Power Failure

As Enron crashes, angry workers and shareholders ask, Where were the firm's directors? The regulators? The stock analysts?

By Daniel Kadlec Monday, Dec. 10, 2001

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    The Dotsons have a familiar problem. Many 401(k) plans do not give employees the flexibility to diversify properly, and even when they do, employees hold a large slug of their employer's stock--an average of 62% in Enron's case. In 1996, Senator Barbara Boxer, a California Democrat, introduced a bill that would have required that 401(k) plans have no more than 10% of assets in the sponsoring company's stock. Firms that offer 401(k) plans lobbied against it, and the bill went nowhere. Now, "Enron is a call to arms," says Mike Scarborough, president of Scarborough Group of Annapolis, Md., which advises 401(k) participants. "Corporations need to do something about that, or change will get forced down their throats."

    The demise of Enron further tarnished the reputations of stock analysts at big brokerage firms, who already stood accused of urging investors to buy the shares of troubled companies that did business with their firms. J.P. Morgan Chase maintained a "long-term buy" rating until Nov. 29, when the stock closed at 36[cents] off its December 2000 high of $84.62. The bank has loans out to the company totaling $900 million and stood to collect millions of dollars in fees for advising on the aborted Dynegy deal.

    Analysts looked the other way early last year when Enron shares were soaring and the company let it be known that it might sell shares of stock in its online-trading operations. Not wanting to miss a shot at the underwriting assignment, analysts were reluctant to be tough. "When you question them in detail, they get offended," says Brian Youngberg, who recently began covering Enron for brokerage Edward Jones and began downgrading the stock in October. "It's been their culture not to disclose things."

    Too few analysts asked why Lay and Skilling were eager sellers of their personal holdings of Enron stock during the first part of 2000. Murky accounting should have been another red flag. Says Rob Plaza, who follows Enron's stock for Morningstar and concedes he might have been more sharp-eyed: "If they're so profitable, why did they need all that borrowed money?"

    Lawmakers may bring the hardest questioning--and the most trouble--to accountants and auditors. Arthur Andersen occupied an entire floor of Enron's headquarters, and was paid $54 million to both audit and advise the company. That relationship and previous impropriety charges against Andersen may leave it as exposed as Enron to a damaging investigation. "When I entered the business, there was an adversarial relationship between accountants and companies, and you had confidence in the numbers," says Morgan Stanley's Wien. "Today the relationship is more collegial, and you can't have that confidence." And now we know just what a crisis of confidence can do.

    --With reporting by Cathy Booth Thomas/Dallas, Michael Duffy and Adam Zagorin/Washington and Frank Gibney Jr., Julie Rawe and Eric Roston/New York

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