Before Debacle, Enron Insiders Cashed in $1.1 Billion in Shares

hile investigators are focusing on how much money investors and employees lost in the Enron Corporation (news/quote)'s collapse, some shareholders and lawmakers are now setting their sights on another target: Enron insiders who received millions selling their shares near the top of the market.

As Enron stock climbed and Wall Street was still touting it, a group of 29 Enron executives and directors began to sell their shares. These insiders received $1.1 billion by selling 17.3 million shares from 1999 through mid-2001, according to court filings based on public records. They continued selling as Enron's stock started to tumble early last year and the company began its slide into bankruptcy.

Kenneth L. Lay, who became prominent as the company's chairman and a leading contributor to President Bush, was among more than a dozen Enron executives who received $30 million or more. One sold shares valued at $353.7 million.

Lawyers and spokesmen for the executives, board members and the company say they had no insider information or other advantages over other investors.

"This issue is being investigated," said Robert S. Bennett, a lawyer for Enron. "But at this point in time, I am unaware of any evidence that supports the allegation there was improper selling by members of the board or senior management."

Some of them retained large holdings of Enron stock and sold regularly, much as executives at other companies do. "In many instances, the sale of the stock was pre-planned according to a strict timetable," Mr. Bennett said.

Mr. Lay himself sold Enron stock 350 times, almost daily, receiving $101.3 million. It has not been determined how much he or the others paid for their shares. In all, Mr. Lay sold 1.8 million Enron shares between early 1999 and July 2001, five months before Enron filed for bankruptcy.

Some of Mr. Lay's shares were sold for as much as $86. This week, Enron was selling for under 70 cents a share. Sometimes Mr. Lay sold in amounts as small as 500 shares, others times he sold as many as 100,000 shares at a time. Mr. Lay and other executives had much of their holdings in the form of stock options, that allowed them to buy shares at a discount to the market price.

Other top sellers were Lou L. Pai, the former chairman of an Enron subsidiary, who received $353.7 million for his 5 million shares; Rebecca P. Mark-Jusbasche , a director who received $79.5 million for 1.4 million shares and Ken L. Harrison, a director who sold 1 million shares for $75.2 million.

Jeffrey K. Skilling, the company's former chief executive, received $66.9 million for 1.1 million shares. Beginning in December 2000, Mr. Skilling began to sell his holdings at a pace of 10,000 shares about every seven days. Andrew S. Fastow, the company's ousted chief financial officer who set up many of the financial partnerships that have been criticized for concealing Enron's large debts, , received $30 million for his holdings.

A detailed accounting of these trades is contained in a lawsuit brought by Amalgamated Bank, of New York, which invested the pension money of union members in Enron shares. Representing the bank in this case, which is now in U.S. District Court in Houston, is the same law firm that successfully brought a shareholder suit against Charles Keating during the savings and loan scandal and against Michael Milken for securities fraud.

While the suit has received little attention to date in the growing Enron scandal, it highlights one of the main points in the political debate now taking place in Washington — how small shareholders were left out of a flow of information about Enron's deteriorating financial condition.

The differences in the trading strategies of the two groups — those outside the company who were buying Enron's shares and those inside the company who were selling them — reflect the different information that each group had, according to the suit.

"The defendants employed devices, schemes and artifices to defraud," the lawsuit stated. It also accused the 29 defendants of "unlawful insider trading," and said the group "materially misled the investing public" by issuing false statements about Enron's financial problems.

Sen. Joseph I. Leiberman, the Democratic chairman of the Senate government affairs committee, has already announced hearings that will, in part, look at how Enron shareholders might have been deceived by the company's financial statements. Democratic California Senator Barbara Boxer has also expressed concern for Enron's small shareholders, especially Enron employees who put Enron shares in their 401(k) retirement plans, only to lose their savings.

At Enron, more than half of the employee's 401(k) assets, or about $1.2 billion, was invested in company stock, which is now worthless. Billions more were lost by other investors, from individuals to large institutions who bought Enron shares for the pension plans of unions and corporation.

The lawsuit says Enron insiders knew of Enron's unraveling finances and traded on it for their own gain while not telling the investing public of the company's problems. The suit claims the insiders withheld information, allowing Enron's shares to remain at an artificially high level during the period in which they were selling their shares.

"This is the most massive insider bailout that we've ever seen and we've been prosecuting these cases for 30 years," said William S. Lerach, one of the bank's lead attorneys. "The overall size of this case is unprecedented. As Enron stock moved to an all-time high, the pace of insider selling accelerated dramatically. In the end, of the $1.1 billion of stock that was sold, hundreds of millions was sold at all-time highs."

Spokesmen for some of the defendants say that this group has done nothing wrong. While Enron was not named in the case, many of its employees, including Mr. Lay, were. Enron spokesman Mark Palmer dismissed the suit as "completely without merit" and a "weak arguement."

Gordon G. Andrew, a spokesman for Mr. Fastow, the former chief financial officer, declined to comment, but said that Mr. Fastow still has about 50 percent of his original holdings. Mr. Andrew said that Mr. Fastow's last stock sale took place in November 2000 and that Mr. Fastow bought some shares in early 2001, which was his last Enron trade.

The defendants have not yet filed answers to the complaint. Arthur Andersen, also named in the suit, declined to comment.

