Wall Street Watchdogs Get An 'F'

The federal market watchdog failed to discover and prevent the massive accounting failure at Enron Corp., as did Wall Street's informal system of policing corporations, a Senate panel said Monday.

The Senate Governmental Affairs Committee, which has investigated the role of the Securities and Exchange Commission and industry watchdogs in the energy-trading company's stunning collapse since early summer, said oversight must be tighter.

It said the failures could be pinned on financial analysts, credit-rating agencies and auditors, as well as the SEC.

The report came as House Democrats criticized the SEC's reported rejection, amid Republican and industry opposition, of pension fund director John Biggs to head a new independent board to oversee the accounting industry.

"We strongly urge you to resist bowing to pressure to reject a candidate due to industry opposition," wrote House Minority Leader Dick Gephardt, D-Mo., and other Democrats to SEC Chairman Harvey Pitt.

Biggs is chairman and chief executive of TIAA-CREF, a teachers' pension fund that is one of the nation's largest.

Rep. John LaFalce, D-N.Y., who is retiring after 28 years in the House, disclosed Monday that he had been asked to meet with the SEC commissioners to discuss his being considered for appointment to the new oversight board. LaFalce is the senior Democrat on the House Financial Services Committee.

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.

Committee spokeswoman Leslie Phillips said recently that staff investigators were continuing to examine the documents.

The new report said the SEC staffers 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 regulatory 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 said.

In a statement Monday, Pitt said the SEC will carefully study the report, which he said "details the bitter aftermath of the over-exuberance of the 1990s" in the bullish stock market.

"Under my leadership, we are already well engaged in taking important steps to improve corporate disclosure and enforce securities laws without delay," Pitt said. He said he appreciated the committee's having noted in the report that the SEC needs additional staff and updated technology to monitor companies.

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 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 Governmental Affairs chairman 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 and other critics.

In addition, the report said, 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, as did Enron's directors and the company's 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.

By Marcy Gordon