- The Washington Times - Wednesday, February 13, 2002

The chairman of the American Stock Exchange said yesterday the Enron scandal was undermining confidence on Wall Street and called for swift action to punish wrongdoers and adopt legislation and regulations to prevent future abuses.
"Enron has caused an issue of confidence in the public markets," Salvatore F. Sodano told the National Press Club. "If investor confidence were to significantly erode, that would be quite simply disastrous. Billions of dollars of equity invested in our economy would be at risk."
Mr. Sodano called for "prompt and bold" action to correct the wider problems with corporate accounting and investor vulnerability brought to light by the Enron scandal. But he said the abuses seen at Enron and its auditor, Arthur Andersen, were extreme and must be addressed through enforcement action.
"It's impossible to legislate integrity. There was a massive loss of integrity at Enron, and in this situation, the accountants quite frankly did not do their job," he said.
As Mr. Sodano spoke, reverberations from the Enron scandal caused another day of losses on Wall Street. The stock market has been plagued intermittently in the past month by worries that other companies are hiding problems similar to Enron's in their balance sheets.
Yesterday, the market was rocked by news that Nortel Networks' chief financial officer was ousted because he traded the company's stock using inside knowledge of Nortel's finances and violated the company's retirement-plan investing rules. Nortel declined 42 cents to $6.42 on the New York Stock Exchange.
The stocks of other technology companies from Cisco to Walcom that are known to have used "aggressive" accounting techniques also have come under pressure. Investors even have been taking a second look at the convoluted finances of blue-chip companies like General Electric and IBM.
"People are worried about what other accounting bombs might be out there," said Richard A. Dickson, analyst at Hilliard Lyons. "It doesn't help to hear all this congressional testimony going on, all these Enron guys taking the Fifth. It sets a sour mood."
The Enron scandal has shaken investors both large and small. Janus, one of the largest mutual-fund companies, disclosed yesterday that it sold off its 5.6 percent stake in Enron late last year while Enron's stock was collapsing. SunTrust Banks announced that it was replacing Andersen, its auditor for 60 years.
Small investors have been spooked by the losses of the retirement savings of many Enron employees as their 401(k) retirement funds were heavily invested in company stock.
The Labor Department announced an agreement with Enron yesterday to transfer control of the company's 401(k) program to an independent analyst for three years.
"Enron's employees should be confident that their interests will be protected by a fiduciary who is unrelated to Enron" said Labor Secretary Elaine L. Chao.
Mr. Sodano endorsed President Bush's legislative plan to prevent other losses like those seen at Enron by allowing employees to trade company stock contributions after three years. The Bush plan also would enable companies to make available independent financial advisers to help employees make wiser investment decisions.
"More than a trillion dollars are invested in 401(k) programs today," Mr. Sodano said, and the loss of confidence among small investors has been particularly acute. "We've got to get people feeling good about the market again."
Investors must be better educated about diversifying their investments, Mr. Sodano said, but he cautioned against heavy-handed attempts by Congress to force diversification by imposing caps on the ownership of individual stocks.
The American Stock Exchange, the smallest of Wall Street's three stock exchanges, in recent years it has become best known for its index funds tracking the Nasdaq Composite Index and the Standard & Poor's 500 Index.
While the stock exchange was rooting for the Securities and Exchange Commission as it aggressively pursued corporate wrongdoers, Mr. Sodano rejected any major new role for the self-regulatory organizations.
Some legislators have proposed putting the exchanges in charge of arranging audits of corporate financial statements to prevent the conflict that arises when auditors who are supposed to be guarding shareholders' interests are paid by the companies they audit.
Because the stock exchanges are funded with fees raised from their listed companies, Mr. Sodano said, such an arrangement would put them into an equally conflicted position.
He endorsed instead a proposal by former SEC Chairman Arthur Levitt to prevent accounting firms from doing consulting work for the companies they were auditing. In the Enron case, Andersen earned half of its $50 million in yearly fees from consulting, and had hopes of doubling those fees with additional contracts.
"Mr. Levitt was ahead of his time," Sen. Tim Johnson, South Dakota Democrat, said at a hearing of the Senate Banking Committee at which the former SEC chairman appeared with four of his predecessors yesterday.
All endorsed putting strict new limits on accounting firms. Congress has not always been warm to the idea, however.
"The same people that today are blasting away at the perfidy of Enron were the ones who blocked our efforts which might have prevented this," Mr. Levitt said in an interview describing Congress' efforts to block his proposal last week on the John McLaughlin show.
"It was my conviction that based on the increasing number of accounting fraud cases we were seeing, the accounting profession was being seduced by the preponderance of consulting contracts they were getting," he said.
"No sooner had we embarked upon this program than I received a battery of letters and phone calls and ultimately threats to the SEC funding if we proceeded with this initiative," he said.

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