ENRON FOR DUMMIES -ENRON CORPORATION. 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 the Houston Chronicle. (Nelson Antosh, Tom Fowler, Dec 8th) The entire ENRON madness should be taught at Harvard Business School and Law school forever forward. It's a classic example of what Karl Marx predicted would happen if a few men got hold of the cash cow transnationals. 29 Enron executives have been indicted by the Justice Department. The head of DOJ, Ashcroft had to recuse himself as he'd been gifted with $25,000 Enron Dollars at some point in his slimey career.
Who's suing these guys is a BANK N.YC-based Amalgamated and if weren't for them, we wouldn't be hearing about this mismanagement. How many transnationals bunco the investors without someone screaming for lawyers?
The 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. The union-owned Amalgamated Bank manages pension funds that hold Enron stock. 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.
He also called flight risk a "more than academic possibility" and asked the court to freeze the defendants' assets.
According to data that surfaced, 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.
Chairman and Chief Executive Officer Ken Lay ranked second for the 2001 stock sales earnings, with $16.1 million from 491,000 shares sold. Former CEO Jeff Skilling earned $15.5 million by selling 240,000 shares. Ken Rice, the former head of Enron Broadband, earned $14.7 million from selling 656,000 shares.
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.
It becomes questionable, however, when executives sell off the majority
of their shares in a short period of time, what Coffee calls a
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
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.
Typically, executives are limited to selling their shares only during
specific times, usually in a short window between earnings
announcements. 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
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.
From Nov. 1 2000 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.
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.
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
Skilling regularly sold 10,000 shares a week.
Enron stock sales in the past year have not been completely worry-free,
some analysts said.
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.
"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."
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.
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.
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.
"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.
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
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 -Karl Marx once predicted that money parasites would appear as the
capitalistic community became filled with big, worthless, unproductive
corporations laden with insiders, exectuvies, highly paid do -nothing scum
and when that corporation had been cannibalized sufficiently by them to
become worthless to the community. he said that the semi criminal elements
would appear in high society.
We're seeing it this week with the out of-energy conglomerate Enron's
filing for Chapter 11 bankruptcy. With total assets listed at $49.8 billion
and debts of $31.2 billion, Enron is the largest
bankruptcy in American corporate history. Enron is now the subject of a
Justice Department investigation that will probe the specific role of
company executives and leading staff in the collapse and the cover-up which
This was once number seven on the Fortune 500 list
Formed in the late 1980s by the merger of two gas pipeline firms,
Enron’s rise was powered by the deregulation of energy markets in the
1990s. In 1986 its revenue was $7.6 billion. By 2000 it had revenue of
$101 billion, and a market capitalisation of $63 billion.
But Enron did not simply take advantage of the new conditions created by
deregulation. It worked to create them through its political
connections. Its chairman Kenneth Lay is reported to have donated nearly
$2 million to George W. Bush and in the 2000 election process the
company spent $1 million. Lay was even touted at one point as an energy
secretary and was regarded as a key adviser on policy. In the early
1990s, one of Lay’s most well-known recruits to the firm was Wendy L.
Gramm, wife of the Texas Republican Senator, Phil Gramm. She was the
commodities regulator in the first Bush administration and joined the
Enron board in 1993 just five weeks after the Commodities Futures
Trading Commission, which she headed, brought down a ruling exempting
energy contracts from regulation.
Deregulation of energy markets opened up new frontiers for the
accumulation of profit, not through the construction of new facilities
and the delivery of energy supplies but by buying and selling in the
energy market. Enron was more than just a trader, arranging a deal
between a buyer and seller and then taking a cut. It was the energy
market equivalent of a financial speculator, buying and selling energy
contracts stretching months or even years into the future. In the space
of a decade it had become one of America’s 10 largest companies and
accounted for 20 percent of energy trading in Europe and the United
States, with operations extending to some 40 countries. Its activities
were not confined to the energy sector. The same business model was
applied to other areas as Enron moved from trading in gas and
electricity to pulp, paper, water and communications bandwidth.
For a firm such as Enron, whose profits are derived from financial
operations, the key to success lies in the constant inflow of funds from
banks and other financial institutions, enabling it to increase its
leverage and thereby its profit. But the accumulation of debt, to the
tune of tens of billions of dollars, depends in turn on confidence, the
creation of a publicity momentum in financial markets that the firm
seeking the loans is a good investment because of some innovation it has
Enron could not have done better if it had organised the publicity
campaign itself. For six years in a row Fortune magazine named it the
most innovative corporation and only last August listed the firm as one
of the ten growth stocks to last the decade. As recently as last year,
the Economist in Britain praised Enron for having created what might be
the “most successful Internet venture of any company in any industry
The publicity campaign did not stop there. As an article in the December
4 edition of the Financial Times noted: “The books of various gurus have
singled out the company as paragon of good management, for Leading the
Revolution (Gary Hamel, 2000), practising Creative Destruction (Richard
Foster and Sarah Kaplan, 2001), devising Strategy Through Simple Rules
(Kathy Eisenhardt and Donald Sull, 2001), winning the War for Talent (Ed
Michaels, 1998) and Navigating the Road to the Next Economy (James
Critin, scheduled for publication in February 2002—and now, presumably
The hype generated around the company was summed up by Hamel, who wrote:
“As much as any company in the world, Enron has institutionalised a
capacity for perpetual innovation ... [it is] an organisation where
thousands of people see themselves as potential revolutionaries.”
Besides publicity, good political connections, ensuring a favourable
legislative climate, are also invaluable. Enron was not lacking on this
score. Its chairman Kenneth Lay had developed close ties with the Bush
family, becoming a major fund-raiser for Bush Snr in the 1980s. When
George W. Bush became Texas governor in 1994 Lay became head of the
Governor’s Business Council.
