It's hard to believe. Last October, some prominent energy analysts at bulge-bracket firms actually had Buy or Market Perform ratings on Enron stock, which by then had collapsed from about $90 per share in early 2001 to around $15. Market Perform? Sure, if one were in the midst of the market debacle of October 1929. The big, nagging question: how could such analyst ratings be touted to investors, when the 400-pound gorilla that was NYSE-listed ENE lay gasping on the trading floor, slipping further into its market death throes? "Enron had successfully gamed or manipulated the analyst system, offering only a minimum of disclosure in some cases, and no disclosure at all in other cases, particularly with respect to its 'unconsolidated equity affiliates' or partnership vehicles," says John Olson, senior vice president and director of research for Sanders Morris Harris in Houston. But the veteran analyst, who previously worked for the likes of Goldman Sachs and Merrill Lynch, puts his finger on the greater core problem. "There was an apparent culture of denial created by the primacy of investment banking in research matters. All too frequently, the investment-banking dogma had become, 'Thou [analysts] shall never say anything bad about [your firm's] corporate-finance clients." Indeed, according to one leading market observer, a research analyst who last August put a Sell rating on Enron at $38 per share was given the boot by his investment-banking firm which, as it turned out, had corporate finance ties to Enron. There was a kind of carrot-and-stick situation at work in many big investment houses, explains Olson. "The carrot was that if an analyst were to write glowing appraisals of Enron, his year-end bonus from the investment-banking side of the firm would be better rather than worse. Conversely, if an analyst didn't write complimentary things about the [corporate finance] client, he might get the ax." Concord, Massachusetts-based D. Barry McKennitt, executive director of the 350-member National Association of Petroleum Investment Analysts (NAPIA), says, "Enron had incorporated 2,832 of these special-purpose entities (SPEs) or partnerships, some 700 of which were registered in the Cayman Islands as U.S. tax havens," he says. "Primarily, they were set up to keep millions of dollars of debt off the parent's books, and to conduct trading activities, the results of which could be manipulated for financial and accounting purposes. "Notably, these partnerships, let alone their structures and purposes, were basically invisible to analysts, so they lacked a true picture of Enron. As far as they knew, the company-up until late last year-had been a story of rising earnings growth, at least based on the data it provided publicly." Nevertheless, McKennitt concedes that many analysts were under pressure to look favorably on Enron-not only from the energy giant itself, but also from their own investment bankers, who wanted the gusher of corporate-finance fees from Enron deals to continue. "Keep in mind that research isn't really a self-supporting activity; the money is made on the corporate-finance side of the house-and that has the prospect of influencing an analyst's thought process." How do analysts regain investors' trust? "If Wall Street is to restore its integrity with the investing community, it has to completely remove investment-banking influences and pressures on securities research, so that [analysts] are not again compromised," says Olson. "Corporate-finance groups can't allow the promise of [positive] research recommendations to enter into any investment-banking transaction with clients. There can no longer be any quid pro quo. Investors don't need analysts who simply make Strong Buy recommendations. Robots can do that." This, he believes, can be accomplished with strong oversight-without creating separate banking- and research houses. "There's a strong case to be made for the complete separation of research and investment banking to remove undue influence and create true analyst independence," says McKennitt. "Some, of course, will claim that such a separation already exists-that there is a Chinese Wall between banking and research. But it's a pretty porous wall in most places today. Probably the most likely, and most practical, outcome of the current debate will be to make that wall more of a real separation, as opposed to completely restructuring the financial industry."