- Enron Corp. executives and directors earned nearly $600
million from selling company stock over the past four years, with many
individuals topping $12 million in the past year alone, according to
trading
data.
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- The players Chart: Biggest bankruptcies
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- The profits from those stock sales are at the heart of
a lawsuit filed earlier this week against 29 Enron current and former
executives
and directors.
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- The plaintiff, New York-based Amalgamated Bank, alleges
that the executives and directors knew the value of Enron's stock was
overinflated
and would eventually fall but did not share that information publicly with
other shareholders.
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- The union-owned Amalgamated Bank manages pension funds
that hold Enron stock.
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- Bill Lerach, of the law firm Milberg Weiss Bershad Haynes
& Lerach, and the lead attorney, suggested Friday during a hearing
on the lawsuit in Houston federal court that the defendants could flee
the country with their millions of dollars in stock sale profits.
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- He also called flight risk a "more than academic
possibility" and asked the court to freeze the defendants'
assets.
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- According to trading data provided by Thomson
Financial/First
Call:
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- * Lou Pai, the former
chairman
of Enron Energy Services, netted the most from his stock sales so far this
year, earning $33.6 million by selling more than 911,000 shares.
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- * Chairman and Chief
Executive
Officer Ken Lay ranked second for the 2001 stock sales earnings, with $16.1
million from 491,000 shares sold.
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- * Former CEO Jeff Skilling
earned $15.5 million by selling 240,000 shares.
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- * Ken Rice, the former head
of Enron Broadband, earned $14.7 million from selling 656,000
shares.
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- * Andy Fastow, the former
CFO many have blamed for the complicated financial partnership that led
to the current troubles, didn't sell any shares of stock this year and
was the only company insider to buy Enron stock on the open market in 2001.
On Aug. 16, he purchased 10,000 shares at $36.98, a transaction that cost
him $369,800.
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- U.S. District Judge Lee Rosenthal questioned whether
her court had the authority to freeze the funds, however, and gave
attorneys
from both sides until Dec. 19 to file their arguments.
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- Though the lawsuit is trying to raise an issue about
the stock sales, it is normal for executives to regularly sell company
stock given as part of their compensation package, said John Coffee, a
securities law professor at Columbia Law School.
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- It becomes questionable, however, when executives sell
off the majority of their shares in a short period of time, what Coffee
calls a "bailout."
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- Attorneys for the defendants say the stock sales are
not the smoking gun the plaintiff's claim. If they were true bailouts,
the executives would have sold all their stock before it became worthless,
the attorneys said.
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- Lay, for instance, sold only 24 percent of his shares,
hanging onto the rest far after the company's stock fell below a price
he could have profitably sold them for, his attorney said during the
hearing.
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- Typically, executives are limited to selling their shares
only during specific times, usually in a short window between earnings
announcements.
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- But since last November, a number of Enron executives
took advantage of a new rule that allows one to sell shares on a regular
basis all year, as long as it is on a plan approved by securities
regulators.
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- For instance, Lay used a plan where almost every day
he would exercise rights to purchase a fixed number of shares of stock
at a given price and sell that stock on the open market.
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- From Nov. 1 until early February 2001, Lay's daily
transactions
included about 4,000 shares per day, while from February to April that
amount dropped to about 3,000.
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- Between May 1 and Aug. 21, the last day there is record
of Lay selling shares, he exercised and sold 3,500 shares per day.
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- Rice sold 1,000 shares per day on the market until June
of this year. After that, he sold a large number of shares on July 13,
about 385,000 shares, for a little over $9 million. Rice left the company
in late August.
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- Skilling regularly sold 10,000 shares a week.
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- Enron stock sales in the past year have not been
completely
worry-free, some analysts said.
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- For Paul Elliott, a senior analyst with Thomson
Financial/First
Call, the first red flag came early this year, when Enron insiders
continued
to sell their stock at the same, steady rate as the per-share value started
to fall.
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- "Selling your stock into a powerful climb in price
makes sense, but when they're still selling it when it goes lower and
lower,
you start to get nervous," Elliott said. "It makes you wonder
if they knew that after they hit the peak that the stock was already
expensive
and wasn't going to go back up."
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- While the data for 2001 only goes through the end of
August, it is unlikely the net value of insider stock sales this year would
top those for 2000. Executives and others sold 8.5 million shares last
year with a net value of $416.6 million. In 1999, 4.6 million shares were
sold with a net value of $37 million.
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- Before the late 1990s, it was rare for energy companies
to give stock options -- the right to purchase a stock at a fixed price,
usually below the market price -- to their executives, Elliott said.
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- But as energy markets started to become deregulated and
integrated companies like Enron, Dynegy and Calpine grew, stock options
became a larger part of the executive compensation package.
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- "They started acting like tech companies, handing
out the stock options, and the executives started acting like tech
executives,
cashing them in once they became vested," Elliott said.
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- At first, the money made from cashing in the options
was staggering. But with so many companies seeing their stocks climb
throughout
the late 1990s, analysts and investors stopped being surprised and paid
less attention. Henry Hu, a law professor at the University of Texas, notes
that while U.S. laws take insider trading very seriously and impose stiff
fines -- including 10 years in jail and fines up to three times the profits
made on such trades -- plaintiff attorneys have a heavy burden of
proof.
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- "Courts that are asked to grant this kind of
injunctive
relief tend to be skeptical unless you can show a really good reason for
doing it," Hu said. "But if they don't freeze the assets, that
doesn't mean the plaintiffs will lose their case, either."
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