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SEC 'Failed' Enron Investors, Report Says

Oct 7, 2002 | The Washington Post A Senate panel criticizes the Securities and Exchange Commission for its passive approach to rooting out financial fraud and rebukes credit-rating agencies for failing to act as watchdogs, lapses it says magnified the effect of Enron Corp.'s collapse last year.

The Senate Governmental Affairs Committee, in a staff report to be released today, chronicles what it labeled the missteps of the SEC and private-sector groups charged with monitoring the health of publicly traded companies.

In a letter to SEC Chairman Harvey Pitt, the committee's top-ranking members, Chairman Joseph Lieberman, D-Conn., and Sen. Fred Thompson, R-Tenn., said the agency "ultimately failed to fulfill its mission to protect investors" in the Enron debacle.

It is not enough for the SEC to investigate securities fraud after the fact, the report said. The agency must do more to prevent abuses from injuring shareholders.

The SEC did not review any of Enron's financial statements after 1997 and did not monitor Enron's compliance with special accounting treatment it permitted the company to use, the report said. After concerted lobbying from Enron, the SEC allowed the company to use mark-to-market accounting for its energy trades, allowing it to estimate the current value of long-term contracts and include that in its profit figures.

Former Enron employees have said mark-to-market accounting was widely misused to exaggerate Enron's financial results. Although the SEC said the company should use objective standards when using the accounting method, it never checked that the company complied, the report said.

"The SEC missed potential opportunities to identify serious problems before the house of cards fell," it added. The report urged the agency's leaders to inspect more company filings and coordinate better with other agencies.

While taking the SEC to task, the committee did not mention Congress's role in blocking attempts to strengthen the agency's enforcement and oversight functions.

"Congress undercut the SEC's attempts to bring more discipline to the (accounting) process," said Douglas Carmichael, director of the Center for Financial Integrity at the City University of New York's Baruch College.

In a recent memoir, former SEC Chairman Arthur Levitt Jr. named a number of prominent lawmakers who opposed securities regulators on key issues, including attempts to restrain the use of stock-option awards to compensate top executives. "None was a more formidable foe than Sen. Joe Lieberman," Levitt wrote in his book "Take on the Street."

Pitt, in a statement Sunday, said the Senate panel's report "details the bitter aftermath of the over-exuberance of the 1990s." Although Pitt said he had not read the report in full, he added: "I think it is an effort that needed to be undertaken, and we will carefully consider the report's conclusions."

The committee also criticized the nation's three major credit-rating agencies and recommended that employees at Moody's Investors Service, Standard & Poor's and Fitch Ratings undergo more training and monitoring by the SEC.

The agencies' bond ratings are used by investors and others as a gauge of a company's financial health. These ratings were vital to Enron's ability to borrow at affordable rates and finance its rapidly growing operations.

The credit raters, which enjoy freedom from most legal liability and enhanced access to corporate executives, lowered Enron's rating several times as its stock price plunged last fall. But they did not drop the ratings below investment grade until four days before the company filed for bankruptcy protection last December, the report noted.

Representatives from the credit agencies told Congress at a hearing earlier this year that Enron executives repeatedly misled them about the company's heavy debt, which was concealed in off-book partnerships and disguised as energy trades.

The report said of the debt raters: "Agencies did not perform a thorough analysis of Enron's public filings; did not pay appropriate attention to allegations of financial fraud; and repeatedly took company officials at their word, without asking probing, specific questions."

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