|
|
Enron Mail |
Special Edition with BusinessWeek and Time BusinessWeek, 02/04/2002: Special Report: The Enron Scandal: THE PARTNERSHIPS The Man behind the Deal Machine As creator of iffy Enron partnerships, ousted CFO Andrew Fastow is a prime = target for investigators Special Report: The Enron Scandal: INVESTIGATIONS THE SWAMP FOX ON ENRON'S TAIL Is Billy Tauzin--a longtime accounting-industry pal--the right man to lead = the Hill's charge? Special Report: The Enron Scandal BRACING FOR A BACKLASH After Enron, business may be subjected to a new wave of regulation RUNNING FOR COVERAGE Suddenly, policies to cover execs are growing scarce The Fine Print: How to Read Those Key Footnotes A new periodic series will guide you through accounting issues ENRON: A POWERFUL BLOW TO MARKET FUNDAMENTALISTS Special Report: The Enron Scandal: COMMENTARY A Regulator with His Own Conflicts of Interest SHOULD YOU FOLLOW THE INSIDERS? Mimicking their trades in company stock is no sure road to riches THE POST-ENRON WORLD ____________________________________________________________________ Time Magazine, 02/04/2002: The [Enron] Spillover/The Suicide Enron Takes A Life The [Enron] Spillover The Enron Players; A humbling resignation and hearings in Congress for Andersen executives (wi= th an audience cameo by The Sopranos' Lorraine Bracco) fueled last week's i= ntrigue First; Value Driven You're On Your Own That Enron workers lost life savings is just another sig= n that the short era of economic security is over. The [Enron] Spillover Enron Spoils The Party;=20 Bush wants his State of the Union speech to drown out those stories linking= the disgraced company and the White House The [Enron] Spillover/Karl Rove Did W.'s Playmaker... The [Enron] Spillover/Ralph Reed ...Do A Favor For A G.O.P. VIP? The [Enron] Spillover Can Lawmakers Now Afford To Be Obstacles To Reform? The [Enron] Spillover Under The Microscope ; After Enron, investors are looking more skeptically = at companies whose bookkeeping seems confusing Nation; Global Agenda The Incredible Shrinking Businessman Corporate titans are out. Government r= eforms are in. Is it the dawn of a new era? The [Enron] Spillover/K Mart's Fall Blame Enron? ______________________________________________________________ Special Report: The Enron Scandal: THE PARTNERSHIPS The Man behind the Deal Machine. As creator of iffy Enron partnerships, ousted CFO Andrew Fastow is a prime = target for investigators By Wendy Zellner in Dallas, with Mike France in Houston and Joseph Weber in= Chicago 02/04/2002 BusinessWeek 40 (Copyright 2002 McGraw-Hill, Inc.) When it comes to Andrew S. Fastow, the former Enron Chief Financial Officer= , there's one thing those who worked with him agree on: He never appeared a= nything but supremely self-confident. Early in his career at Enron, when Fa= stow was just another bright young executive at the energy company, he barg= ained relentlessly to win a concession from a banker. Afterward, Fastow tha= nked him and said: ``I'll remember that when I'm CFO.''=20 Now, some see Fastow's cockiness as one factor behind Enron's collapse into= the biggest bankruptcy in U.S. history. Certainly he wasn't the only top e= xecutive at Enron with that kind of attitude; the word most people use to d= escribe the company culture is arrogant. But Fastow was one of the few whos= e aggressive tactics and overconfidence had the capacity to turn dangerous = for the company. If former CEO Jeffrey K. Skilling was the architect behind Enron's transfor= mation from stodgy pipeline to high-tech trading powerhouse, Fastow was the= trusted lieutenant who created the increasingly complex and unusual off-ba= lance-sheet financing that fueled Enron's growth. He was also key in sellin= g the deals to banks and institutional investors--sometimes with veiled thr= eats and sometimes with sweet talk, say those familiar with his tactics. ``= He had a dual personality. He could be charming but he could also be irrati= onally mean,'' says one high-ranking insider.=20 As congressional investigators, the Securities & Exchange Commission, the J= ustice Dept., and shareholders' lawyers try to pin down the culprits in Enr= on's demise, Fastow, 40, has fast become one of the primary targets. He dev= ised the LJM partnerships that triggered the controversy over Enron's accou= nting. His lawyers stress that the LJM partnerships, which Fastow ran and h= ad stakes in, were approved by top management and the board. They also note= that Fastow had no oversight of the accounting for these deals--that was t= he responsibility of another Enron executive who did not report to him. Fas= tow spokesman Gordon G. Andrew says that ``Enron senior management had full= knowledge of the LJM transactions.'' But some former and current Enron exe= cutives believe that Fastow may have hidden some aspects of the partnership= s--including the involvement of other insiders--from Chairman Kenneth L. La= y and Skilling.