Enron/Andersen Scandal Updates on April 30, 2002
Bob Jensen at Trinity University

Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm 

Arthur Andersen LLP has signed a letter of agreement with Robert Half International (RHI) arranging for the transfer to RHI of a "substantial majority" of the firm's partners and other employees of the firm's U.S. Business Risk Consulting Services group. http://www.accountingweb.com/item/79084 

For a complete index of Andersen stories, see: http://www.accountingweb.com/item/76481 

For a list of Andersen client defections, see: http://www.accountingweb.com/item/74745 

For a list of Andersen Worldwide Network firm mergers, see: http://www.accountingweb.com/item/76820 

On April 24, 2002, the U.S. House of Representatives passed H.R. 3763, the "Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002" by a vote of 334 to 90. The discussion now moves to the Senate, where the Banking Committee is likely to introduce comparable legislation.

For links to statements released by the White House and the AICPA use the links below:

AICPA Statement on the Passage of HR 3763

Statement by President Bush on the Passage of HR 3763

Forwarded by Mike Roye (a current student)

Dr. J,

I came across this article today in the Financial Times. Goes right along with the pro/con exam question. Sounds like EnronGate is impacting many areas of finance and accounting, beyond just auditing reform.




The  pro/con exam question that he refers to is Question 1.5 at http://www.cs.trinity.edu/~rjensen/Exams/5341sp02/exam02/ 

The exam relates to my evolving letter to Senator Schumer at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm 

Rotten to the Core Updates
I added the following to http://www.trinity.edu/rjensen/fraud.htm#Cleland 

On April 12,  I reported on the Merrill Lynch indictment by the State of New York --- http://www.trinity.edu/rjensen/fraud041202.htm 

Nice Going Merrill Lynch:  To Hell With the Widows and Orphans
The pressures put on the Merrill Lynch internet group to appease both investment bankers and clients led the group to ignore the bottom two categories of the five-point rating system (“reduce” and “sell”) and to use only the remaining ratings (“buy”, “accumulate” and “neutral”). The absence of clear guidance from Merrill Lynch management on how to resolve the conflicts created by these pressures led respondent Henry Blodget, the head of the internet group, in a moment of candor, to threaten to “start calling the stocks (stocks, not companies)... like we see them, no matter what the ancillary business consequences are."
Chief of the Investment Protection Bureau of the New York State Department of Law and am of counsel to Eliot Spitzer, Attorney General of the State of New York before the Supreme Court of the State of New York, April 2002 
(Dan Gode from NYU sent me this Merrill Lynch Indictment as an email attachment.)
Bob Jensen's similar "Go to Hells" from Investment Bankers are listed at http://www.trinity.edu/rjensen/fraud.htm#Cleland  
Bob Jensen's April 12, 2002 updates on the Enron/Andersen scandals are at http://www.trinity.edu/rjensen/fraud041202.htm 

On April 25, we learned that the "rotten to the core" investment banking and security analyst scandals are gaining national criminal investigation levels and that the Enron/Andersen scandals are being overshadowed by a much larger and more rotten cancer investment markets.

"Stock Hyping Under The Microscope," CBS Evening News, April 25, 2002 --- http://www.cbsnews.com/stories/2002/04/25/eveningnews/main507282.shtml

(CBS) When George Zicarelli, a videotape editor at CBS News, invested his life savings with Salomon Smith Barney in 1999, the firm recommended a hot new fiber optic company called Global Crossing.

"And then the stock starts dropping," said Zicarelli. As the stock, which Zicarelli first bought at $50 a share, began to swan dive, Salomon's star tech analyst, Jack Grubman, stuck to his "buy" rating and said he was "still bullish."

"I constantly asked my broker to reassure me. And he constantly reassured me," said Zicarelli. In the end, Zicarelli said, he lost more than $450,000 on Global Crossing.

"Close to half a million dollars altogether."

But after learning that analyst Grubman was making millions in investment banking deals from the very companies whose stocks he was recommending, Zicarelli is now seeking damages from Grubman and Salomon Smith Barney.

Zicarelli isn't unique in his experience. On Thursday, New York Attorney General Eliot Spitzer announced that his office and the Securities and Exchange Commission are heading a multi-agency investigation of investment analysts with conflicts of interest.

The inquiry will be conducted by the SEC, the New York Stock Exchange, the National Association of Securities Dealers, Spitzer, the North American Securities Administrators Association and several states, according to a statement released by Spitzer and the SEC.

"I think there is a crisis of accountability right now," Spitzer told CBS News Correspondent Anthony Mason before Thursday's announcement of the inquiry.

It's possible that Zicarelli could get some settlement resulting from the inquiry. He has also hired an attorney, Jacob Zamansky, to pursue matters directly.

"Jack Grubman and Salomon Smith Barney have misled investors with thoroughly conflicted stock research," said Zamansky. Zamansky has already won $400,000 in damages for another client from Merrill Lynch. He says the two cases are similar.

