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Bigger Than Enron

Thursday, June 20, at 9pm, 60 minutes

The meteoric rise and stunning collapse of Enron caused many to question why the watchdog system that was supposed to protect investors failed to sound any alarms about the company's dubious finances. But Enron and its accounting firm, Arthur Andersen, turn out merely to be the tip of the iceberg.

In the 1990s, Enron was just one of more than 700 corporations forced to dramatically correct misleading financial statements as a result of accounting failures, lapses or outright fraud, costing investors an estimated $200 billion. What went wrong?

In "Bigger Than Enron," airing Thursday, June 20, at 9 P.M. on PBS (check local listings), FRONTLINE examines an oversight system gone soft. Through interviews with SEC officials, corporate executives, members of Congress, and investor advocates, the one-hour documentary explores how the system of controls was eroded by conflicts of interests among watchdogs such as outside auditors, as well as congressional intervention that blocked efforts at protecting investors through improved checks and balances.

"Enron's collapse revealed systemic failures in the regulatory process that's designed to protect investors," says correspondent/producer Hedrick Smith. "Our investigation showed that the growing conflicts of interest within the industry were exacerbated by weakened regulations and a Congress that rejected any attempts to strengthen them."

"Bigger Than Enron" examines the investor frenzy of the 1990s--a market mania not unlike the stock market fever that gripped the nation during the 1920s. After that speculative binge led to the 1929 stock market crash, Congress passed laws to protect investors, establishing the Securities and Exchange Commission and requiring companies to have their books audited by outsiders.

So why didn't those safeguards protect the public in the 1990s?

"Since the Great Depression, gradually what has happened is that those laws have been eaten away--by corporate executives, by Wall Street, by interests--at the expense of investors," says Sarah Teslik, executive director of the Council of Institutional Investors. "The watchdogs now work for executives, accountants, and Wall Street. They don't work to protect shareholders."

Jim Chanos, manager of Ursus investment fund, agrees. "Many of these so-called corporate watchdogs are paid by the corporations themselves," he tells FRONTLINE. "The auditors are paid by the corporations. The bond rating agencies have an agenda where they, too, have consulting arrangements and are paid in many cases by the issuing corporations. Analysts are paid often on the basis of their investment banking fees that their firms bring in for the companies that they are either recommending to buy or sell. So we have all kinds of conflicts of interest that revolve around who is paying who."

Industry insiders also point to the so-called "options culture" of the1990s as a key incentive for pushing up the company's stock price and then doctoring the books to make the company look good.

"When an executive has a portfolio of a hundred million stock options, they can make far more money by getting the stock to move a few dollars in response to false information than anybody could do in most insider trader cases," says Richard Breeden, SEC chair from 1989 to 1993. "So, the size of the stock packages creates a temptation for economic gain that is very corrosive and will lead some people to be willing to lie, to cook up false income, to not tell the truth about negative factors. And in Enron's case, to create an entire picture of a company that didn't exist."

Yet again, industry executives stress that Enron wasn't the only company to provide investors with inaccurate financial reports. "If you go back and look over the last half dozen years...investors had lost probably close to a hundred billion dollars," says Lynn Turner, former chief accountant of the SEC in the late 1990s. "[Investors] suffered those types of losses from these situations like Cendant, Waste Management, Sunbeam, Microstrategies, Rite Aid, Lucent, Xerox...."

"Bigger Than Enron" examines several cases as well as several pivotal battles in Congress, concluding with an examination of the lessons learned from the Enron scandal and its lingering political and financial fallout.

"The Enron scandal has conveyed to the American investor that he can't have confidence in the traditional gatekeepers that protect America's markets," says Arthur Levitt, SEC chair from 1993-2000. "He can't have confidence in the auditor that presented him with the statements. He can't have confidence in the standard setter that created standards which were so fuzzy that Enron was able to hide the obligations of the parent in subsidiaries. You can't have confidence in investment bankers, in the lawyers for the company. You can't have confidence in the rating agencies that should have given him a clear picture of what Enron's obligations were."