=20 To many colleagues and bankers who knew him, it is easy to draw Fastow as o= ne of the villains in this story. Insiders saw him as sometimes volatile an= d vindictive, determined to get to the top by pleasing Skilling. That meant= putting together creative financial structures that ensured Enron could ex= pand its business without adding too much new debt to the balance sheet or = threatening its crucial credit rating. But Fastow's desire to follow Skilli= ng's lead didn't end there. To build his new home in the exclusive River Oa= ks section of Houston--where construction continues despite Fastow's troubl= es--he hired the same architect Skilling had used, says a source familiar w= ith the project. Some at Enron even came to believe that Fastow named his f= irst son, Jeffrey, after Skilling--a contention denied by Fastow's wife thr= ough a friend. ``I don't think Andy ever did anything that Jeff didn't tell= him to do,'' says one former co-worker. Adds another high-level insider: `= `He wanted to make Jeff happy.''=20 Former colleagues say Fastow's screaming, table-pounding style suited the a= ggressive Skilling. And Fastow's penchant for belittling co-workers certain= ly didn't hinder his climb to the top. ``He loved to make people look stupi= d,'' says one Enron executive. ``He seemed to do it most when he was in fro= nt of a lot of people.'' Some former co-workers say he often remembered per= sonal slights or grudges when it came time for performance reviews; at Enro= n, the top managers could offer their evaluations of anyone, even those who= didn't report to them.=20 The aggressiveness was all in service to Skilling's plan to transform Enron= into a fast-growth, technology-oriented trading company: the company of th= e future. When Fastow joined Enron's finance group in 1990, the company, an= d the energy industry in general, were still considered backwaters for brig= ht young MBAs. Skilling was determined to change all that; even then he was= pushing Enron to take advantage of the newly deregulated energy business. = Fastow clearly sensed opportunity. And his wife Lea hailed from the wealthy= Weingarten realty and grocery family in Houston, so he was eager to move t= o Enron's hometown. Lea, an MBA who had also worked at Continental Illinois= Bank in Chicago, joined Enron, too, in the treasury department. She left t= he company in early 1997.=20 Fastow and Skilling quickly became partners in the effort to reshape Enron,= and Skilling looked to Fastow to help develop the financing that would fue= l the growth of his empire. At first, the off-balance-sheet financings crea= ted by Fastow and his group were not particularly risky, say bankers famili= ar with the deals. Early ones were backed by payments from oil and gas prod= ucers. But before too long, they say, Enron began using its growing clout t= o include in the deals a hodgepodge of assets, some of dubious quality, and= a range of unusual provisions. One banker recalls a partnership that had v= ery few restrictions on what energy assets Enron could put in; his bank eve= ntually started turning some of the deals down. Another banker was stunned = by an on-balance-sheet financing that was to be backed up by third-party re= ceivables. The problem was that Enron also included the right to replace th= e receivables with its own paper, which is now almost worthless. That deal = was code-named Tammy, after Tammy Faye Bakker, and included her picture on = the tombstone presented to participating bankers. As the banker recalls: ``= I said, `Is it that ugly?'''=20 So why did so many bankers go along? Most didn't want to miss the Enron gra= vy train. One Houston banker estimates that Fastow controlled some $80 mill= ion to $100 million in annual fees for a wide variety of banking and invest= ment banking services. Reluctance to join an Enron deal or persistent quest= ioning about the terms would lead to threats that they'd be cut out of futu= re business, some bankers say. To help in its arm-twisting, Enron kept an i= nternal spreadsheet listing which banks were in which deals and what they m= ade. Fastow and his team would also sell their deals by hinting that even t= hese off-balance-sheet structures were somehow backed up by Enron, says one= former banker who did business with the company. And Fastow could also tur= n on the charm: He delivered flowers to the house of one banker after his s= on's baptism. Fastow's spokesman denies that he ever threatened bankers to = get them into Enron's deals.