Enron Traders Are Set to Quit,
In Possible Blow to UBS's Plans
By ALEXEI BARRIONUEVO
Staff Reporter of THE WALL STREET JOURNAL
HOUSTON -- Some top energy traders for Enron Corp. are expected to quit shortly, and more are likely to follow, dealing a potential setback to the efforts by Swiss financial powerhouse UBS AG to revive the business, which it bought recently.
At least six key wholesale-energy traders, including Enron's former head natural-gas trader and the head of the options desk, turned down offers to stay at UBS Warburg Energy, the unit of UBS that purchased the trading business from Enron, which is in bankruptcy-court proceedings.
The departures are coming as a 90-day period for hefty -- and controversial -- retention bonuses paid by Enron ends Thursday, though it isn't known how many of the people leaving shortly received retention bonuses.
See full coverage of the Enron saga.
In the biggest blow, John Arnold, a 27-year-old whiz kid who helped build Enron Online into the juggernaut of the energy-trading world, has decided to depart, according to UBS. Mr. Arnold handled $1 billion in trades some days, putting him among the elite energy traders in Houston. His trading account made more than $700 million in gross profit for Enron last year, fellow traders say.
The defection of Mr. Arnold and a handful of other key traders are likely to make it tougher for UBS to rebuild Enron's once industry-leading energy-trading franchise. Successful trading relies on savvy individuals to spot market trends, and Enron's top traders were considered among the best and most aggressive.
"If you lose a handful of people like John [Arnold] it becomes a whole different caliber of organization," says J. Robert Collins, president of the New York Mercantile Exchange and former head gas trader for El Paso Corp. "This is definitely going to hurt them."
Mr. Arnold, in an e-mail response to questions, declined to comment.
UBS, while confirming the departures, said the "overwhelming majority of people offered positions accepted them," without elaborating on the numbers. UBS didn't pay Enron any cash in acquiring the energy-trading operations, but instead will pay Enron royalties amounting to one-third of the business's pretax profit for as much as 10 years.
The departures could raise eyebrows because they come at the earliest possible date that recipients of retention bonuses can leave without forfeiting the bonus. Shortly before filing for bankruptcy-court protection, Enron paid retention bonuses totaling $55.5 million to 556 key employees; more than half of them worked in the energy-trading operation, with the rest spread across Enron's other businesses. Similar retention bonuses were paid earlier to other key traders not in that group of 556, Enron confirmed.
The payment of bonuses for key employees of troubled companies isn't uncommon. Like other companies, Enron justified the move by contending that employees who were needed to revive the company might otherwise depart. But the payments angered thousands of Enron workers who were laid off with little or no severance and who lost much of their retirement savings because Enron's stock became virtually worthless.
The names of Mr. Arnold and the others departing shortly weren't among the group of 556 but, because of his position, he likely would have been among the other group receiving retention bonuses, former and current traders said.
One person who is staying with UBS is John Lavorato, who received a $5 million retention bonus. But Mr. Lavorato, who previously served as president and chief executive of Enron Americas, the wholesale trading operation, will take a step down, assuming Mr. Arnold's old job as head natural-gas trader, UBS confirmed.
Traders said Enron and UBS may have underestimated the impact of retention bonuses. UBS, in acquiring the trading business from Enron, doled out $11 million in bonus payments, $6 million from the Enron bankruptcy estate. UBS's public filings don't indicate the timing of its payments or to whom they were targeted. A UBS spokesman declined to elaborate.
It is possible that some of Enron's creditors could challenge the retention-bonus payments. Bankruptcy law enables creditors to try to recoup payments made before a company sought protection under Chapter 11 of the U.S. Bankruptcy Code. But creditors must show that the payments didn't have a rational basis at the time they were agreed upon, and that the company didn't receive value for its money, a concept known as fraudulent conveyance.
Andrew Rahl, a bankruptcy lawyer in New York, said, "The issue would be: Is three months reasonable for the amount that was paid out? Obviously, that is arguable" depending on how much each employee received.
In addition to those who have decided to leave, more defections are imminent, both at UBS and at Enron, where retail gas and power traders are still working to close out trading positions, former and current Enron traders said. "We are losing people left and right," explained one trader still with Enron. "A lot of people are working real hard to get out of here."
Industry officials estimated that traders like Mr. Arnold could earn millions of dollars a year at a hedge fund. (Hedge funds are little-regulated private investment partnerships for large investors. They wager huge sums in global currency, bond and stock markets in search of quick profits.)
A Dallas native who joined Enron out of college, Mr. Arnold earned between $1 million and $5 million a year at Enron, according to competitors and traders familiar with Enron's compensation structure. He lives in a penthouse apartment in downtown Houston and occasionally jetted to Europe for weekends to watch soccer matches, friends and fellow traders said.
Aside from money, departing traders likely are nervous about UBS's prospects. Rebuilding the trading operation could be a slow process, limiting what traders can earn in the near term. "Trading businesses get paid on annual performance," said David Sobotka, president of Entergy-Koch LP, a joint venture that trades natural gas and power. "If it takes two to three months to get up and going, that is a big part of your year that is gone ... and that could limit the income of the trading operation, and of the individual traders."
-- Richard B. Schmitt in Washington contributed to this article.
Write to Alexei Barrionuevo at alexei.barrionuevo@wsj.com
Updated February 28, 2002 |
