Beware the Angry Investor

A post-Enron investor revolt appears to be brewing against companies seen as using loose accounting to pump up earnings. Tyco International (TYC ), AOL Time Warner (AOL ), Cendant (CD ), Anadarko Petroleum (APC ), Williams (WMB ), PNC Financial Services (PNC ), Dynegy (DYN ), and even General Electric (GE ) are getting pummeled in the stock market for what is viewed as flawed accounting. Investors are angry--but perhaps not angry enough.

It is increasingly clear that Wall Street has known for years that many corporations had wildly exaggerated earnings, but it didn't tell the investing public. Some on the Street may be guilty of worse. Take the case of Enron Corp. (ENE ) and Merrill Lynch & Co. (MER ) Merrill executives helped create the LJM2 Enron partnership and attracted institutional investors. As many as 100 of Merrill's own top executives put their personal money into the deal. Why? Because Enron's chief financial officer, Andrew S. Fastow, would run it, and he promised enormous returns. That Fastow would also put $2 million of his money into LJM2 was seen as giving him even more incentive to generate big payouts. Fastow's glaring conflict of interest, which should have stopped the Merrill executives, actually acted as an incentive to them: "A. Fastow's dual role creates advantages for the fund and Enron," said the Merrill Lynch prospectus sent to a select group of potential investors.

Many institutional investors declined to buy into LJM2 because of Fastow's conflict of interest. But some of the world's biggest institutions took a piece. Among them were Citigroup (C ), Credit Suisse Group, Deutsche Bank (DTBKY ), J.P. Morgan Chase (JPM ), and Lehman Brothers (LEH ).

What were they thinking? Much of the world's financial community turned out to be willing enablers of Enron. No wonder "Wall Street credibility" is fast becoming an oxymoron. Investors are angry, but are they angry enough?

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