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STATEMENT
OF ANATOL FEYGIN ON BEHALF OF JPMORGAN
SUBMITTED TO
THE COMMITTEE ON GOVERNMENTAL AFFAIRS
OF
THE UNITED STATES SENATE ON FEBRUARY 26, 2002
Mr. Chairman and Members of the Committee, my name is
Anatol Feygin. I
am a Senior Analyst and Vice President of J.P. Morgan
Securities Inc. (“JPMorgan”), a subsidiary of JPMorgan
Chase & Co.
JPMorgan is a leading global
financial services firm with operations in more than 50
countries, serving more than 30 million consumers and the
world's most prominent corporate, institutional and government
clients, including over 99% of the Fortune 1000 companies.
JPMorgan has an established reputation for integrity.
The Firm welcomes the opportunity to discuss my role as
an analyst and the analysis underlying my recommendations
regarding the stock of Enron Corporation (“Enron”) prior
to its bankruptcy.
I am pleased to appear before you today at the invitation of
this Committee. In
1997, I joined JPMorgan as an intermediate analyst following
my graduation from New York University’s Stern Business
School, where I earned a Masters of Business Administration
degree in Finance. I
currently work in the U.S. Equity Research Department of the
Firm (the “Research Department”).
At the present time, I follow eight companies in the
Natural Gas sector and make specific recommendations to
institutional investors concerning the equity securities of
those clients.
Before turning to my evaluations of Enron, I would like to
make a few preliminary but very significant points.
First, absolute integrity is critical in this line of
work. Second, I
do not own any stock of the companies that I follow, and I did
not own Enron stock. In
addition to that, my family does not, and did not, own Enron
stock or any of the securities of the companies that I follow.
Third, I have complete freedom with respect to the
recommendations that I make concerning any equity security and
my compensation is not tied to the recommendations that I make
with respect to any particular company.
Finally, I have never received any compensation in any
form from any company that I analyze, including Enron.
Independence and integrity form the foundation of JPMorgan’s
investment research. The
Firm has well-established and comprehensive policies designed
to ensure analysts’ independence, which require the physical
separation of investment banking from research and the close
monitoring of our contact with investment banking personnel by
the Compliance Department of the Firm.
Consistent with JPMorgan’s policies of analyst independence,
in analyzing the companies that I follow, I rely on publicly
available information.
My sources of information include the audited financial
statements of the companies, their filings with the Securities
and Exchange Commission (“SEC”) and other regulatory
bodies, annual reports and company presentations to analysts. The accuracy of the publicly available information
provided by the issuer is essential to the accuracy of the
resulting analysis.
In June 1999, I began
following Enron equity securities.
Prior to issuing my report and my initial “Buy”
recommendation on Enron stock, I conducted extensive research
tapping all available public sources of information.
This process lasted close to a year.
I met with Enron senior management and other personnel
in the wholesale and retail energy businesses of the company.
I was impressed at the outset with Enron’s business
model and its management team.
The rapidly deregulating energy markets offered Enron
tremendous opportunity to grow earnings through the
application of its innovative business model.
I believed that it could be successfully applied in
other industries to generate stable and growing earnings with
minimal risk.
It was clear from my review of Enron’s audited financial
statements and other available public information that the
company used off-balance sheet financing in a variety of
circumstances. This
was not in and of itself surprising.
These techniques, which were widely used by other
companies, were, and still are governed by generally accepted
accounting principles and we had no reason to believe that
Enron’s audited financial statements were not prepared in
accordance with such principles.
From the date of the initiation, I issued numerous research
notes and updates pertaining to Enron that were distributed to
JPMorgan clients. These
updates and reports contained my analysis of significant news
and events as they related to the company.
In 2000, Enron's revenue grew from $40 billion to $101
billion. EnronOnline
was among the largest revenue generating websites.
Enron's telecommunications business was generating
growing revenues and expanding its customer base.
Its recently founded retail energy business turned
profitable in the fourth quarter.
The next year, 2001, started out well for Enron. Management reported that the company would continue to pursue
its wholesale and retail energy businesses and that its
developing businesses would continue to gain critical mass and
momentum. First
quarter results as publicly reported were strong, as expected.
Enron reported that its business, both in the United
States and abroad, was growing rapidly. Trading power volumes in North America almost doubled from a
year ago; European volumes tripled.
We viewed these increases as a testament to the
sustainable competitive advantage Enron had amassed through
its systems, scale and scope.
Second quarter results were similarly impressive with the
company reporting earnings of $0.45 per share, ahead of our
estimate of $0.43 per share.
The results in all of Enron’s business units, save
for Enron Broadband, were excellent and we believed that the
current energy environment presented an abundance of long-term
opportunities.
In mid-August 2001, Enron's then CEO, Jeff Skilling resigned
abruptly. We
viewed this as a negative event, but we saw ample senior
management talent to fill this gap. Indeed, Enron, in our view, had uniquely engineered a culture
of innovation, with a deep and broad management team. Shortly thereafter, Enron made two new appointments to the
"Office of the Chairman" which in my opinion
returned the company’s focus to its core, successful
business model.
On the morning of October 16, 2001, Enron reported a $618
million third quarter loss and disclosed a $1.2 billion
reduction in shareholder equity, related to the partnerships
run by Andrew Fastow, Enron’s then Chief Financial Officer.
However, core earnings were up 35% and the stock
finished the day 2% higher.
Nevertheless, during the next week, we saw a developing crisis
of confidence, fueled by press reports, the SEC’s disclosure
that it had commenced an informal investigation and Enron's
failure to address the resulting investor concerns head-on.
On October 24, 2001, I downgraded Enron’s rating from
a “Buy” to a “Long-Term Buy” and removed it from the
firm's "Focus List", which contains the firm's top
near-term recommendations.
A "Long Term Buy" means that the company is
facing near term challenges that, once resolved, should allow
the stock to outperform its peers.
It does not mean that the stock should be purchased
prior to the resolution of those issues.
On November 8, 2001, Enron filed documents with the SEC
revising its financial statements for the past five years to
account for $586 million in losses.
However, its results for the previous three quarters of
2001 were not materially impacted and I did not believe that a
further downgrade of the company was warranted.
On November 9, 2001, a proposed merger was publicly announced
between Enron and Dynegy.
As the Committee is aware, JPMorgan was one of the
advisors to Enron with respect to the merger. I,
however, was not involved in the proposed transaction, and was
only informed of it a few hours before it was publicly
announced. Otherwise, I was not privy to any non-public
information with respect to Enron, Dynegy or the proposed
transaction. I viewed the proposed merger as a positive event and believed
that if the merger had been consummated the combined entity
would go on to outperform.
The merger was abandoned on November 28, 2001, following
Enron's downgrade to below investment grade.
Immediately following, on November 29, 2001, we
suspended coverage of Enron.
Enron filed for bankruptcy on December 2, 2001.
Thank you, Mr. Chairman.
I would be pleased to respond to any questions that you
or the other Members of the Committee may have.
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