Published: January 29, 2002

photo preview / download CNBC’s Consuelo Mack Interviews Dan Scotto , Top Ranked Analyst by “Institutional Investor”

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.

MACK: Yeah.


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