WASHINGTON - Several Wall Street analysts told a skeptical Senate committee yesterday that they continued to recommend stock in Enron even after it began its slide into bankruptcy because they had been duped by the company.
Senators pressed the analysts from four top brokerages to explain how they missed the warning signs and failed to sound alarms that might have saved private investors and state pension funds the billions of dollars that were wiped out when the energy trader collapsed in December.
After several congressional hearings into how senior Enron executives contributed to its spectacular fall, the Senate Governmental Affairs Committee turned yesterday to the role that financial analysts played in the debacle.
Committee members told the analysts that their stock advice appeared to have been tainted by a conflict of interest because they work for investment banking firms that stood to benefit from the purchase of Enron's stock.
"It now seems clear that too many analysts failed to ask why before they said buy," said committee Chairman Joseph I. Lieberman, a Connecticut Democrat. "And often when they did ask why but didn't get a straight answer from Enron's executives, they went right on touting the stock."
But the analysts said they continued to recommend Enron's stock despite signs of trouble because they believed in the strength of its core business model and were never told about the substantial debt incurred by Enron's off-the-books partnerships.
"We were misled," said Anatol Feygin, of J.P. Morgan Securities, who rated Enron stock a "buy" until days before it imploded late last year. "We didn't have the right information."
Curt N. Launer, of Credit Suisse First Boston, who rated Enron stock a "strong buy" until mid-November, said he felt no pressure from Enron or anyone in his firm to issue recommendations other than those based on his own research.
Rather, Launer said, his analysis proved to be flawed because it was based on information that was "inaccurate or incomplete."
Staged trading activity
In the most glaring example, Launer said, he was among a group of about 100 financial analysts who toured the busy Enron trading floor in 1998 and came away impressed with the brisk business the company appeared to be doing in marketing energy products. But he said he recently learned that Enron officials are alleged to have staged the trading activity to create the appearance of progress "that was illusory."
The committee's senior Republican, Sen. Fred Thompson of Tennessee, said it seemed clear that the stock analysts were reluctant to downgrade their rating of Enron because they worked for investment banking firms that were doing lucrative business with Enron.
The analysts acknowledged that they receive bonuses based on the overall profits of their firms.
"Your financial interests were the same" as Enron's, Thompson told the analysts. "They would just tell you everything was going to be all right." He said the analysts overlooked evidence to the contrary until the company began its collapse.
Even then, most analysts downgraded Enron's stock to "hold" rather than to "sell."
That move, said Sen. Susan M. Collins, probably hurt ordinary investors more than others. Collins, a Maine Republican, pointed out that while "hold" is widely understood on Wall Street to mean "dump the stock quickly," many average investors - in Enron and other stocks - are unaware of that code.
As part of its multipronged response to the Enron debacle, Congress is trying to determine how to restore investor confidence, which several senators said had been shaken by a failure of the checks and balances that were supposed to protect them.
Among the options under consideration is legislation that would require stock analysts to function separately from investment banking firms to remove any conflict of interest.
"Mr. Chairman, I'm ready to go" on such legislation, said Sen. Jim Bunning, a Kentucky Republican.
Bunning said he spent 25 years as a stockbroker - after his Hall of Fame baseball career - and found it hard to believe the claims of some analysts that they were unaware of financial interests their firms had in Enron.
'You don't rock the boat'
Howard M. Schilit, president of a small independent financial research firm in Rockville, said the signs of Enron's impending doom were clear since at least March 2000 to anyone who read the company's filings with the Securities and Exchange Commission. But Schilit said that brokerage-based analysts were discouraged from issuing a negative rating that might hurt stock sales.
"If you want to move up the hierarchy in the Wall Street establishment, you don't rock the boat," Schilit said.
The analysts and other industry representatives told the committee that they believed legislation was not needed because brokerage firms were taking steps on their own to increase disclosure and reduce potential conflicts of interest.
Sen. Robert G. Torricelli, a New Jersey Democrat, said he preferred a market-based solution.
"The status quo is not an option," he said.