Enron: Financial Information and Conflict of Interests

Abstract

In this article we discuss the relationship between the financial conglomerates, the issuers and the market and in particular the role-played by the financial analysts in the dissemination of financial information in Italy and the U.S. In the last months the financial analyst have been criticized on the grounds that they had contributed to inflate the speculative bubble of the 1990s. Numerous financial analysts had a growing tendency to 'boost' the investments in the financial market and the reluctance to issue sell recommendations on companies whose shares they owned or which were clients of the investment banking side of their own firms or which were actually aggressively seeking with the promise of 'rosey' analyst reports. This attitude of the financial analysts was crystal clear in the Enron case. A Thompson Financial survey of all research recommendations covering Enron on November 29, 2001, a day after the stock price fell from the 60-cent to the 40-cent range, found six 'strong buys', two 'buys', six 'holds', zero 'sells', and only one 'strong sell'. And of the two brokers who did change their recommendation after the stock fell below a dollar, one went from 'strong buy' to 'hold' while the other went from 'buy' to 'market underperform'. In Italy this phenomenon has not reached the magnitude it had in the United States but the problem exists since the market of the financial information is also in Italy in the hands of the financial conglomerates and the integrity of the financial analyst is under siege. The Italian regulation on the protection of investors provides: (a) a duty to disclose in any research report the potential conflict of interests of the financial analysts; (b) and the duty to build in the financial conglomerate the so-called traditional 'Chinese wall'. Also the European Commission has presented a proposal for a Directive on insider dealing and market manipulation ('market abuse') that would increase the standards for market integrity in the securities field throughout the EU. However, the actual (and future) regulation does not solve the problem, which seems to persist, since the rules do not attack directly the structure of the financial conglomerates, which is the source of the potential conflict of interests inherent in the different functions the conglomerates perform.