Enron Cases Underscore Need to Review Information Policies
Lustgarten, Isaac, American Banker
The roles that banks, investment banks, and insurance companies played in providing financial services for Enron Corp. have raised concerns about how they will conduct their business in the future.
Banks are being scrutinized for their roles as lenders to and underwriters for Enron and other companies -- notably for their roles as swaps counterparties and as lenders and syndicators of loans. Investors are suing banks for being lenders to Enron in addition to underwriting Enron bonds.
When financial institutions play multiple roles in related transactions, the law often requires information barriers -- "Chinese walls" -- to prevent insider trading, stock manipulation, front running, and conflicts of interest. These lawsuits raise the question of whether information should be shared within an institution or disclosed.
When news first broke of Enron's collapse, many asked whether abolishing the Glass-Steagall Act, which separated banking and investment banking, had contributed. Obviously, there would have been a conflict, and perhaps a violation of SEC insider trading rules, if banks had knowledge of Enron's deteriorating financial condition and then used that knowledge (without disclosure) to promote the investments. For securities, regulatory, antitrust, and confidentiality reasons, financial institutions should make their lending, research reports and recommendations, underwriting, and securities sales decisions separately.
On Jan. 24 the National Association of Securities Dealers proposed new rules governing securities recommendations made by research analysts. The proposal imposes a comprehensive set of measures to address potential conflicts of interest by research analysts, and the NASD can punish violators.
This initiative addresses the easier issues: the conflicts of a broker-dealer that puts out research reports and underwrites securities. It does not address the issues raised by multiservice financial firms that offer asset management, research, lending, underwriting, swaps, and insurance products to the same company or in related transactions.
On April 8, New York State Attorney General Eliot Spitzer announced that he had obtained a court order requiring immediate reforms by Merrill Lynch in its research business, including that it not prepare a public research report without disclosure of an investment banking relationship.
The court action against Merrill was the result of a 10-month investigation. This concluded that the firm's supposedly independent and objective research was tainted and biased by the desire to aid its investment banking business.
According to reports, Merrill is not the only firm under scrutiny by Mr. Spitzer, who has apparently launched the nation's most aggressive probe of research at investment banking firms.
Meanwhile, in a lawsuit related to the proposed Hewlett-Packard purchase of Compaq, Walter Hewlett is claiming that Deutsche Bank's asset management unit switched its vote to support of the deal after Hewlett-Packard offered some investment banking business. …