Risk & Compliance

Enron and on It Goes: More Investigations, Suits

Labor Department investigating Enron's retirement benefits, and company employees reportedly sue auditor for $1 billion.
Stephen TaubDecember 6, 2001

Now the spotlight on Enron is being shined on the company’s retirement benefits.

The Department of Labor has opened an investigation into questions raised by Enron’s handling of its workers’ retirement benefit plans, according to Labor Secretary Elaine Chao. Chao also announced that the department has teamed up with the Texas Workforce Commission to help workers who are being laid off in the wake of Enron’s bankruptcy. “Enron’s employees have gotten the short end of the stick in the sudden collapse of this company, and we are committed to doing everything we can to help them,” Chao said in a statement.

In the past few days Enron has filed for Chapter 11 bankruptcy and laid off 4,000 employees. It also put another 3,500 on temporary leave.

Responding to these sudden layoffs, the Labor Department and the Texas Workforce Commission have set up rapid response teams to provide orientation sessions for the affected workers, informing them how to sign up for unemployment insurance benefits and receive free job training and other services.

The Labor Department also acknowledged that many Enron employees lost 70 to 90 percent of their retirement assets after the company indicated that it would restate profit reports. “The Labor Department’s Pension and Welfare Benefits Administration is reviewing Enron’s benefits plans, the rules that govern them, and steps that were taken by the company shortly before its collapse to temporarily freeze trading of 401 (k) plan assets,” it said in its press release. “This action is being closely coordinated with other government agencies investigating Enron.”

Meanwhile, Enron employees have filed a $1 billion lawsuit against Big Five accounting firm Andersen, according to The Times of London.

The lawsuit seeks compensation for losses suffered by members of Enron’s retirement plan, plus the return of Andersen’s $1 million-per-week fees, according to the paper.

The lawsuit alleges Andersen “knowingly participated in Enron’s breaches of fiduciary duty” by helping the firm hide its debts, says the paper.

And in yet another lawsuit, Amalgamated Bank, which manages worker retirement funds, sought to freeze the bank accounts of 29 senior executives at Enron, alleging they reaped huge profits by artificially inflating the company’s stock price.

Among those named were chairman and chief executive Kenneth Lay; former chief financial officer Andrew Fastow; board member Wendy Gramm, a former chairman of the Commodity Futures Trading Commission and the wife of Sen. Phil Gramm (R-Tex.); and the company’s auditor, Arthur Andersen LP.

In a lawsuit filed in U.S. District Court in Houston, the bank called Enron a “grotesque fraud” and said insiders gained about $1.1 billion from the sale of more than 17.3 million shares of stock over the past three years.

“Based on our own ongoing investigation, we believe the chicanery and financial manipulations at Enron were far more widespread than the company has admitted,” said Bill Lerach, lead attorney for the case at law firm Milberg Weiss Bershad Hynes & Lerach LLP, at a press conference. “This appears to be one of the worst instances of illegal insider trading we’ve ever encountered.” Milberg Weiss is representing Amalgamated.

The lawsuit said Lou Pai, chairman and chief executive of Enron unit Enron Accelerator, allegedly gained the most from insider trading of Enron shares, reaping $353.7 million. Lay allegedly gained $101.3 million, the second-highest total.

And Thursday’s New York Times reports that only a few days before Enron filed for bankruptcy and laid off thousands of people, the company paid $55 million in bonuses to about 500 employees.

U.S. Insurers Report $3.5 Billion Enron Exposure

Where there are huge losses, there is usually scrutiny of the effects on insurance companies. And the Enron debacle is no different.

But so far it seems as if the insurance industry hasn’t been hurt much by the collapse of Enron. The direct exposure of U.S. insurers’ asset portfolios to securities issued by Enron Corp. and its affiliates is estimated to exceed more than $3.5 billion so far, according to Standard & Poor’s. The rating agency said the liability is not likely to negatively impact the insurers’ ratings, however.

“The exact total of insurers’ asset exposure will take some time to resolve, because many insurers liquidated some or all of their holdings in the weeks preceding Enron’s bankruptcy filing of Dec. 2, 2001,” S&P said in its press release. “But Standard & Poor’s estimates that most of this asset exposure — about $2.6 billion — was with life insurance companies at year-end 2000, primarily in fixed-income investments.”

Among the life insurers making early announcements of their exposure was John Hancock Life Insurance Co., which reported a net investment exposure of $320 million, for which it would be taking a fourth-quarter charge of up to $125 million.

Fed’s Meyer Sees Lesson in Enron Mess

Enron’s troubles illustrate what can happen when a business turns out to be more involved in financial activities than many initially realized, Federal Reserve governor Laurence Meyer said Wednesday night.

“That’s an unregulated firm that turned out to be significantly involved in financial activities,” Meyer said in response to a question after speaking at Swarthmore College in Swarthmore, Pennsylvania, according to published accounts.

Asked whether Enron was a striking example of the failure of private money or business activity, Meyer suggested it was not a typical private business. “It wasn’t producing money, it was producing financial claims and making markets,” he reportedly said. “That’s quite different from issuing money. It does illustrate issues about private financial firms.”

Financing News

  • Management at pharmaceutical company Acusphere Inc. said on Wednesday it cancelled plans to go public. It had hoped to raise up to $69 million, led by Thomas Weisel Partners, UBS Warburg, and First Union Securities.
  • Indiana Michigan Power Co., a unit of American Electric Power Co. Inc., issued $300 million in 5-year senior notes, led by Banc of America Securities LLC and Barclays Capital. The medium term notes were priced to yield 6.141 percent, or 190 basis points over comparable Treasurys. The utility’s paper was rated Baa2 by Moody’s and BBB-plus by S&P.
  • Verizon New York Inc., a wholly owned subsidiary of Verizon Communications, filed a shelf registration to issue up to $2 billion in debentures. Management said it would use the proceeds for debt repayment and general corporate purposes.