Unless major reforms are undertaken to restore that confidence, observers say, it could spell trouble for the U.S. markets.

"Without reform, there's no question we'll see more damage inflicted--we will see more Enrons," Turner asserts. "We have seen a litany of cases, a big increase in cases in the last five or six years. That's not going to change. It's the result of fundamental flaws and shortcomings in the system. Any businessman knows that if you don't fix your systems when you have systemic problems, eventually the customer--the investing public in this case--won't buy. And when that happens, the money won't go into the markets."

Following the broadcast, visit FRONTLINE's Web site at for extended coverage of this story, including:

A deeper look into the story of Arthur Andersen and how the company built its once unimpeachable reputation;
A primer on the various conflicts of interest in auditing, securities analysis, and corporate governance that have defined the Enron-Andersen scandal;
An analysis of the political fallout in the upcoming 2002 elections, and beyond;
FRONTLINE's extended interviews with key figures in the story, background readings, related links, and more.

"Bigger Than Enron" is a FRONTLINE co-production with Hedrick Smith Productions. The senior producer and correspondent is Hedrick Smith. The producer is Marc Shaffer. The editor is Cliff Hackel.

FRONTLINE is produced by WGBH Boston and is broadcast nationwide on PBS.

Funding for FRONTLINE is provided through the support of PBS viewers. National sponsorship for FRONTLINE is provided by EarthLink® and NPR®.

FRONTLINE is closed-captioned for deaf and hard-of-hearing viewers.

The executive producer for FRONTLINE is David Fanning.

-- Cherri (whatever@who.cares), June 20, 2002


Anyonw watch it? If you lost money on the stock market, it went a long way in explaining why. And why you will continue to do so if harvey Pitt, head of the SEC has his way.

But if you missed it, most of it is on the PBS Frontline page.

And don't think it is all republican, a number of key Democrats had a big effect on lowering the protections of public. Although Bill Clinton vetoed legeslation that lowered oversight, he was stabbed in the back by felllow Democrats who had been highly paid (Campaign contributions) by the auditing industry.

Including Al Gore running mate Sen. Joe Lieberman.

Bigge r Than Enron

Before investing, you should read how the auditing and business industries ripped up all of the safeguards that were put in place after the stock market crash of 1929.

-- Cherri (whatever@who.cares), June 21, 2002.

If there is no major outcry over the revelations coming out about the stock market and every entity involved, congress and the "oversight" organizations are only going to do window dressing to hide the incredible failure of stock market regulating and watchdog system failures, there is going to be a crash that will make the crash of 1929 look like a tiny glitch.

The more I look, the more I find is coming out on the incredible out of control corruption, even in the firms that have been the backbone of the industry. If you have any investments you are relying on for the future, you need to do a little research and make some informed decisions about your investments before you end up loosing everything you have invested. Even retirement funds are getting decimated.

This is the time people need to contact their congressional representitives and demand they do the right thing.

Chances are, your money isn't in banks--it's in brokerage accounts. And the people you're counting on to watch over it may not have your best interests at heart.

By Janice Revell, FORTUNE

May 13, 2002

Given the catastrophes that have slammed the securities industry over the past few months, it's no surprise that investor confidence has hit rock bottom. Enron is just the tip of the iceberg. In early 2002 a rogue Lehman Brothers broker was charged with bilking his clients of some $125 million over a period of years. Retirement accounts have been eviscerated by a series of shocking stock collapses--with analysts often screaming buy to the bitter end. Even with the inquiries by the SEC and several state attorneys general into analysts' conflicts of interest, investors can't help but feel that only part of the sordid story is emerging.

And they're right.

There's more at stake now than ever before. We used to rely on banks to guard the bulk of our savings, stashing hard-earned money in these highly regulated, federally insured institutions. No more. Dissatisfied with the modest returns banks provide and encouraged by retirement plans, Americans have poured more than three-quarters of their liquid assets--some $12 trillion--into stocks, bonds, mutual funds, and money markets. Pause for a moment and consider how much of your money is there--not safely tucked in a passbook savings account but in the hands of brokers.