"Absolutely," said Zamansky. "It's the same issue."

The issue is the credibility of Wall Street's investment advice and potential charges of criminal fraud. And it's not just burned investors out for blood. Wall Street hasn't faced this kind of legal scrutiny in decades.

"It may only be the tip of the iceberg," said Spitzer, who has been investigating Merrill Lynch.

After subpoenaing company e-mails, Spitzer revealed that Merrill's former Internet analyst Henry Blodget, while publicly touting a stock called Infospace, was privately ridiculing it as a "powder keg" and "a piece of junk."

Spitzer said that across the entire investment industry there is "a desire and an urge to push the boundaries in a way that means fraud on almost a daily basis. And that can't be permitted."

SEC Chairman Harvey L. Pitt said the disclosures that resulted from Spitzer's investigation, as well as practices uncovered by the SEC, the New York Stock Exchange and the National Association of Securities Dealers, "reinforced the commission's conclusion that further inquiry is warranted."

Salomon Smith Barney has refused to comment. Merrill Lynch's chief financial officer, according to the Wall Street Journal, has called its analyst's actions "inappropriate." That may not be enough, said Spitzer, who wants both reform and an admission of wrongdoing.

"If they continue to maintain that what happened was inappropriate, but wasn't illegal, then there will be no settlement. Then there will be much tougher sanctions. There could be criminal charges. And the fate of the company is in their hands."

Among ordinary investors like George Ziccarelli, Wall Street's credibility has already taken a beating.

"I believed 'em," he said. "I know it sounds dumb now. But I did."


Nice going Lehman:  To Hell With the Widows and Orphans
Richard Gross, an analyst at Lehman Bros., maintains a "strong buy" rating on Enron as the stock declines from $81 to $0.75. A Lehman spokesperson helpfully explains to the New York Times that the firm was advising Dynegy on its purchase of Enron's pipeline, and it is Lehman's policy not to change the firm's rating on any company involved in a deal in which Lehman is an adviser.
Number 55 among the 101 Dumbest Moments in Business reads as follows at http://www.business2.com/dumbest/

Nice Going Paine Webber:  To Hell With the Widows and Orphans
"The Man Who Paid the Price for Sizing Up Enron," by Richard A. Oppel, Jr., The New York Times, March 27, 2002, Page C1 ---  http://www.nytimes.com/2002/03/27/business/27ENRO.html 

Enron (news/quote) executives pressed UBS PaineWebber to take action against a broker who advised some Enron employees to sell their shares in August and was fired by the brokerage firm within hours of the complaint, according to e-mail messages released today by Congressional investigators.

The broker, Chung Wu, of PaineWebber's Houston office, sent a message to clients early on Aug. 21 warning that Enron's "financial situation is deteriorating" and that they should "take some money off the table."

. . .

The episode illustrates just how easily Enron appears to have thrown its weight around at a Wall Street firm, which may have satisfied a big corporate customer at the expense of some retail customers. PaineWebber managed Enron's stock option program for employees and handled brokerage accounts for many company executives. It also did substantial investment banking work for Enron, which generated fees for the firm. PaineWebber said that Mr. Wu was fired because he had violated policies by sending unauthorized e-mail messages to more than 10 clients and by failing to disclose that PaineWebber's research analyst had rated Enron a "strong buy."

But the day that Mr. Wu was fired was the day that Enron's chairman, Kenneth L. Lay, was both shedding some of his own shares and talking up the stock. On Aug. 21, Mr. Lay sold $4 million of stock to the company. He also sent an e-mail message to employees saying that one of his highest priorities was to restore investor confidence, adding that that "should result in a significantly higher stock price."

The message complaining to PaineWebber about Mr. Wu was sent by Aaron Brown, an Enron official who PaineWebber said helped oversee the stock option program. Mr. Brown could not be reached for comment. A switchboard operator at Enron said today that Mr. Brown no longer worked at the company, and a spokesman did not respond to questions.

Mr. Wu, who declined to comment through his lawyer today, previously asserted that Enron was behind his dismissal, but today's disclosure was the first to show pressure was applied by Enron officials. Mr. Wu now works for A. G. Edwards.

A PaineWebber spokesman declined to elaborate on the matter involving Mr. Wu but pointed to a letter sent to Congress last week.

