Wall Street's Den of Thieves

So if Enron's actions weren't a crime, and they weren't a political scandal, then what were they? I've spent the better part of two months talking to people on Wall Street and around the country about Enron. I've read everything that I could get my hands on since the company's collapse became a scandal. Here's what I come away with: Enron was nothing more than an old Wall Street scam called the "pump and dump."

Experienced Wall Street watchers define the pump and dump as a private selling spree conducted in the middle of a public-relations blitz, which is designed to pump up the price of a stock. That was exactly what Enron's senior management did in the first quarter of 2001, hyping a target price of $120 per share while selling blocks of the company's stock by the boatload. And it appears that they did it again in July and August of last year -- but this time by other means.

Concerned about a cascading stock price (and fearful that its employees would begin to bail out of its stock), Enron switched its 401(k) administrator, firing Charles Schwab and signing up UBS Warburg. Why any company would fire Charles Schwab as its 401(k) administrator is a complete mystery -- unless that company wanted to freeze employee stock selling. Significantly, a freeze is required when a 401(k) shifts from one administrator to another.

The pump and dump is now the focus of the SEC's investigation into Enron. It is likely that charges will be filed soon. The government's chances of "winning" are fairly good. The chances of successful prosecution of Enron management on charges of fraud or criminal malfeasance, however, are not nearly as good, since the gray areas of private-partnership accounting, debt securitization, and all the rest of its complex business transactions are as vast as the North Sea.

But the most important thing that I learned is this: Enron is not the story. The larger, more important story is the whole culture of dishonesty on what we call Wall Street. It starts with a lie: Earnings don't mean anything; they can be engineered. It is seconded by another lie: Those financially engineered numbers are right. It is complicated by yet more lies: Sales revenue and cash flow can be manipulated as well. And then it is all locked down in a code of omertà: Enron is a strong buy!

The next Wall Street scandal will probably be called the "lazy Susan" or the "round-tripper." Lazy Susans are revenue deals that work as follows: Company A gives company B $400 million. Company B, after an insignificant amount of time, spins the $400 million back to company A. And both companies book $400 million as "revenue." It is alleged that lazy-Susan deals are endemic in the information-technology and telecom sectors and may well have spread to financial services and the media. Global Crossing, which went belly-up in January, is just one of many companies charged with spinning the wheel.

If lazy Susans turn out to be epidemic, then investors will know that on Wall Street, earnings don't mean anything, revenue doesn't mean anything, and cash flow doesn't mean anything. They will suspect that every analyst is out there to deceive -- and, in some cases, to pump-and-dump on television. That's a gigantic crisis of confidence. That's what we're approaching, unless Wall Street, the SEC, and the political community get their act together. Don't hold your breath.

John Ellis (jellis@fastcompany.com) is a writer and consultant based in New York.