A spokeswoman for Mr. Skilling, the former chief financial officer, said that `'there is absolutely no basis to the allegation that Mr. Skilling did anything improper with regard to the sale of Enron stock."

The lawsuit contains pages on each stock sale made by the 29 defendants, with information collected from filings required with the Securities and Exchange Commission.

At the top end of the selling was Mr. Pai, who headed an Enron subsidiary called NewPower Holdings (news/quote), an online retailer of electricity and natural gas. Before leaving Enron last spring, Mr. Pai sold 5 million shares of Enron between January 1999 and July 2001 for $353.7 million.

In January 2000, just 60 days after the formation of NewPower, Mr. Pai received over 2 million Enron shares. He began to sell them almost immediately, mostly while the shares were trading at over $70 each.

Enron directors, who were also named in the case, were also big sellers — generally in the million-dollar range, often in double digits. A director, Robert A. Belfer, for instance, received $51 million. All Enron directors receive stock options as part of their $380,619 annual directors fees. Fifteen percent of this was paid in cash, the remainder in stock.

Yet, one of the most politically-connected directors, Wendy L. Gramm, wife of Republican Senator Phil Gramm, was one of the smaller sellers. She sold 10,256 shares and received $276,912. All her stock was sold on one day — Nov. 3, 1998 — for $27 a share. Ms. Gramm had said earlier that she and her husband decided to sell Enron common shares to avoid an appearance of conflict. She was paid then only in cash.

Other top Enron executives named in the suit who made big sales included Kenneth D. Rice, president of Enron Broadband Services, who received $72.7 million and Mark A. Fervert, chairman of Enron-North America Corporation, who received $50 million.

Besides this lawsuit, the Securities and Exchange Commission is also investigating Enron's financial transactions and public disclosure. The Justice Department is also conducting an inquiry.

The government investigations should make it easier for the lawyers bringing the case against the 29 insiders, according to Michael Hennigan, a Los Angeles attorney who represented the plaintiffs in the Orange County, Calif., bankruptcy litigation.

"I assume that the government is going after the exact same things that Lerach is after," said Mr. Hennigan, referring to the lead lawyer on the case. "They will be doing a lot of the investigating for him."

Not all laws create a bigger government, and that one certainly wouldn't.

Of course not. All laws enforce themselves. When you're governing angels pehaps.

Like double-white lines painted on the road - you know, those lines you're *not* supposed to cross?

They enforce themselves too ...

"That aspect (cutting the blood-letting), although down and dirty and looking VERY ominous in the eyes of the public - could turn out to be true and entirely legitimate."

Maybe. Maybe not. But an investigation is warranted and correspondence files might reveal what the real motive was. If they haven't been destroyed...

I couldn't do a darn thing with the stock they had contributed to the plan. It consistently underperformed the market, and I didn't think it was particularly fair. The stock was mine. The company couldn't take it back if I quit. But I couldn't sell it and put the money into a different financial investment.

So, what you're saying is, you want gov't involvement between you and the company that employs you - in the matter of a private contract ... WONDERFUL.

What if that company just dropped that progam? Who mandates that they CONTRIBUTE anything anyway (the Free Market maybe - in an attempt to attract able, competant employess)?

Ever thought of working for a compnay in a growing field whose stock value actually appreciates?

No. You want the gov't to serve as your protector and overseer.

Fine. Beware of what you *wish* for though - and forget those words of Ben Franklin (about 'security') while you're at it.

Oh, I get it. All laws are bad.
I used to think you were a deeper thinker than that.

I'll bet the time is ripe for a National Uniform Employers Act -

- a bill that will define not only the wages that should be paid to employees - but the manner in which all manner of compensation (as well as retirement) is handled ..

Wanna bet that Daschle and the whole cadre of Dems (and not just a a few Repubs) would jump at that opportunity?

See, this is the problem I see - we are all too willing to run towards the gov't for the solution of some of these perceived problems - rather than through some work, effort and better choices on our part.

I guess there shouldn't be any civil laws at all? Everything should be a matter of contract between individuals or businesses, and the government shouldn't get involved. No regulation, no oversight, just let 'er rip and let the chips fall where they may. Is that it?

I guess there shouldn't be any civil laws at all?

Eventually, with all other things being equal - yes.

It *really* is in the best interest of everyone that no one cheat, lie, fabricate, employ hyperbole, obfuscate the facts, et cetra.

But, we live in world where not every one behaves honestly. Therefore, we establish 'rules' with penalties.

I Still believe that better choices - exercised by a LOT more people - would eventually expose those employers that cheat, those businesses that swindle, those organizations seek to dishonestly do business.

At heart - I am a Libertarian. In practice, however, I will see enacted that legislation that allows our society to 'function' ...

In most cases I think that the free market does enact its own penalties, and leads to better choices. The company I work for today does allow me to sell its stock contributions, for example, and no law requires them to do so.

But a law requiring them to do so wouldn't cost the company a cent, and it would prevent someone from having a sizeable portion of their retirement savings locked into a single stock, something which is universally regarded as imprudent.

Laws which require people or companies to behave in ways that we would expect them to if they were good citizens are NOT bad laws.

Laws which require people or companies to behave in ways that we would expect them to if they were good citizens are NOT bad laws.

Then, this would be a law aimed at preventing "dumbness"?

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