  Continued at http://www.nytimes.com/2002/03/27/business/27ENRO.html 

JP Morgan – whose lawyers must be working overtime – is refuting any wrongdoing over credit default swaps it sold on Argentine sovereign debt to three hedge funds. But the bank failed to win immediate payment of $965 million from the 11 insurers it is suing for outstanding surety bonds.
Christopher Jeffery Editor, March 2, 2002, RiskNews http://www.risknews.net 
Note from Bob Jensen:  The above quotation seems to be Year 2002 Déjà Vu  in terms of all the bad ways investment bankers cheated investors in the 1980s and 1990s.  Read passage from Partnoy's book quoted at http://www.trinity.edu/rjensen/book02q1.htm#022502 

While watching the CSPAN television special on Enron (Part 2) on January 16, I learned that CSPAN provides some really useful helpers for educators and students at http://www.cspan.org/classroom/ 
There are special materials from CSPAN's week long series entitled "The Enron Bankruptcy"

The Enron Bankruptcy page is at http://www.c-span.org/enron/index.asp 
The links called "Review" allow you to download video which will playback on your computer.  I especially encouraging the downloading of the Tuesday, January 15 "Review" video.

I was particularly impressed, as were all people who phoned in, by the testimony of Scott Cleland (see Tuesday, January 15) and then click on the following link to read his opening remarks to a Senate Committee on December 18.  If you think the public accounting profession has an "independence problem," that problem is miniscule relative to an enormous independence problem among financial analysts and investment bankers --- two professions that are literally rotten to the core.  Go to http://www.c-span.org/enron/scomm_1218.asp#open 

Bob Jensen's threads on accounting and investment frauds are at http://www.trinity.edu/rjensen/fraud.htm#Cleland 

Faced with a limited budget and committed to more frequent reviews of filings by large registrants, the Securities and Exchange Commission is developing new analytical software to help identify the reports most likely to contain accounting irregularities or other potential problems. http://www.accountingweb.com/item/79071 

McGraw Hill's PowerWeb Updates --- Focus on Enron --- http://www.dushkin.com/powerweb/0072827564/ 

The view -- and vacuum -- in the eye of Enron storm...
Washington Business Journal   Wed May 1 03:12:00 CDT 2002
Wife of ex-Enron chief opens resale shop...
Dallas Morning News   reg   Wed May 1 03:09:00 CDT 2002
Wife of ex-Enron chief opens resale shop...
Dallas Morning News   reg   Wed May 1 01:23:00 CDT 2002
AUDITING: Enron's collapse puts the spotlight on auditors...
Business Day   Tue Apr 30 19:06:00 CDT 2002
White House Staff to Answer Enron Questionnaire...
Washington Post   Tue Apr 30 18:58:00 CDT 2002
Giant banks, law firms targeted in Enron battle...
San Francisco Chronicle   Tue Apr 30 18:56:00 CDT 2002
Congressional Panel Snubs Andersen Record Subpoena...
iWon   Tue Apr 30 17:24:00 CDT 2002
Tyco Says Can Make Payment, Stock Rises...
iWon   Tue Apr 30 17:24:00 CDT 2002
Investors file suit over DOV Pharmaceuticals IPO...
iWon   Tue Apr 30 15:56:00 CDT 2002
White House surveying aides on Enron contacts...
CNN   Tue Apr 30 15:32:00 CDT 2002
USATODAY.com - Dynegy stock rises on new credit line despite loss...
USA Today   Tue Apr 30 15:08:00 CDT 2002
Linda Lay to Open Enron Thrift Shop...
FOXNews.com   Tue Apr 30 15:05:00 CDT 2002
Ex-Enron exec's wife plans to open antique, secondhand shop...
AccessAtlanta   Tue Apr 30 13:13:00 CDT 2002
Committee refuses to give Enron documents to Andersen...
Ledger-Enquirer   Tue Apr 30 13:13:00 CDT 2002
White House staff given Enron survey...
Ledger-Enquirer   Tue Apr 30 13:13:00 CDT 2002
Andersen Snubbed on Enron Papers...
Tallahassee Democrat   Tue Apr 30 13:12:00 CDT 2002
Andersen Snubbed on Enron Papers...
Miami Herald   Tue Apr 30 13:12:00 CDT 2002
House balks at handing Enron papers to Andersen...
Nando Times   Tue Apr 30 13:11:00 CDT 2002
Andersen Snubbed on Enron Papers...
Sun-Sentinel.com   Tue Apr 30 13:11:00 CDT 2002
EU clears GE purchase of Enron's wind turbine business...
AP via New Jersey Online  

And that's the way it was on April 30, 2002 with a little help from my friends.


Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm 


In March 2000, Forbes named AccountantsWorld.com as the Best Website on the Web --- http://accountantsworld.com/.
Some top accountancy links --- http://accountantsworld.com/category.asp?id=Accounting


For accounting news, I prefer AccountingWeb at http://www.accountingweb.com/ 


Another leading accounting site is AccountingEducation.com at http://www.accountingeducation.com/ 


Paul Pacter maintains the best international accounting standards and news Website at http://www.iasplus.com/

How stuff works --- http://www.howstuffworks.com/ 


Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at http://www.cs.trinity.edu/~rjensen/video/ 
Accompanying documentation can be found at http://www.trinity.edu/rjensen/default1.htm and http://www.trinity.edu/rjensen/HelpersVideos.htm 


Professor Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134  Email:  rjensen@trinity.edu