Published: January 29, 2002
In an exclusive interview on last night’s “Business Center,” Consuelo Mack spoke with analyst Dan Scotto, who questions the integrity of his profession and its culpability in the Enron collapse. Scotto, who was ranked the #1 analyst by “Institutional Investor” magazine for the past 9 out of 10 years, says that his negative report on Enron in August, 2001, may have cost him his job at BNP Paribas.
The transcript follows:
Please reference CNBC’s “Business Center.”
SUE HERERA, co-anchor:
For many investors, the warning signals about Enron did not go up until far
too late, but not all of the analysts were clueless. Consuelo Mack joins us
now. She has her exclusive story of one analyst who told it like it was, and
he paid for it. Right, Consuelo?
CONSUELO MACK reporting:
He did, Sue. Thank you very much.
I talked to one of Wall Street’s consistently top-ranked analysts, who is
willing to go public about the coverage of Enron because he basically wants to
tell the truth and he has nothing more to lose. I asked him, `Who’s at fault
in the Enron situation? Who really dropped the ball?’
Mr. DAN SCOTTO (Former Enron Analyst): It–you know, from my perspective,
from an analyst’s perspective, I think the Street dropped the ball. I–I
think that–that people should have been putting out–analysts should have
been putting out warning signals much earlier on. And then that, of course,
would have helped even employees, who could–you know, who got locked into the
40–401(k)s and–and were precluded from selling. I mean, if they had started
to see some reports early last year that the story was not necessarily holding
together or–or that the risks were much higher–you know, the–the problem
with Enron, also, was that it was a darling. I mean, it was almost a Teflon
company. It–the stock just continued to move up. No one could really say
anything negative about it and be credible. And that was another issue.
And–if–if that had happened, maybe some people would have taken notice and
gotten out a little earlier.
MACK: For the last 25 years, Dan Scotto has called Wall Street home. Serving
as research director at L.F. Rothschild, Donaldson, Lufkin & Jenrette as well
as Bear Stearns, Scotto is a superstar in the world of corporate bonds. His
specialty: utilities. For nine consecutive years, the influential
Institutional Investor magazine ranked Scotto first team in their All-American
analyst rankings. In their description of Scotto and his accomplishments, II
quotes his colleagues and competitors who refer to him as `an icon of
fixed-income, electric utilities research.’ They say, `He’s practically an
institution, always way ahead of the curve,’ and ask, `Is Daniel Scotto ever
wrong?’ A former colleague at Bear Stearns says Scotto is unparalleled in his
Mr. PAUL GREENBERG (Trilogy Capital): In the utilities space, he was–he’s
the best in the business. He’s the–he is–he is the person that we all go to
to find out information because he–he has a wide breadth of understanding of
the industry, and, quite frankly, he understands how the players fit into it.
And you know that you’re going to get an unbiased opinion from him. You’re
not going to–you–you know it’s not going to be some distilled management
MACK: On August 23rd of last year, working for the US branch of France’s BNP
Paribas, Scotto issued his last report. Entitled “All Stressed-Up…And No
Place To Go,” the report was about Enron. Released just one week after the
surprise resignation of Enron’s CEO Jeff Skilling, Scotto gave the company a
neutral rating and wrote the following: `Has Enron’s credit story run out of
steam? Probably. It’s safe to assume that an upgrade is not on the horizon.
Some of that are industry-related, and some of that is company-related. On
the industry front, deregulation, political turbulence poses an upgrade
barrier to all companies, except those with compelling fundamentals and/or
well-above-average rates of return. Enron doesn’t pass this test.’ Scotto
says this was Wall Street speak telling investors to sell.
Mr. SCOTTO: As we all know, there’s that clear understanding on–that no one
is going to say `negative’ or `sell.’ We all know about the–the Wall Street
taboos. So the report that was issued publicly calls it a neutral, but says,
`Use Enron as a source of funds.’ And if you can’t read between the lines on
that one, you probably shouldn’t be investing.
MACK: As for BNP Paribas’ sales force, Scotto says he left them with no doubt
as to where he stood.
Mr. SCOTTO: I told the sales force to go to their clients and tell them to
sell Enron at all costs; that they should completely exit the situation
and–and go into anything else.
MACK: According to Scotto, those views and others did not sit well with BNP
Paribas management. Just three days after Enron declared bankruptcy, Scotto
was notified by a FedEx letter delivered to his home that his employment was
Mr. SCOTTO: Officially, I–I–I was terminated–Should we say?–on December
5th, but that was after, you know, several months of–of–of a very stressful
period in terms of my recommendations and–and the way I approached research
and I guess their–their acceptability of the way I did things.
MACK: BNP Paribas would not say why Scotto was terminated, but in a
statement, the only response the company said it would give, it did say why he
was not. It reads, `Dan Scotto’s departure from BNP Paribas was completely
unrelated to any research he wrote on any company, including Enron.’ It’s a
characterization Scotto questions.
Mr. SCOTTO: Feedback comes back in–in–in various ways and forms. So there
would be some e-mails from some of the capital markets people for the
individ–investment banking, you know, saying, `Could I modify this? Could
I–could I tone it down, or could I emphasize certain business segments–for
example, broadband?’ what–wha–when they were pushing very hard to identify
themselves as–as more of a broadband business.
