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CFRA was founded in 1994 by former American University accounting Professor Dr. Howard Schilit, author of the popular book Financial Shenanigans in 1993. Even before the publication in 1993 of the landmark Financial Shenanigans, Dr. Schilit had explored the intersection of accounting and the markets. At the time, there were very few researchers dedicated to the space and the distinct games outlined in the book helped shape a new era of financial statement analysis. With a relatively small staff, CFRA was founded and immediately began serving long-only funds that thought they would benefit by understanding alpha-killing time bombs in their portfolios and hedge fund clients looking for early signs of company weakness to support short strategies. CFRA was able to add meaningful insight and early warnings to such frauds as Worldcom and Parmalat as well as provide prescient calls on several other large stock declines. These and other frauds helped fuel interest in the product and eventually led to the passage of Sarbanes-Oxley in 2002. 2002 also saw the formal launch of CFRA’s European company coverage, a first in the industry.
In 2005, CFRA acquired Criterion, LLC, who had developed a quality of earnings model based on accrual anomaly research by professors Richard Sloan and Scott Richardson. In 2006, CFRA received broad recognition for its market moving work on the growing options backdating scandal, identifying early several companies at risk for scrutiny around this controversial practice. In addition, CFRA’s series on the growing risk in the subprime mortgage space received wide media recognition and culminated in the addition of New Century Financial to the Biggest Concerns list, several months before that company filed for bankruptcy related to risks we identified. In 2007 RiskMetrics Group acquired CFRA.
CFRA’s research product has continued to thrive, with the Biggest Concerns List generating alpha (as measured against a broad market index) each year and as of early 2010 underperforming the market by a cumulative 60% since we began measurement in 2005. In 2008, CFRA received awards for its coverage and contrarian view on General Electric and in 2009 for its early call on risks in the alternative energy sector, with many stocks down 30 per cent or more from where coverage was initiated. In 2010, Co-Director of Research Jeremy Perler published the third edition of Financial Shenanigans with Dr. Schilit. On June 1, 2010, MSCI acquired the RiskMetrics Group which included CFRA.