Risk & Compliance

Enron De-energized: Exec Comes to Terms

Energy unit's Lou Pai consents to SEC civil charges of insider trading dating back to 2001.
Stephen TaubJuly 29, 2008

The former chairman and CEO of Enron Energy Services agreed to pay $31.5 million to settle civil insider trading charges.

Lou L. Pai, who had spent 15 years with Enron Corp., also agreed to be barred from serving as an officer or director of a public company for five years as part of a consent decree arrived at with the Securities and Exchange Commission. Under the terms of his arrangement, Pai neither admitted to nor denied the SEC’s allegations.

From March 1997 until January 2001, Pai was chief executive Enron Energy, and from February 2001 until June 2001 he was chairman and CEO of another Enron division, Enron Xcelerator. Pai’s resignation from Enron was effective June 30, 2001.

According to the SEC complaint, between May 18, 2001, and June 7, 2001, Pai made hundreds of millions of dollars from selling 338,897 shares of Enron stock and exercising stock options that resulted in the sale of 572,818 shares to the open market. The regulator alleged that before the sales, Pai learned from Enron Energy successor management that it had identified financial and operational problems and substantial contract-related losses at the unit. Had Enron reported Enron Energy’s contract-related losses in its Retail Energy Services segment, the segment would have shown a quarterly loss of at least $60 million, rather than a profit of $40 million as falsely reported in Enron’s quarterly report for the first quarter of 2001.

The commission’s complaint further alleged that Pai avoided substantial losses from these sales when the price of Enron stock collapsed in the fall of 2001. Enron’s stock price averaged about $53.78 a share during the time of Pai’s sales, but closed at 40 cents on December 3, 2001 — the day after Enron filed for Chapter 11 bankruptcy protection. “By virtue of these sales, Pai avoided millions of dollars of losses that he otherwise would have incurred when Enron’s share price collapsed in the fall of 2001,” the complaint stated.

Under the settlement, Pai agreed to pay $30 million in disgorgement and prejudgment interest, subject to a $6 million offset based on his prior waiver of insurance coverage for the benefit of Enron investors, plus a $1.5 million civil penalty.

4 Powerful Communication Strategies for Your Next Board Meeting