz could well be building a position. We don’t know. Nor do we know where the Nelson Peltz rumor came from.

I tried to discuss the source of the rumor with the Telegraph reporter who published it. He referred me to his editor, Richard Fletcher, who commented:

“We have investigated the story written by Mr. Harrington and we are confident that he has acted at all times to the high journalistic standards required by Telegraph Media Group.”

In two days the value of Legg Mason’s shares swung as much 22%. Millions were made and millions were lost. The journalist did his job. The analysts did their job. And the investors did theirs.

As I said, you can never be too cynical about Wall Street.

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