SEC & WS Watchdog System Failed Enron ("Enron" Rubin/"Global Crossing" McAuliffe watch

Report: Watchdog System Failed Enron
Mon Oct 7, 1:58 AM ET
By MARCY GORDON, AP Business Writer

WASHINGTON (AP) - The Securities and Exchange Commission and Wall Street's system of informally policing big corporations failed in their duty to detect the impending accounting failure at Enron, a Senate panel finds in a new report.

The Senate Governmental Affairs Committee, which has investigated the role of government and industry watchdogs in Enron's stunning collapse since early this summer, said the oversight system must be tighter.

It said the oversight failures included financial analysts, credit-rating agencies and auditors as well as the SEC.

Criticism of the SEC was also coming from the House side of the Capitol. Democratic leaders there are angry with the SEC's reported rejection, amid Republican and industry opposition, of pension fund director John Biggs to head the new independent board to oversee the accounting industry established by a law enacted this summer.

"We strongly urge you to resist bowing to pressure to reject a candidate due to industry opposition," House Minority Leader Dick Gephardt, D-Mo., and other Democrats wrote SEC Chairman Harvey Pitt. Biggs is chairman and chief executive officer of TIAA-CREF, the teachers' pension fund which is one of the nation's largest.

The Senate committee has received some 2,500 pages of documents under subpoena from the White House related to contacts with Enron officials. But it did not address that issue, a potential political embarrassment for President Bush, in its lengthy report.

Panel spokeswoman Leslie Phillips said recently that committee investigators were continuing to examine the documents.

The report released Monday said the SEC staff failed to review Enron's earlier financial reports filed with the agency. Had they done so, it said, "they would have had an opportunity to uncover some of the problems with the company's financial practices that appear to have been signaled in those documents."

In addition, the report noted, the market watchdog agency made earlier decisions allowing Enron to engage in certain accounting practices and exempting the energy-trading company from some federal requirements.

"The leeway afforded Enron by these determinations in certain cases appears in fact to have been abused by the company in ways that ultimately played a role in Enron's collapse," the report says.

SEC spokesmen couldn't be reached for comment Sunday night. They have previously noted that the lack of review of Enron's financial filings and exemptions for the company occurred under the Clinton administration.

Houston-based Enron slid into one of the biggest corporate bankruptcies in U.S. history last December, toppled by a complex web of thousands of partnerships used to hide some $1 billion in debt from the SEC and shareholders. Its failure, which decimated the retirement savings of thousands of employees and hurt individual investors and pension funds nationwide, became the first in a series of big company scandals that shook public confidence in the stock market and the integrity of corporate America.

Last week, the Justice Department charged Andrew Fastow, Enron's former chief financial officer and the alleged mastermind behind the partnerships, with fraud and conspiracy. His attorney said that Fastow, the most prominent Enron figure targeted by federal prosecutors to date, was just following orders from top company executives.

The Senate report, released by committee chairman Sen. Joseph Lieberman, D-Conn., also cited the oversight failure of Wall Street analysts — many of whom continued to issue bullish "buy" recommendations for Enron even as its stock slid last year. Many of the analysts' brokerage firms did investment-banking business for Enron, a built-in conflict of interest cited by the committee's investigation and other critics.

In addition, the Wall Street credit-rating agencies, such as Standard & Poor's and Moody's Investors Service, failed to ask probing questions about Enron's financial condition, the report said, as did Enron's directors and its longtime auditor, Arthur Andersen LLP.

"These failings call into question the basic assumptions on which our financial regulatory framework is built," the report said.

Andersen was convicted in June of obstruction of justice for destroying thousands of Enron audit documents.

Can Blue-Ribbon Panel Fix the IPO System?
Sun Oct 6, 4:05 PM ET
By Jake Keaveny

NEW YORK (Reuters) - Blue-ribbon committees are famous for issuing reports and recommendations that are promptly forgotten.

So it's noteworthy that such a committee has been called on to look at the initial public offering process, one of Wall Street's biggest problems in memory. Investor confidence has been shaken by claims that the IPO process was rife with conflicts of interest and favoritism -- assertions that helped drag the IPO market to its slowest period in 25 years.

