Analysts Testify Enron Misled Them

Analysts who continued to recommend Enron Corp. stock to investors even as the firm slid toward bankruptcy last year testified Wednesday that they were swayed by Enron’s financial deceptions rather than by their own greed.

The role that Wall Street analysts played in the massive losses suffered by employees and shareholders of Enron has been the subject of an investigation by the Senate Governmental Affairs Committee, which held a third hearing on the issue Wednesday.

No legislation is pending to regulate analysts, but Sen. Joseph I. Lieberman (D-Conn.) said taking a hard look at the inherent conflicts in the brokerage business is important.

A lack of faith in company reports and in analysts’ recommendations is shaking public confidence in markets at a time when half of Americans own stocks--often through employer-sponsored retirement plans such as 401(k)s, Lieberman said.

“Today’s investor is like a swimmer who sees a shark,” he said. “They don’t know how many more sharks there are in the water.”

Analysts’ pay often is linked to investment banking fees paid by firms on which the analyst is issuing advice. Analysts or their brokerages also often own stock or have other business relationships with the companies that they recommend, creating conflicts of interest, critics say.

But the four Wall Street analysts who testified said their Enron recommendations were based on public documents and conversations with company executives who remained upbeat. “The role of the analyst is to make informed judgments about companies based on publicly available information. We assume such information is complete and truthful,” said Curt Launer, a utility industry analyst at Credit Suisse First Boston.

“Without accurate and complete financial reporting from a company, I simply do not have the proper tools to do my job.”

Launer added that he performed his analysis without pressure from any investment banker or other employee of his firm. Only inaccuracies and withheld information affected his Enron ratings, he said.

However, other witnesses testified that analysts have for years accentuated the positive about the companies they follow while minimizing risks.

“For at least the last several years, roughly one-third of all analysts’ recommendations were ‘strong buys,’” said Charles Hill, research chief at ratings tracker Thomson Financial/First Call. “The total of both ‘sells’ and ‘strong sells’ was always less than 2%.”

Analysts remained upbeat even as the market tanked in the last two years, Lieberman said.

In the case of Enron, 11 analysts were still rating the stock a “buy” or “strong buy” as late as Nov. 8, lawmakers said. By that point, the stock had sunk to $8.41 from about $80 earlier in the year.

The National Assn. of Securities Dealers recently proposed rules that would bar analysts from receiving compensation that was directly related to investment banking transactions, restrict their personal stock trading and increase disclosures about potential conflicts of interest.

However, a spokesman for the Assn. for Investment Management and Research, which certifies analysts, said some blame must rest on the people who allegedly fabricated Enron’s financial statements.

“The fallout from the scandalous activities at Enron, which resulted in severe financial losses by investors and a lack of confidence in the financial markets, should not and cannot be borne totally by Wall Street analysts,” Thomas A. Bowman, president of AIMR, testified.

In another Senate hearing Wednesday, the head of the Pension Benefit Guaranty Corp. said that Enron’s traditional pension plan is underfunded by at least $125 million, and that the agency may have to step in to make payments, as required by law.

Enron’s traditional pension plan is separate from its 401(k) retirement savings plan.

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Bloomberg News was used in compiling this report.