Congress to Investigate Wall St.'s Ties With Enron
The New York Times
February 19, 2002
By LESLIE WAYNE
N ow that Congressional
investigators have looked at the
role of accountants and insiders in the
Enron (news/quote) debacle, they are
widening their investigation and
focusing on Wall Street and the role it
played in the company's rise and
collapse.
Democratic Senate leaders have put Wall Street's relationship with Enron and
potential financial conflicts of interest at the top of a broad Enron-related legislative
agenda that was announced last week. Meanwhile, the House committee leading
the Enron investigation is gathering documents and preparing to summon Wall
Street executives.
These Congressional inquiries, still in their early stages, will examine the way Wall
Street firms structured and sold Enron's limited partnerships. They also will look
into the reasons Wall Street firms were issuing recommendations to buy Enron
stock while they had detailed information about Enron's poor financial condition.
"We're trying to understand whether Wall Street firms had a vested interest to
pump up Enron stock," said Senator Byron L. Dorgan, a North Dakota Democrat
and chairman of the Senate Commerce subcommittee investigating Enron. "Even
as Enron was collapsing, analysts were pushing a strong buy. Did investment
banks have an interest in trying to keep the stock from falling too far and was there
an attempt to deceive investors?"
No date has been set for committee hearings, nor have
individual firms or executives been named. But already,
some members of Congress have said they would like to
examine arrangements involving Merrill Lynch
(news/quote), which underwrote and invested in some of
Enron's off-the-books partnerships; Citigroup
(news/quote), which structured some of the deals to
remove poorly performing assets from Enron's balance
sheet; and Alliance Capital, which aggressively bought
Enron shares for public pension funds as the stock
tumbled in value.
"You can expect to see some Wall Street investment
bankers and stock analysts coming before our committee
soon," said Representative Diana L. DeGette, a Colorado
Democrat and member of the main House subcommittee
investigating Enron. "The whole Enron situation is ripe
with conflicts of interest and Wall Street is no exception.
We want to explore how much those conflicts lead to the
huge overvaluation in Enron stock."
Among the questions to be explored is whether Wall Street
firms urged investors to buy Enron shares in order to
protect their relationships with Enron. Others will ask why
some investment banks had an accurate picture of Enron's
poor financial health but did not share it with their own
customers.
Still others will look at whether Enron pressured Wall
Street firms to push Enron shares into clients' portfolios
or to put money into Enron partnerships. In addition,
lawmakers will raise the question of whether Wall Street
helped facilitate Enron's deceptive financial practices.
"We cannot say that we have evidence of wrongdoing," said
Representative James C. Greenwood, a Pennsylvania
Republican and chairman of the House Energy and
Commerce subcommittee leading the Enron investigation,
"but we certainly have concerns."
Yet taking on Wall Street is not an easy matter. Not only
has Wall Street been a leading campaign contributor, but it supports a powerful
lobbying force with considerable influence. For example, it took more than 17
years for the banks and brokers finally to agree on a modernization of securities
laws.
For that reason, Congress may tread carefully. "This is not going to be an
investigation of all firms," Senator Dorgan said. "But investment banks were
enabling the Enron partnerships and participating in them, and we need to
understand what happened."
Dozens of Wall Street firms were involved in financing Enron's rapid rise, selling its
stocks and bonds, arranging acquisitions and, later, putting together the
off-the-book deals that masked Enron's true financial condition. In doing so, these
firms earned tens of millions of dollars in fees and put billions of dollars of Enron
securities into the market.
They helped Enron on the way up and on the way down. As Enron's downward
spiral began, Wall Street firms - among them Credit Suisse First Boston,
Citigroup and Deutsche Banc Alex. Brown - helped finance Enron's side
partnerships that removed lagging assets from the company's balance sheet. In
these deals, the banks arranged partnerships that allowed Enron to appear more
profitable than it actually was and then sold several billions of dollars in bonds
backed by Enron stock.
In other cases, dozens of banks and brokerage firms were approached about
investing in Enron side partnerships and were shown confidential documents
disclosing the extent of Enron's off-balance-sheet deals. Yet this information was
considered confidential and not shared with Enron shareholders or clients of these
Wall Street firms.
One of these firms was Merrill Lynch, the nation's largest retail broker, which was
the underwriter of a partnership called LJM2. Other LJM2 investors - all of whom
had more information about Enron's finances than Enron shareholders - were
Citigroup; Travelers Insurance, a Citigroup unit; an investment group affiliated with
Morgan Stanley Dean Witter and a group of Merrill Lynch
executives.
A spokesman for Merrill Lynch, Joseph Cohen, said: "There is no need for us to
comment. Our dealings with Enron were proper." John Meyers, a spokesman for
Alliance Capital, which was the largest institutional holder of Enron shares, said,
"Given the information available at the time, we consider our investment to be
reasonable." Citigroup declined to comment.
Speaking for the industry, Marc E. Lackritz, executive vice president of the
Securities Industry Association, said Wall Street, too, was hurt by the Enron
collapse.
"We hope that Wall Street will not be pilloried," Mr. Lackritz said of the upcoming
hearings. "We've been victimized like other investors. Our analysts were
stonewalled and lied to and didn't have adequate information. We were victims,
too."
Securities experts say this line of Congressional inquiry highlights ways that
safeguards put into investment banks to protect confidential information can hurt
investors. Some experts, like Arthur Levitt, former Securities and Exchange
Commission chairman, have even suggested that Wall Street firms refrain from
making stock recommendations on companies whose deals they are financing.
"Clearly, when you see analysts recommending a buy after the company has
declared bankruptcy," Mr. Levitt said, "and when you see many of these schemes
devised by investment banks, there are quite a number of items that bear looking
at. Firms may very well consider not doing research on companies they have an
underwriting relationship with."
At the heart of many of Congress's questions is the so-called Chinese Wall that
prevents Wall Street firms providing investment banking services to Enron, or any
other corporate client, from sharing financial information with their own stock
analysts who make buy and sell recommendations on stocks.
"One of the questions to be investigated is whether we need to keep some
information flowing between the two sides of a firm," said John Coffee, a securities
law expert at Columbia. "One side of the firm knows it is dealing with a highly risky
leveraged company, but the colleagues across the office are putting out a very
bullish recommendations, which they would not do if they knew about the risk."
Joel Seligman, a securities expert and dean of the Washington University Law
School, said that if Congress was considering eliminating potential conflicts within
accounting firms, it should consider the same for investment banks.
"There should be a systematic prohibition on a firm recommending a stock while it
is being underwriting," he said. "Perhaps we should go further and have
investment banks chose whether to provide brokerage or underwriting, but not
both."
That proposal may get a hearing in Washington. "It's not a bad idea," said
Representative DeGette. "It's the same thing as with the accountants."
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