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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Ex-INTCfan who wrote (47396)	2/4/2002 10:21:08 PM
From: stockman_scott	Respond to of 65232

Ken Lay's Fourth-Quarter Drive Monday February 04 07:38 PM EST SmartMoney.com THE PRESSURE ON federal prosecutors to pursue criminal charges in the Enron (Other:ENRNQ) scandal is building, particularly after last weekend's release of a damaging report from Enron's board of directors. University of Texas Law School Dean William Powers and his team concluded that top Enron brass intentionally engaged in shadowy dealings in order to enrich themselves and inflate corporate profits by some $1 billion. The cries for punishment have resonated on Capitol Hill, which could explain why Enron's former Chairman Kenneth Lay abruptly decided not to testify Monday before a Congressional panel. Legal experts say if prosecutors are going to make a criminal case in the Enron affair, it must center on allegations that Enron executives concealed their strategy to inflate earnings from the general public while profiting by selling company stock in the open market. In other words, it will come down to a case of illegal insider trading. Prosecutors would do well to examine the four-week period following the Jan. 22, 2001, release of a surprisingly good earnings report for Enron's just-completed fourth quarter. Enron's stock was showing clear signs of fatigue by early 2001, sinking to $68 by mid-January 2001 after peaking at $90 in August 2000. But the news that Enron's operating earnings for the fourth quarter of 2000 had come in 17%, or six cents a share, above the consensus estimate of an already bullish bunch of Wall Street analysts provided an instant adrenaline boost for the stock. Shares leapt $5, or 7%, on the day of the announcement. Lay, in a Jan. 22 press release, boasted: ``Our strong results reflect breakout performances in all of our operations.'' Jeffrey Skilling, Enron's then-chief executive, said in an interview that same day on CNNfn: ``We've had a long run of very, very strong performances for our shareholders. So I think they can expect the same as time goes on.'' There was more good news from Enron a few days later, when Skilling and other company executives met with analysts on Jan. 25 and told them to increase their earnings outlooks for 2001. The stock jumped to $82 and hovered around the $80 mark for the next 15 days before settling back to $72.15 on Feb. 22 — just about where the stock was trading before the fourth-quarter earnings report was released. That four-week bump in Enron's stock coincides with a period when some Enron executives dumped shares by the boatload. Lay and Skilling were especially active sellers, netting $4.7 million and $4.4 million, respectively, by selling shares they'd acquired from exercising stock options priced between $17 and $20, according to Thomson Financial Lancer Analytics. For 2000 and 2001, Lay's reported net proceeds from inside stock sales totaled $22.3 million, while Skilling took in $15 million. Enron's stock soared 89% in 2000. What makes the fourth-quarter 2000 results and those ensuing stock sales so interesting is that, without the use of the now-infamous Raptors — off-balance-sheet partnerships also known as special-purpose entities — Enron actually might have recorded a pretax loss for the quarter rather than a positive earnings surprise. The board's report estimates that without the earnings contributions of the Raptors, Enron would've posted a pretax loss of $176 million that quarter. It's difficult to say for sure how Wall Street would've reacted to that kind of unexpected news, but it's highly unlikely Enron's stock would've rallied 17%, as it did in the weeks following the fourth-quarter earnings release. The report notes that some Enron executives knew that some of the Raptors were beginning to falter as early as the fourth quarter of 2000. Indeed, one of the Raptors in the most serious trouble was one created by Enron to hedge against a potential loss on its sizable investment in NewPower Holdings (NYSE: NPW - news) — the deregulated electrical power company that Enron spun off in an October 2000 initial public offering. (For more on the NewPower IPO, see ``Enron Versus Investors.'') This hedging strategy enabled Enron to claim on its income statement a $39 million net gain in investment from the private sale of NewPower stock in the fourth quarter of 2000, and register other gains on its balance sheet. When Enron ultimately restated its earnings last October, the gain on the NewPower investment was one of the things it disavowed. Of course, the challenge for prosecutors will be to establish that Lay, Skilling and other Enron executives knew the better-than-expected fourth-quarter earnings and the rosy outlook for 2001 were bogus. Securities lawyers say that in order to bring criminal charges, prosecutors will have to establish that Enron's strategy of inflating corporate profits was more than the result of overly aggressive accounting and wishful thinking. Rather, prosecutors will have to prove that Enron executives either knew for a fact that what they were doing was wrong and possibly fraudulent, or that they were simply so reckless that they went out of their way to avoid finding out whether their strategy was lawful or not. ``For insider trading you have to show that when [Enron executives] sold, they had materially negative information about the company that wasn't public,'' says Marcel Kahan, a securities law professor at New York University School of Law. ''But a lot of it will depend on whether [prosecutors] think these people are really evil, or if these are people who simply made a few false and very bad judgments but...[shouldn't] be put away for 10 years.'' It's way too soon for anyone to predict which way prosecutors will come down on that question. But you can be certain that over the next few weeks, they're going to be spending a lot of time looking over those fourth-quarter 2000 numbers and the stock sales that quickly followed.