January 29, 2002

Ex-Analyst at BNP Paribas Warned His Clients in August About Enron

By REBECCA SMITH
Staff Reporter of THE WALL STREET JOURNAL

DON'T ASK, DON'T TELL?
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Financial analysts who tracked Enron Corp. have taken a pounding for being company "shills" and for failing to concede they didn't fully understand the Houston energy-trading concern's complex finances.

Then there is Daniel Scotto.

The bond analyst in New York for BNP Paribas says he was forced out of the French securities firm because he told his clients in August that Enron securities "should be sold at all costs and sold now." That warning came about two weeks after Enron Chief Executive Jeffrey Skilling suddenly quit and a couple of months before Enron began the plunge that ended in federal bankruptcy court on Dec. 2.

Mr. Scotto, 49 years old, issued a research report on Aug. 23 to his clients that lowered his firm's recommendation on Enron to "neutral" from "buy." He pushed that designation even further by suggesting Enron might be a "source of funds." Translation: Consider selling Enron securities to raise money for other investments.

If he had gone with a "sell" rating, he says, "I'd have been taken out to the guillotine that very day."

BNP Paribas declined to elaborate on the reasons for Mr. Scotto's departure. A spokesman says the move "was completely unrelated to any research he wrote on any company, including Enron." Spokesman Mark Wisniewski, reading from a statement, added that the securities firm "is committed to the integrity of its research product" and said the securities firm was surprised by Mr. Scotto's allegations, as "he has not raised this issue with us."

[Enron]

Mr. Scotto's experience highlights one of the oldest pressure points on Wall Street involving financial analysts, who traditionally act as a filter between investors and the financial markets. During the past decade, Wall Street securities firms increasingly have pushed their research analysts to actively trumpet stocks and bonds, not impartially analyze them.

The side benefits to the securities firms can be enormous: If an analyst touts a company's securities, the securities firm stands a greater chance at becoming an adviser to that company, and garnering the fees that will follow. Nowadays, analysts can be stars, receiving bonuses of several hundred thousand dollars for helping their firm to win big underwriting deals. Bash the securities of a corporate client, though, and the securities firm could be shut out of lucrative deals. Enron issued billions of dollars worth of securities in recent years, generating huge fees for its financial advisers and bankers.

Some analysts say Enron wasn't hesitant to complain about research conclusions it didn't like. Some of these people say they now are under orders not to talk about Enron, in view of its stunning collapse.

For his part, Mr. Scotto says Paribas didn't want him to say negative things about Enron because the securities firm had an investment-banking relationship with the energy trader.

Still, Mr. Scotto says he followed up his August written report with an investor conference call -- recorded because it took place from the firm's trading floor -- that he says was much blunter. He says he decided to flatly advise his clients to dump Enron securities because Enron's profit margins "were flattening out and starting to decline. This wasn't a company with hard assets; it was built on paper and highly leveraged."

A few days after the brouhaha, Mr. Scotto says he was told "you're demoted, and we don't think it was a good recommendation or a reasonable one."

After the flap and reprimand, Mr. Scotto says, he was put on family leave, at full pay, for 120 days. He says he checked in frequently but was told he wasn't needed back at work and to take time to "cool off." He then received a termination letter dated Dec. 5. That letter said, in part, that due to a lack of documentation "justifying your continued absence from work, as well as the indeterminate nature of your extended leave, BNP Paribas is left with no choice but to terminate your employment effective December 5, 2001."

Mr. Scotto says he is looking at other options and has no intention of returning to Wall Street. He once worked at New York investment bank Bear Stearns Cos. and the bond-rating division of Standard & Poor's Corp. He says he is considering writing a whistleblower-type book on how Wall Street "really works." He says he wants investors to understand that companies like Enron won't tolerate dissension. "You couldn't ask hard questions, because it was viewed as offensive," he says.

Consider an April conference call Enron had with analysts. Mr. Skilling, then Enron's chief executive, called a questioner -- upset because the energy concern's balance sheet wasn't available when the quarterly earnings were released -- a vulgar term.

In another call that followed the release of Enron's disastrous third-quarter financial results in October, Enron's former chairman, Kenneth Lay, cut off an analyst widely regarded as "short" on the stock, meaning the analyst's firm was betting on a continued decline in Enron's stock. Mr. Lay moved on to others with more sympathetic questions.

"All I can say," Mr. Scotto says, "is it's been a long 30 years on Wall Street for me." He adds that the motto for the Street should be: "Don't ask, don't tell."

Write to Rebecca Smith at rebecca.smith@wsj.com2

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Updated January 29, 2002 11:59 p.m. EST





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