Wall Street entangled in Enron case
Congress, law enforcement question analysts' part in fiasco

Saturday, February 9, 2002

By MARCY GORDON
THE ASSOCIATED PRESS

WASHINGTON -- Powerful Wall Street players are being pulled into the congressional investigation of Enron's collapse -- analysts who recommended buying stock as the company foundered, investment firms that both financed Enron bond sales and invested in the company, and credit-rating agencies that didn't warn investors promptly.

As Congress and law enforcement agencies dissect the biggest bankruptcy in U.S. history, curtains are being lifted from financial institutions that operate away from public view.

One view of the accounting industry, as ink-stained wonks with green eyeshades, has been replaced by images of massive document shredding at Arthur Andersen, Enron's auditor, and by criticism of accountants for turning a blind eye to companies cooking the books.

Some lawmakers are warning that a crisis of confidence by ordinary investors in the nation's financial system is hammering the stock market, which had a terrible week as more revelations surfaced about the Enron disaster.

Rep. Billy Tauzin, R-La., whose House Energy and Commerce Committee is investigating Enron, said the energy-trading company had promised bond-sale business to Merrill Lynch & Co. and First Union Corp. in exchange for their investments in some of Enron's questionable partnerships. Merrill Lynch, the nation's biggest brokerage firm, helped Enron raise nearly $400 million for one of the partnerships from pension funds and other big investors.

Lawmakers also are questioning the role of analysts, some of whom became celebrities and stars of financial television networks as the bull market of the past decade drew in millions of ordinary investors. The problem, as critics see it, is that financial analysts may give biased advice because they hold substantial positions in company stocks they recommend and their investment firms do lucrative financial work for the same companies.

"We can't afford the crisis of confidence the Enron cloud has cast upon the markets this week, with so many people from Main Street to Wall Street wondering how many Enrons are out there," Rep. Richard Baker, chairman of a House Financial Services subcommittee that also is delving into the debacle, said yesterday in a telephone interview.

The market recovered somewhat yesterday, with the Dow Jones industrials average gaining more than 100 points after dropping nearly 300 over the previous five sessions.

"There was so much disconnect" between analysts' touting Enron stock and the reality of the company's condition, Baker said, "that that in itself is enough to warrant a thorough investigation."

Did analysts who kept issuing "strong buy" recommendations for Enron stock know what they were doing? Baker and other lawmakers are asking. Did they have a conflict of interest because the Wall Street investment firms they work for performed services for Enron?

Aiming to stanch a decline in public confidence in analysts, the New York Stock Exchange and the brokerage industry's self-policing arm, the National Association of Securities Dealers, proposed rules Thursday governing the way investment firms manage and disclose potential conflicts of interest. They were welcomed by lawmakers and federal securities regulators who must approve them.

Countless investors nationwide, individuals with small stakes as well as big state pension funds, were burned by the meltdown of Enron stock last fall. The stock, once a darling of Wall Street, traded at around $83 a year ago but plunged to less than a dollar a share in late November as the Houston-based company spiraled toward bankruptcy on Dec. 2.

The Justice Department and the Securities and Exchange Commission are investigating Enron and the role played by the auditors at Arthur Andersen.

In other Enron-related developments:


Former Enron Chairman Kenneth Lay could testify at a Senate hearing Tuesday, a week after pulling out of two scheduled appearances when some in Congress suggested he had engaged in criminal activity. Lay's spokeswoman said he hadn't decided what to do about his scheduled testimony, but Sen. Byron Dorgan sounded optimistic that Lay would answer questions.


Lay has sold his stake in the brand-new NFL team the Houston Texans.


UBS Warburg completed its deal to resurrect Enron's trading business under the Swiss investment bank's control. The new business, UBS Warburg Energy, will begin trading this month.


A committee of Enron's creditors asked a bankruptcy judge to approve their request for information about more than 50 of Enron's partnerships.