Yes, the overwhelming majority of securities dealers are ethical, law-abiding professionals. However, as the recent news makes eminently clear, there are unscrupulous operators: brokers who trade stocks without their clients' permission, plow customers' money into unregistered securities, or "churn"--excessively trade--stocks to earn greater commissions. Sometimes they simply steal. Now for a critical question: How can you find out if the people you've entrusted with your money are on the level?

The way the system works now, investors often have no clue. The National Association of Securities Dealers (NASD), the self-regulating body that oversees the brokerage business, does provide some answers on its Website, But to get the full story, the average investor has to piece together complicated data from a host of different sources. (More on that later.)

First, a tiny bit of background on how the industry is regulated. Contrary to what you may think, the Securities and Exchange Commission--the ultimate stock market watchdog--doesn't spend much time keeping an eye on brokerage firms. For the most part, day-to-day policing is in the hands of the NASD. While all 50 states and the District of Columbia also have their own regulators to watch over brokerages in their jurisdictions, the state agencies tend to be small and strapped for resources. The expectation is that the NASD, with its large enforcement division, will do the job.

But here's the rub. The NASD is also a trade group. So it has the dual--and seemingly contradictory--responsibilities of representing both its members (virtually every brokerage in the country) and the investing public. Critics say that it is this conflict of interest that keeps investors in the dark.

"The lack of public information is no accident," warns Edward Siedle, a former SEC attorney who also worked as the director of compliance for Putnam Investments. Siedle now advises institutional investors on suspected fraud cases and has conducted hundreds of such investigations. "Wrongdoing in the securities industry is far more pervasive than the public realizes," says Siedle, who himself owns a Florida-based brokerage firm, Benchmark Financial Services, and is an NASD member.

NASD officials insist that the interests of investors come first. "Our primary responsibility is regulatory," says Derek Linden, an NASD senior vice president. The NASD, he adds, provides far more information about its members than does any other financial services organization.

Siedle, however, has powerful evidence to suggest that the NASD isn't doing nearly enough to keep investors informed. FORTUNE obtained an advance copy of the report he drafted on the nation's 5,000-plus securities dealers, which outlines among other things their regulatory histories, bankruptcies, and criminal actions. More important, in a 50-page introduction, the report details what the NASD doesn't reveal through its highly touted public disclosure program. "What I offer is a road map to where the bodies are buried," says Siedle.

It's a book the NASD doesn't want you to see. In a recent letter to Siedle, the organization warned that it has "not in any way authorized" him to sell the data he has compiled from the NASD's public-disclosure system and "will pursue all legal remedies available to it" if he proceeds with publication. Siedle is pushing ahead despite the threats.

It's not that the NASD is trying to guard state secrets. The necessary information about broker misconduct is already out there. Broker disciplinary records are kept in a database known as the Central Registration Depository (CRD). Each brokerage firm must send its broker records--including regulatory actions, which are typically fines, suspensions, or censures; arbitrations; and complaints that investors have filed--to this central database. (Yes, you got that right. It's up to the brokerage firms to rat on themselves!) The state regulators and the NASD have full access to this data, and they in turn decide what information to supply to the public.

As Siedle documents, the information you--the average investor--can obtain depends entirely on which regulatory body you ask. Start with the number of regulatory actions against a given firm. Siedle compared NASD and state-provided disclosures for four large brokerage firms: Salomon Smith Barney, Merrill Lynch, Morgan Stanley, and Prudential Securities. According to the NASD data, the firms had a total of 747 regulatory actions taken against them. Violations include not just churning and burning but more subtle sins, like having too little capital in reserve or hiring brokers without the proper qualifications.

Contrast that with the information from the state agencies: They count almost 2,400 actions for those same four firms over the same time period. The massive discrepancy arises in part from what is considered "reportable" and "nonreportable" under the byzantine requirements of the CRD. A reportable event becomes nonreportable in any number of circumstances--for example, the CRD decides it's out of date, reported in error, or that "some change occurred in either the disposition of the underlying event after it was reported or in the question on the form that elicited the information." (Got that?) The NASD provides only reportable events; the states include both.