These connections assumed greater importance when Bush became president
this year. A report published in the New York Times on June 3 noted: “At
least three top White House advisers involved in drafting President
Bush’s energy strategy held stock in Enron Corp. or earned fees from the
large Texas-based energy trading company which lobbied aggressively to
shape the administration’s approach to energy issues.”
Karl Rove, Bush’s chief political adviser, Lawrence Lindsey, his
economics adviser and I. Lewis Libby, Vice President Cheney’s chief of
staff, all had share holdings in Enron. Lindsey received $50,000 from
Enron in consultancy fees last year, while the value of Rove’s stock was
put at between $100,000 and $250,000.
Like other evangelists of the “free market,” Lay was a fervent advocate
of what he called “transparency”. In the arcane world of finance, where
the real meaning of words is so often reversed, transparency generally
means the absence of government controls and regulations and the lack of
scrutiny of the activity of the major players in the pursuit of profits.
Transparency certainly did not apply to Enron’s accounting system and
its published results. There is a saying in accounting circles that the
purpose of a balance sheet is more often to conceal than reveal, and
Enron developed concealment to an art form. As Lay himself was finally
forced to acknowledge, the company’s financial statements were “opaque
and difficult to understand.”
So long as it was reporting increased profits, few questions were raised
about Enron’s methods, least of all by the firm’s auditors, Arthur
Andersen. The financial watchdog, the Securities and Exchange Commission
(SEC), remained silent.
The wheels only started to fall off the Enron operation earlier this
year when investments began to go sour. With the crash of the telecom
sector, its investments in fibre optics capacity and other
telecommunications ventures turned out to have been very expensive.
Then came the sudden resignation of CEO Jeff Skilling, barely six months
after he had been promoted as Lay’s successor. Skilling was the man most
closely associated with the transformation of the company from the owner
of pipelines to a high stakes player in the new economy.
The financial problems came to a head in mid-October when the company
reported a $638 million loss. But even more significant was the
revelation that shareholders’ equity had declined by $1.2 billion in the
third quarter as a result of deals with partnerships headed by the
company’s chief financial officer Andrew Fastow.
What set the alarm bells ringing was that the write-downs were not
apparent from Enron’s quarterly earnings report. This is because the
off-balance-sheet partnerships had been set up to hide the company’s
debt, ensuring that its credit rating and capacity to borrow was not
affected. Besides inflating Enron’s bottom line, the partnerships also
proved lucrative for Fastow who received some $30 million in fees and
On November 8, Enron filed documents with the SEC revising its financial
statements for the past five years to account for $586 million in
With the company structure now rapidly unraveling, a last-ditch rescue
operation was attempted as energy rival Dynegy made a $10 billion offer
for the company in addition to taking over $13 billion in debt. But on
closer examination, Dynegy decided not to go ahead and Enron was forced
to file for bankruptcy.
Foremost among the immediate victims of the firm’s demise are its 21,000
employees, more than half of whom had their 401(k) pension plans linked
to Enron’s now worthless stock. A significant portion of the life
savings of these workers and their plans for the future have been wiped
out virtually overnight. There are many thousands more small investors
who, following the advice of the financial media and investment
analysts, placed their future in Enron stock. Their fate raises the
broader social implications of the Enron collapse.
Back in the 1970s, when financial markets in Britain were rocked by a
series of collapses and scandals, former Tory Party leader Edward Heath
coined the phrase “the unacceptable face of capitalism.” His aim was to
present these events as an aberration, and to deflect attention from the
more fundamental processes of which they were an expression.
Similar attempts will no doubt be made in the Enron case. There will be
investigations, possibly even demands for action against those
responsible, and calls for stricter accounting procedures.
But Enron cannot be dismissed as an aberration. When Heath made his
remarks, the processes to which he pointed were only just beginning and
the claim that they were an aberration had a certain plausibility. That
is not the case today.
Financial market operations of the kind in which Enron was engaged are
not peripheral to the world capitalist economy but at its very heart.
Every day trillions of dollars course through global equity, currency
and financial markets in the search for profit. Since the start of the
1980s as much as 75 percent of the total return on investments has
resulted from capital gains arising from an appreciation of market
values, rather than from profits and interest.
In this drive for shareholder value, each corporation is compelled, on
pain of extinction, to devise measures which attract investment funds by
lifting the price of securities above that which would be justified by
an objective valuation of the underlying assets. In other words, Enron
was only the most graphic expression of what is becoming a near
universal “business model.”
Moreover, this increasingly speculative mode of accumulation, with its
attendant semi-criminal activities, has come to dominate society as a
whole. All sections of the working class, whether they be blue- or
white-collar, cannot provide for their future, the education of their
children and the health of their families, without placing their limited
savings in the investment and mutual funds that form such a key
component of the financial system.
But, as the Enron experience has shown, the whole system has come to
resemble a house of cards where the accumulated savings of a lifetime
can be wiped out overnight. No amount of controls and regulations can
rectify this situation because the processes which gave rise to Enron
are no longer peripheral but endemic to the present-day functioning of
the capitalist economy.
The political task of the day is not a futile attempt to reform the
present social order but rather its complete transformation. Today, the
social existence of working people, the producers of all wealth, is
subordinated to the ever-more frenzied process of profit accumulation
for the benefit of the few. That situation must be reversed. That is,
society must be re-organised so that the mode of accumulation of wealth
is subordinated to the needs and requirements of its producers and is
controlled and regulated by them. This is the lesson of Enron.
And we are the Dummie that had to learn it.
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