ENRON: Why Insiders Get Rich, and the Little Guy Loses
By WILLIAM LERACH and AL MEYERHOFF
Los Angeles Times
January 20, 2002
This has been a tough couple of weeks for Kenneth
L. Lay, chairman and chief executive officer of
Enron Corp. His company's outside auditor,
Andersen, reported that thousands of e-mails and
documents related to Enron audits were shredded
after federal regulators had launched a probe into
Enron's finances. Late last week, the Enron board
fired Andersen. A letter written by a company vice
president warning of an accounting "implosion" was
made public. Lay's private conversations seeking
help from Bush Cabinet members were suddenly
the talk of Washington. The Justice Department
announced a criminal investigation of his company.
And Enron was delisted from the New York Stock
Exchange.
But this is also a story of real people, like Roy Rinard, a 54-year-old utility
lineman with an Enron subsidiary, who will have to work long past when he had
hoped to retire. The reason? The value of his 401(k) savings account, all
invested in Enron stock, shrunk from $472,000 to less than $4,000 after Enron
declared bankruptcy. He was helpless to stop the loss. Along with the bulk of
Enron's other employees--although not its top management--Rinard was
prevented by company rules from selling his retirement-plan stock. Meanwhile,
Enron executives allegedly carried out a scheme that artificially inflated the price
of the company's stock and then cashed out before bankruptcy was declared.
All told, top Enron executives and board members sold more than $1 billion in
stock, all the while assuring their employees and shareholders that all was well
at the company, according to news reports.
The federal government is investigating, but perhaps its first task should be to
examine its own culpability in the matter, particularly with regard to the Private
Securities Litigation Reform Act, enacted by Congress in late 1995 as part of
Newt Gingrich's "contract with America."
The Private Securities Litigation Reform Act might more accurately be labeled
the "Corporate License to Steal Act." Approved by just two votes over a
presidential veto, the law was written largely by and for powerful corporate
interests. It gutted historic safeguards against fraud and weakened those
protecting investors. It set up legal obstacles that may have enabled Enron to
hide its questionable accounting practices. Under the law, victims must prove a
fraud in detail without access to evidentiary documents. Damages are limited.
Those collaterally responsible for a fraud like, perhaps, an accounting firm, are
protected from liability.
The allegations in the Enron story echo some of the allegations in suits our law
firm is currently litigating or has settled since the act was passed.
At Waste Management Inc., insiders reaped millions of dollars of profits while
at the same time--it later became clear--the company was falsifying profit
reports. Twice in 10 years, Waste Management had to restate previously
reported earnings.
At Cisco Systems, top executives sold nearly $600 million of their own
company stock before breaking news of serious financial problems to
investors. While they were rushing to sell their shares at prices as high as $80 a
share--more than four times its current value--the executives misled investors
about sales, inventory and profits.
At Oracle Corp., Chairman and Chief Executive Larry Ellison dumped nearly
$900 million in stock--his first sale in five years--just weeks before the
company disclosed bleak revenue and earnings news that sent stock
plummeting more than 50%.
Sunbeam Corp. ultimately declared bankruptcy and its stock plummeted, but
not before its chairman and chief executive, Albert J. Dunlap, who later was
found to have falsified financial reports and destroyed a valuable brand name,
managed to sell 100% of his holdings--for more than $60 million. Enron's
accounting firm, Andersen (then known as Arthur Andersen), was also
responsible for auditing Sunbeam and recently paid $110 million to Sunbeam
shareholders to settle its liability.
These financial tragedies, while shocking, were not totally unexpected. A 1999
Fortune magazine article predicted just such events, noting that "beneath
corporate America's uncannily disciplined march of profits ... lie great expanses
of accounting rot, just waiting to be revealed." Since then, U.S. investors have
lost trillions in shareholder value. As economist Ben Stein recently put it, "It
now is clear that the worst stock market debacle in the history of post-war
America did not just happen by chance or by greed of the masses, but
happened in large part because of conspiracy, greed in high places, and a
federal regulatory failure of unique proportions."
Which brings us back to Enron. Enron formed limited partnerships that were
apparently used, among other things, to keep debt off company books. Several
Enron executives, including Chief Financial Officer Andrew S. Fastow, acted
as managing partners or investors in these partnerships, despite the fact the
partnerships were treated as unconsolidated affiliates. Fastow--who liquidated
more than $30 million of his own Enron shares--reportedly received an
additional $30 million in managing fees from the partnerships.
At the same time, Enron's independent accounting firm may have pushed the
limits of conflict-of-interest rules. Andersen, previously in charge of insuring the
accuracy of the books for Waste Management and Sunbeam, had received
about $1 million a week in fees from Enron for accounting and auditing. But the
auditing never resulted in a disclosure that the partnerships existed primarily to
hide debt, which meant that, on paper, Enron seemed profitable. Now
Andersen has admitted to destroying Enron documents and has fired its chief
Enron auditor, David B. Duncan.
We are the plaintiff attorneys for Amalgamated Bank, which, as trustee of an
equity fund that invests the retirement savings of union employees, suffered
losses of $10.3 million in the Enron collapse. (This amount represents just a
fraction of an estimated $20 billion overall loss for public investors.)
Under one of the few consumer protection provisions of the 1995 reform act,
institutional investors, by serving as plaintiffs in fraud litigation, can now help call
corporations like Enron to answer. An increasing number, including
Amalgamated Bank, have stepped up to try to recoup funds for unwitting
investors.
The Enron case is a symptom of the same disease that afflicted us in the 1920s.
The company is not a victim of market forces, but a motivator as old as
humankind: greed. It is past time for Congress to revisit the Private Securities
Litigation Reform Act and enact true reform. Otherwise, the financial
well-being of millions of Americans will remain in the hands of the insiders, who
can be counted on only to be faithful to the instincts of greed.
__________________________________________
William Lerach and Al Meyerhoff are plaintiffs' lawyers with Milberg Weiss
Bershad Hynes & Lerach and represent Amalgamated Bank in the Enron
class-action litigation. E-mails: billl@mwbhl.com and alm@mwbhl.com. |