"The NASD is taking you on a tour through its system, and the tour doesn't include the basement," says Joseph Borg, the state securities regulator for Alabama and president of the North American Securities Administrators Association (NASAA), which represents the 50 state regulators. The NASD's Linden responds, "We tried to identify what would be of most interest to investors and came up with what we felt was the right balance."

The way the NASD reports arbitrations can also gussy up a firm's past. Brokerages require customers who open accounts to agree in advance to deal with any future disputes with the firm through an arbitration panel, not in court. The NASD--not the states, in this case--keeps and discloses information on these arbitrations. But Siedle's research indicates that it's virtually impossible to get an accurate count of the arbitrations against any one brokerage. He went through NASD's public disclosure system, counting arbitrations firm by firm, and found 9,267 since 1990. However, even the NASD concedes there have been some 64,000 arbitrations filed against firms over the same time period--almost seven times as many as disclosed in the NASD's firm listings!

The main reason for the vast gap: Arbitrations against firms that are settled--about 70% of all cases--do not show up on the NASD system.

None of the above takes into consideration the written customer complaints filed against brokerages that don't end up in arbitration. The NASD won't track these gripes--and there are many. Some are resolved before arbitration becomes necessary; others are simply dropped. The legal fees in taking on a brokerage firm can be steep, and some investors don't have the means to take their case to arbitration. Poof! Any suggestion of possible misconduct disappears.

The brokerage industry says publishing complaint data on the firms is irrelevant. "It's not the firm people are concerned about, it's the individual broker," scoffs Amal Aly, associate general counsel of the Securities Industry Association, the trade group that represents the country's largest brokers.

Such information, however, can be important to investors. A raft of complaints about account churning at a specific firm can indicate that something is truly wrong. The states, unlike the NASD, will provide the data, although getting it can be a slog. Investors must request it on a state-by-state, firm-by-firm basis.

Siedle tried it for one state--Florida--asking for a summary of complaints issued against the four firms cited above (Prudential, Merrill Lynch, Morgan Stanley, and Salomon Smith Barney) since 1986. He counted a total of 1,676 in the Sunshine State alone. Similar data obtained by FORTUNE and dating back to 1993 showed that the most common complaints involve allegations of brokers trading in unregistered securities, followed by the firms misrepresenting themselves, and finally, steering customers into unsuitable investments. That's just four firms--out of 5,000 or so--in one state.

Now, if you want to find complaints against individual brokers, in most cases the NASD will oblige. But here too there's a problem: Brokers can force the deletion of complaints from the books under the terms of arbitration settlements. That means if a broker settles with a client, a firm can buy not only that client's silence but a clean record. The NASD now says it's joining with state regulators to put an end to such deletions except in cases where a clear factual error exists. "It's a very serious matter," says the NASAA's Borg. "We're concerned about brokers who use fraud and deceit as a way of making money and don't mind paying big bucks to not let anybody know about it."

Doing away with this practice won't be easy. No surprise, the brokerage industry is up in arms about the proposed rule changes, arguing that they'd make it too difficult for brokers whose reputations have been tarnished by trumped-up customer complaints to set the record straight. "Anybody can name anybody in a customer complaint, and it's part of the broker's record forever," says the SIA's Aly. "If you're going to sweep in every single allegation, then you have to have an equally expeditious means of erasing falsities."

Despite all the roadblocks, Siedle says investors can still benefit from the information currently available. As a first check, they should access the information provided by the NASD's disclosure program, available through the organization's Website. He also urges investors to call their state regulators, which will mail brokerage disclosure records on request. In the meantime, Siedle says, he's hoping his directory will help pave the way to a better level of disclosure--one that won't handicap investors trying to get the straight goods on the people handling their financial future.

-- Cherri (whatever@who.cares), June 22, 2002.

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