The New York Stock Exchange and the National Association of Securities Dealers appointed the committee last Thursday. There's no telling what weight its resolutions will carry -- it's still not even clear what its mandate is.

But given the circumstances, the breadth and clout of the appointed members, and most importantly, that it was created at the behest of Securities and Exchange Commission Chairman Harvey Pitt, optimists, at least, are hopeful.

"I think, I hope, that we will have some powers, that the resolutions we come up with will have broad support," said Robert Mendelson, a longtime securities lawyer at Morgan Lewis, and one of 11 members appointed to the committee. "It's important for the restoration of confidence."

The composition helped ease concerns that Pitt, who has come under fire for being behind the curve on the reforming process, was mostly posturing. The array of interests represented -- from publicly traded corporations to retail investors -- suggests there is little incentive to maintain the status quo.

There are more than a few old hands aboard. The advisory committee is chaired by Geoffrey Bible, the retired chief executive of Philip Morris Cos , who headed the cigarette maker during the landmark tobacco legal settlements in 1998.

Daniel Tully, a former head of Merrill Lynch & Co who oversaw the investment bank's growth to a global powerhouse, was also called in from quasi-retirement, as was Peter Brooke, the founder of Boston-based private equity fund Advent International, who over the last 40 years, by his own measure, has brought "hundreds of companies public."

Other notable members include John Brennan, chief executive of institutional fund manager The Vanguard Group; Martin Lipton, a pioneering mergers and acquisitions lawyer from Wachtell, Lipton, Rosen & Katz, and John Markese, president of the American Association of Individual Investors;

KEEP IT SIMPLE

While regulators were clearly looking for a distribution of interests, the group's disparate nature could be the biggest hurdle to accomplishing anything.

The members have yet to convene for their first meeting, but Morgan Lewis partner Mendelson expects that the idea was to let market regulators impose new limitations on the underwriting banks. The committee's mandate will likely be more focused on taking a deeper look into the process, especially as to how issuers and investors could be better served.

Another member, William Hambrecht, the chief executive and founder of West Coast investment bank WR Hambrecht + Co, will undoubtedly -- and doggedly -- promote an IPO auction process he pioneered.

It's transparent enough, he has long claimed, to eliminate most of the incentives that led to the manipulation of IPOs.

Advent's Brooke, though, doesn't have radical measures on his mind (at least no yet, as of Friday he knew nothing more than that NASD Chief Executive Robert Glauber had asked him to take part). He expects that you could get a lot of mileage out of some simple rules -- like having underwriters put limits on how many IPO shares that executives could receive.

"It doesn't take a hell of a lot to police yourself," said Brooke. "If you have the will to do it."

MANDATE?

Members don't know how their imperative fits with a web of existing initiatives by the SEC, NYSE, NASD and the New York Attorney General's office.

Among the recent proposals are amendments to further separate analysts' compensation from banking revenues to help eliminate the incentives to manipulate stock research. Also, the SEC and the New York Attorney General's office are reportedly pushing to completely separate banks' research businesses from investment banking operations.

Given that Wall Street firms are central to the IPO process, it was notable that the NYSE and the NASD left them largely out of the mix. From the street's largest firms, only Tully, who is retired from Merrill Lynch, was appointed.

That may seem obvious since banks like Citigroup's Salomon Smith Barney, Credit Suisse First Boston and Merrill Lynch have been largely blamed for the abuses during the late 1990's IPO market.

Bankers, though, say it was a tactical mistake because any reforms will most directly affect the so called "bulge bracket" banks, which dominate the IPO process from underwriting to sales to research.

"You need to have people who understand the nuts and bolts of the process, otherwise how can the input be constructive," one investment banking executive said before the committee was named.

Other members include: Myra Drucker, chief investment officer of GM Trust Co.; Jay Ritter, a finance professor at the University of Florida, and Lawrence Sonsini, chief executive of West Coast law firm Wilson Sonsini Goodrich & Rosati.

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