The Man Who Paid the Price for Sizing Up Enron
By RICHARD A. OPPEL Jr.
The New York Times
March 27, 2002
Enron executives pressed UBS
PaineWebber to take action
against a broker who advised
some Enron employees to sell
their shares in August and was
fired by the brokerage firm within
hours of the complaint, according
to e-mail messages released today
by Congressional investigators.
The broker, Chung Wu, of
PaineWebber's Houston office,
sent a message to clients early on
Aug. 21 warning that Enron's
"financial situation is
deteriorating" and that they
should "take some money off the
table."
That afternoon, an Enron
executive in charge of its stock
option program sent a stern
message to PaineWebber
executives, including the
Houston branch office manager.
"Please handle this situation," the
newly released message stated.
"This is extremely disturbing to
me."
PaineWebber fired Mr. Wu less
than three hours later.
That evening, the firm retracted
Mr. Wu's assessment of Enron's
stock - then about $36 - by
sending his clients an optimistic
report that Enron was "likely
heading higher than lower from
here on out." A few months later,
the stock was worthless, and the
company was in bankruptcy
court.
The episode illustrates just how
easily Enron appears to have
thrown its weight around at a
Wall Street firm, which may have
satisfied a big corporate customer
at the expense of some retail customers. PaineWebber
managed Enron's stock option program for employees and
handled brokerage accounts for many company
executives. It also did substantial investment banking
work for Enron, which generated fees for the firm.
PaineWebber said that Mr. Wu was fired because he had
violated policies by sending unauthorized e-mail messages
to more than 10 clients and by failing to disclose that
PaineWebber's research analyst had rated Enron a "strong
buy."
But the day that Mr. Wu was fired was the day that
Enron's chairman, Kenneth L. Lay, was both shedding
some of his own shares and talking up the stock. On Aug.
21, Mr. Lay sold $4 million of stock to the company. He
also sent an e-mail message to employees saying that one
of his highest priorities was to restore investor confidence,
adding that that "should result in a significantly higher
stock price."
The message complaining to PaineWebber about Mr. Wu
was sent by Aaron Brown, an Enron official who
PaineWebber said helped oversee the stock option
program. Mr. Brown could not be reached for comment. A
switchboard operator at Enron said today that Mr. Brown
no longer worked at the company, and a spokesman did
not respond to questions.
Mr. Wu, who declined to comment through his lawyer
today, previously asserted that Enron was behind his
dismissal, but today's disclosure was the first to show
pressure was applied by Enron officials. Mr. Wu now
works for A. G. Edwards.
A PaineWebber spokesman declined to elaborate on the
matter involving Mr. Wu but pointed to a letter sent to
Congress last week.
In that letter, PaineWebber said that Mr. Wu violated a
rule of the National Association of Securities Dealers
requiring that sales literature be reviewed by a supervisor
before being sent to clients. The firm also said that Mr.
Wu's advice was hastily drafted and "raises basic
suitability concerns" and pointed to his suggestion that
investors who hold the stock or vested options might want
to use options to hedge their exposure.
The firm said that Mr. Wu had acknowledged that he
violated its policy and recognized the seriousness of the
situation.
The PaineWebber letter stated: "Any financial adviser who
sends an e-mail in the middle of the night to dozens of
firm clients urging them to take an action contrary to
Warburg's research recommendation, without informing
the clients of that recommendation or obtaining the
necessary review and approval, would be treated the same
as Mr. Wu." (UBS Warburg is an affiliated firm.)
A securities lawyer suggested that PaineWebber may have
overreacted. "While certainly brokerage firms should have
some reasonable controls over the flow of information, this
appears to be a totally egregious example," said Lewis
Lowenfels, of Tolins & Lowenfels in New York and the
co-author of a treatise on securities laws.
The e-mail messages from Enron were released today by
Representative Henry A. Waxman of California, the
ranking Democrat on the House Government Reform
Committee. Mr. Waxman has accused PaineWebber of
breaching its fiduciary duties in the episode and has said
that Mr. Wu previously sent group messages to clients
without being punished.
Mr. Waxman said today that "Enron's conduct regarding
PaineWebber appears to be the latest in a series of
indefensible actions."
"It appears that Enron's management pressured
PaineWebber to dismiss Chung Wu, a PaineWebber
financial adviser who was supposed to be independent of
Enron, simply because Mr. Wu suggested to clients that
they sell their Enron stock."
A lawsuit against PaineWebber filed by Enron investors,
including some clients of Mr. Wu, argues that
PaineWebber "directly lied to its clients for its own
pecuniary gain by failing to reveal adverse information
which it knew about Enron."
It asserts that other PaineWebber brokers in the Houston
office "were selling as much Enron stock as they possibly
could for highly placed Enron clients, despite the fact that
inside PaineWebber, brokers commonly joked about
Enron's stability."
The lawsuit also suggests another reason PaineWebber
wanted to keep Enron happy. The brokerage firm had "an
exclusive arrangement with Enron that PaineWebber
would be the first brokerage company any Enron
employee would deal with concerning the Enron
employees' stock options and deferred benefit plans."
The suit also says that "getting first crack at these Enron
employees paid off because about one out of three
employees decided to keep their portfolios at
PaineWebber."
That meant hundreds of millions of dollars in added
revenue each year, the suit says.
A PaineWebber spokesman called the lawsuit "totally
without merit."
In an e-mail message shortly after Mr. Wu's firing,
PaineWebber's Houston branch office manager, Patrick
Mendenhall, apologized profusely to Enron.
"I should have known that if I was this frustrated, that
you, as our client, were more so," Mr. Mendenhall wrote to
Mary Joyce, an Enron official who helped run the stock
option program. "The financial adviser has been
terminated," Mr. Mendenhall added. The PaineWebber
spokesman declined to comment about the e-mail.
That evening, Mr. Mendenhall sent a message to Mr. Wu's
clients. "To the fullest extent possible, on behalf of UBS
PaineWebber, I hereby retract Mr. Wu's statements," he
wrote. He said that Mr. Wu had violated firm policy and
attached a copy of the firm's latest report from Ron
Barone, who had a "strong buy."
"We would be aggressive buyers of Enron at current
levels," Mr. Barone's research report stated.
nytimes.com
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BTW, when's Kenny Boy going to have to answer some of the tough questions...? The guy speaks out of both sides of his mouth...my grad school friends who were at Enron claimed Mr. Lay knew MUCH MORE about what was really going on at the company than he has revealed so far...He seems to be trying to keep a low profile and is hiding behind his high priced lawyers. Kenny Boy and his board members sure gave corporate governance a bad name. |
