N.Y. Bank Sues Over Enron Stock Trades
Pension Adviser Says Officials Sold Shares Before Bad News
By Peter Behr
Washington Post Staff Writer
Thursday, December 6, 2001; Page E01
Enron Corp. senior officials and directors sold more than $275 million in Enron stock over the past year, frequently trading before the company revealed business setbacks and accounting errors that ultimately forced its bankruptcy, a New York-based bank said yesterday in a lawsuit.
From October 1998 to last month, 29 officials and directors of the energy-trading company sold a total of 17.3 million shares for $1.1 billion, according to the lawsuit by Amalgamated Bank, adviser to pension funds that lost $10 million on Enron stock and bonds.
In selling stock, particularly from mid-2000 on, the Enron group took advantage of insider knowledge about the company's deteriorating financial condition that was not disclosed to the public until the past two months, the lawsuit says.
"While lining their pockets, Enron insiders misled and defrauded the bank and other investors who were not privy to the same information they were," Ronald E. Luraschi, Amalgamated senior vice president, said at a news conference.
Enron chairman and chief executive Ken Lay, who sold shares worth $101.3 million, and former chief executive Jeffrey Skilling, who sold $66.9 million worth, have declined previous requests to discuss their transactions. Enron did not return phone calls seeking comment yesterday.
Amalgamated asked the U.S. District Court in Houston to attach the $1.1 billion in proceeds until the court determines whether the trading violated federal securities laws. The court has scheduled a hearing on the request for Friday. The suit focused on sales back to 1998 because of Enron's recent disclosure that it had overstated its profits for four years.
The bank's suit also names Arthur Andersen LLP, Enron's auditor, as a defendant. Andersen certified financial statements about Enron that the company now says were inaccurate.
Enron has disclosed that it is under investigation by the Securities and Exchange Commission, which enforces laws that prohibit stock profit-taking based on corporate information that has not been publicly announced.
Yesterday the Labor Department said it is investigating Enron's handling of its retirement plans. Enron prohibited employees from selling company stock held in 401(k) accounts for several weeks recently while the price plunged, wiping out 70 to 80 percent of the value of many employees' retirement savings.
Last year, Enron's stock was one of Wall Street's hottest, its price rising from $43 a share on Jan. 3, 2000, to $83 at year-end. It dropped gradually in the first part of this year but was still worth $32 a share in mid-October, just before Enron revealed the first clues to its damaging ties to private investment partnerships run by its chief financial officer, Andrew Fastow. Enron shares closed yesterday at $1.01, up 14 cents.
Some of the largest partnerships had purchased major energy and water plants from Enron -- more than $4 billion in assets the company no longer wanted -- with the intention of selling them.
But in order to create the partnerships, Enron had to guarantee to make up any losses from the asset sales with its own stock, or cash. In a public filing in October, it acknowledged that those losses would be heavy. And it admitted that it had violated standard accounting principles in detailing the partnership deals, inflated its earnings by $586 million over the past four years and overstated the value of its shareholders' equity by $1.2 billion. The flight of investors and customers of its energy-trading operations became a rout that forced Enron on Sunday to become the largest company ever to seek bankruptcy protection.
Had investors known the risks Enron faced in its partnership deals, they would have been far more cautious about holding the stock, the lawsuit claims.
Many of the stock sales by Enron officials and directors were clustered in large blocks that followed earnings reports and optimistic forecasts by Enron, said the bank's attorney, Bill Lerach.
On Oct. 17, 2000, Enron reported third-quarter net income of $292 million and Lay said Enron was "very optimistic about the continued strong outlook for our company." Over the next three months, insiders sold 850,009 shares for a total of $68 million. In the first quarter of 2000, after Enron reported record earnings for the year before, insiders sold 4 million shares for $295 million. How much the Enron insiders had to pay for that stock -- and thus the size of their profits -- wasn't calculated by the bank's lawyers.
The largest sales reported in the lawsuit by insiders other than those by Lay and Skilling in the past three years were by Lou Pai, director of Enron's Energy Services operation and other departments, for $353.7 million; Rebecca Mark-Jusbasche, who ran Enron's troubled Indian power plant operation and also its money-losing water company, $79.5 million; Ken L. Harrison, head of Enron's Portland General Electric subsidiary until March 2000 and an Enron director, $75 million; and Kenneth D. Rice, head of Enron Broadband Services, another venture that produced huge losses, $72.8 million.
Wendy L. Gramm, an Enron director and former chairman of the Commodity Futures Trading Commission, sold $276,900 worth of Enron stock, though none after November 1998 -- before the stock price took off. Director Robert K. Jaedicke, former dean of Stanford University's business school, sold $841,400 worth in two sales, this May and in February 2000. Both were on the board's audit committee.
Amalgamated Bank, in bringing a private insider-trading case, must pin down just what Enron's officers and directors knew about the company's slide, Lerach said. "It comes down to knowledge; who knew it and when," he said.
"In that situation, they have to show there was information that wasn't put out that would have been material to investors' decisions," said Washington lawyer and former SEC lawyer Barry P. Barbash.
More than a year ago, analyst Andre Meade at Commerzbank Securities in New York and some others were skeptical of Enron's claims for its Internet network business, which it aggressively touted but which later failed. "The enormous amount of value Enron gave to its broadband business was hard to justify. My guess is Enron's insiders knew it was hard to justify, too," Meade said.
Some analysts saw holes in Enron's story months ago, Meade said. Some investors bailed out then while others did not. A judge will have to decide whether Enron's statements misled investors, lawyers said.
© 2001 The Washington Post Company
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