Is Corporate America’s cozy relationship with Wall Street’s sell-side analysts about to come to an end?
Possibly. As CFO.com reported in late April, New York State attorney general Eliot Spitzer’s investigation into conflicts of interest at Merrill Lynch is apparently wrapping up. Reportedly, management at the investment bank is close to agreeing on a settlement with Spitzer. Part of the deal: reportedly, Merrill will pay New York State a hefty fine for its actions.
And on Wednesday, the Securities and Exchange Commission approved new rules aimed at addressing conflicts of interest that arise when research analysts recommend the securities of their firm’s customers.
The new rules include the following provisions:
Meanwhile, back on the Street: while Merrill Lynch appears to be nearing a settlement with New York state, the bank still faces a lawsuit arising from Spitzer’s investigation. It seems some investors are less than thrilled that Merrill analysts allegedly issued buy ratings on certain company stocks—while privately deriding those companies. In addition, it’s uncertain whether Spitzer’s investigation will end with Merrill Lynch or spread to the rest of the investment-banking community. Even with the SEC’s announcement on Wednesday, this controversy is a long way from over.
Andersen on Trial
Yesterday in Houston, an SEC investigator told jurors in the Andersen obstruction of justice trial that the commission started informally investigating Enron Corp. in late August. As you recall, Enron management didn’t publicly admit to troubles at the company until October. That month, Enron management acknowledged it would have to restate revenues at the company due to huge losses incurred by its off-balance-sheet investment vehicles.
So why did the SEC begin looking into Enron? According to Spencer Barasch, the SEC investigator who testified yesterday, commission members decided to launch a preliminary probe after reading an article on August 28 in The Wall Street Journal. That article “suggested some improprieties at Enron,” particularly potential conflicts of interest involving special-purpose entities managed by then-CFO Andrew Fastow.
In addition, Barasch testified that investigators at the commission were perplexed by some of the management changes at the Houston-based trading company. “We were curious why [former CEO Jeffrey Skilling] resigned after only six months in that position,” explained Barasch.
Barasch said the SEC was even more curious about Fastow’s partnerships doing deals with Enron. Said Barasch: “This suggested to us that there could be a conflict of interest in his role as chief financial officer of Enron and his role as owner and manager of these partnerships.”
As Andersen’s trial continues, the overriding question is: Will there even be an Andersen when the jury finally hands the judge its verdict?
On Wednesday, the Big Five accounting firm announced that about 2,000 U.S. tax partners and professionals are joining Deloitte & Touche. In addition, 80 Andersen employees—including six partners—will join Ernst & Young’s Pittsburgh audit and tax practices.
“These announcements are consistent with the firm’s plan to move forward as a smaller and different firm aligned with the reforms we have outlined and the smaller scale of our client base,” said Andersen management in a statement. “To sustain an ongoing business for Andersen, in light of the realized and expected loss of clients, we are reducing the scope and scale of our United States practice. In short, we are aligning our personnel complement and cost structure with our revenue base.”
Andersen management said it would focus its remaining business on middle-market companies, and potentially merge with a “recognized middle-market service provider.”
It added, “This plan is based on Arthur Andersen’s goals of preserving a business operation committed to go forward under reformed measures, providing the firm’s people with career opportunities, and ensuring that our clients will be provided continued quality service from respected professionals.”
In addition, KPMG Consulting Inc. said it signed a letter of intent to acquire up to 23 independent Andersen consulting units for as much as $284 million. As much as 6.5 million shares of stock will be issued during a three-year period to Andersen’s consulting partners who join KPMG Consulting in connection with the transaction.
The letter of intent covers the acquisition of consulting practices of Andersen Worldwide member firms in Europe, the United States, the Asia Pacific region, and Latin America. KPMG Consulting has already bought Andersen’s consulting practices in Hong Kong and in China (technically the same place).
The Andersen consulting practices included in these transactions generated $1.4 billion in net revenue in fiscal 2001, more than half of which was generated from Global 2000 clients.
“It’s a once-in-a-lifetime opportunity to get some real value,” said KPMG Consulting chief executive Rand Blazer in a conference call with analysts and media. “If you look at the price and you do some math, you can see we have some good room to play.”
(Editor’s Note:: For a ranking of the Big Five firms by revenues and lines of practice, click here.)
Pitt Denial: Once More, with Feeling
SEC chairman Harvey Pitt insisted to a congressional committee that he did not discuss enforcement matters with KPMG chairman Eugene O’Kelly during their April 26 meeting.
“The meeting was relatively brief—approximately 10 minutes—and at no time was there any discussion of Xerox or any other enforcement matters at the SEC,” Pitt reportedly wrote in a letter to House Energy and Commerce Committee chairman Billy Tauzin, which was released Wednesday.
Pitt said he remembered the meeting as being rather unremarkable until he read published reports about an O’Kelly memo that implied that the two discussed KPMG’s work for Xerox. Xerox recently paid a $10 million settlement to the SEC without admitting or denying allegations of accounting fraud. The SEC is reportedly investigating KPMG’s audit work for Xerox.
Apparently, Pitt did a good job in stating his case. Tauzin’s spokesman reportedly told Dow Jones Newswires: “As far as chairman Tauzin is concerned, the case is closed. We’re convinced that nothing improper was discussed.”