MACK: And what was your response when you were told to tone it down or
emphasize the positive or do something different in your report, when your
reports essentially were edited?
Mr. SCOTTO: Occasionally I–I modified them, but not necessarily modified
them significantly enough. And the final report, which came out in–on August
tw–23rd, you know, it was pretty clear that–that my relationship with the
firm was coming to an end, certainly if not by their desires, by mine at the
end of the year. So, in essence, I was operating it–as–as a lame-duck
analyst, and I felt that I–I certainly was not going to let it a–an–a
report on Enron or anyone else, for that matter, go out that I didn’t
completely believe in.
MACK: So, Dan, you said that–that the report that you put out in August on
Enron was one of the most negative that you’ve ever put out on any company.
Mr. SCOTTO: Yes.
MACK: Why have you put out so few negative reports on companies that you’ve
been following over 30 years on Wall Street?
Mr. SCOTTO: You really have to be sensitive when you write a negative report.
I used to tell my research assistant, `How would you like to be–you know,
just pretend that someone is writing this about you. And so, you know, if
you’re going to bite the hand that feeds you, do it a little gently.’ So,
historically, I–I have tried to–to be a little sensitive, but get my message
through. And, you know, as I said, the business has changed. In the ’80s,
you could be very direct and say sells. and, in fact, that was really how, I
think, I–I made my reputation on Wall Street–was being brutally honest.
And–and, again, I couldn’t imagine doing that today.
So as the business changed, what I did was avoid writing reports where there
was companies that had problems or that should be sold. And, you know,
customers that were interested in hearing what I had to say would call.
MACK: So even you, Dan Scotto, number-one analyst on the debt side for
Mr. SCOTTO: Years.
MACK: …for a decade and–and known as an independent thinker, really was
reluctant to write a negative report about a company.
Mr. SCOTTO: Yes. It–it was apparent to me, and it should have been apparent
to just about every other analyst who was looking at the company. I think the
real question was: Who was willing to articulate it? In–in essence, who was
going to say the emperor has no clothes? And I don’t think that, given the
nature of the business on Wall Street now, that many analysts were willing to
take that kind of an aggressive stance.
MACK: You said that the business on Wall Street had changed, and, therefore,
many analysts who were covering Enron were unwilling or unable or just didn’t
choose to write about the things that you wrote about…
Mr. SCOTTO: Right.
MACK: …and saw in the company. What’s changed?
Mr. SCOTTO: Clearly, who–who pays the bills. I–if you look at the
different generations on Wall Street, in the ’70s and the ’80s, cust–it was
a–very much a customer-driven business; that is, firms were paid back in
trading revenues and trades for good analytical calls, good–good ideas. In
fact, way back in the ’70s, analysts, particularly on the equity side,
received little credits, or votes, and that’s the way commission dollars were
allocated. That changed in the 1990s when investment banking and the revenues
from a particular deal really dominated the profitability of a firm, and
trading margins had declined to–to–to minimal levels. And that just wasn’t
where it was at.
So I think that you have a whole generation of analysts, particularly younger
analysts, who were schooled in–in being sort of beholden, if you will–and
this is one of the–sort of the tacit agreements there; that–that you will
not step on the toes of–of–and–of clients. I mean, you won’t bite the hand
that feeds you. And I think that if you kind of look at it objectively in
terms of how many analysts, you know, are still employed who–who missed the
call here, you know, in–in–in other business and other industries, they
would be sent to the guillotine quickly. Unf–and that didn’t happen here.
And so you have to ask yourself why.
MACK: So what use is Wall Street research?
Mr. SCOTTO: You know the old saying, `You get what you pay for.’ And as–as
investors, whether you’re a large institution or an individual, if you don’t
pay for it or think you’re getting a free ride, then I think you’re going to
get research which is really not necessarily up to par or–or not what you
would think it would be because, again, you are not the constituency. You
are–you are not paying the bills. Someone else is paying the bills, and
that’s really where the problem lies.
And that–you know, you may very well see, at some point, the pendulum shift
the other way, to boutiques and research-type boutiques and boutiques that
kay–get paid back, reimbursed, for independent research. But I think
you–investors really need to look at–there’s–the kind of research that
comes out on the Street–we–we–you know, and–and question it.
MACK: Do you ever want to work on Wall Street again?
Mr. SCOTTO: No. I–I–I don’t think–and that’s one of the reasons that I’m
being so candid with you, is that I–I don’t think I’m ever going to work on
Wall Street again, because I–I don’t feel like I could be beholded to
investment banking. I think that it would have to be a situation where I
would be allowed to be completely independent-minded. And I–I don’t think
anyone is–you know, no one is buying what I’m selling.
MACK: So right now Scotto is working as an independent energy consultant and
(technical difficulties), and his work will be missed by many of his former
clients on Wall Street. But I’ve known him for a couple of years. I’ve never
seen him look more relaxed.
HERERA: He was.
MACK: He is glad to be out from under the pressure.
HERERA: I know. I’ve interviewed him a number of times, and–and his
demeanor is comprite–completely different.