=20 Fastow's hard-nosed business style doesn't square with the Andy that friend= s and acquaintances saw outside of the office. He was a major benefactor to= the city's art museums, a fund-raiser for the local Holocaust Museum, and = a co-founder of a synagogue. ``The Andy Fastow I know is one of the most th= oughtful and generous people in Houston,'' says Robert E. Lapin, an attorne= y who is one of Fastow's closest friends. When one of Lapin's three childre= n was diagnosed with a rare disease, Fastow was one of the first to call. `= `He said, `You just tell me when and how you need help and I'll do it,''' s= ays Lapin. Even old chums from New Providence (N.J.) High School recall Fas= tow as popular and well-liked, though extremely ambitious. He was the first= permanent student representative to the New Jersey State Board of Educatio= n, for instance, a post he pushed to create.=20 Now as friends and colleagues try to figure out how Fastow landed in the mi= ddle of one of the biggest financial scandals ever, that driving ambition i= s looking more and more like a liability. RESUME: Andrew Fastow BORN Dec. 22, 1961, Washington EDUCATION BA in economics and Chinese from Tufts University, 1984; MBA, Northwestern University, 1987 POSITION Former chief financial officer, Enron. Removed from post in October, 2001, amid controversy over off-balance-sheet partnerships that he ran and held stakes in. CAREER TRACK Worked in structured finance group at Continental Illinois Bank from 1984 t= o 1990. Joined Enron Finance in 1990 and developed close relationship with up-and-coming executive Jeffrey Skilling. Fastow became CFO in 1998 with Skilling's backing. WHAT EVERYBODY WANTS TO KNOW Did Fastow hide some aspects of the partnerships from Enron's top execs and board, which approved the deals? FAMILY Married grocery store and real estate heiress Lea Weingarten, who previousl= y worked at Continental Illinois and Enron; they have two sons. When naming t= he LJM partnerships that later triggered the scandal, he used the first letter= s of his wife's and two sons' names. Photograph: CONSTRUCTION HAS RESUMED ON FASTOW'S NEW HOME IN TONY RIVER OAK= S PHOTOGRAPH BY PHILLIPPE DIEDERICH=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Special Report: The Enron Scandal: INVESTIGATIONS THE SWAMP FOX ON ENRON'S TAIL Is Billy Tauzin--a longtime accounting-indust= ry pal--the right man to lead the Hill's charge? By Dan Carney and Laura Cohn in Washington, D.C. 02/04/2002 BusinessWeek 36 (Copyright 2002 McGraw-Hill, Inc.) Representative W.J. ``Billy'' Tauzin, the affable Republican chairman of th= e House Energy & Commerce Committee, once observed of his home state of Lou= isiana that ``half of it is underwater. And the other half is under indictm= ent.'' That pretty much sums up Tauzin: wickedly funny, disarmingly candid,= and--given some of the politicians Louisiana has produced--painfully on th= e mark.=20 Sometimes called the Cagey Cajun or the Swamp Fox for his droll humor and d= eft politics, Tauzin is a master at using his committee to full effect. Whi= le he's leading just one of 10 groups looking into the Enron Corp. mess, co= unt on him to be at the center of the action as the investigations heat up.= Thanks to his early acquisition of documents and digging, much of what has= come to light in recent weeks--including the letter that Enron executive S= herron S. Watkins wrote last August to CEO Kenneth L. Lay warning of the co= mpany's impending collapse--has come from his team of 15 investigators. The Enron probe won't be the first controversy to put Tauzin in the spotlig= ht. Many of the highest profile congressional hearings of the past 18 month= s have been his doing. Remember the Ford-Firestone probe? That was his. The= hearings into the election-night network-TV projections in Florida? Tauzin= again. The California energy crisis? He was in the middle of that investig= ation, too. The explanation for his frequent forays? It's partly due to his= committee's jurisdiction--and partly his own desire to be the showman.=20 But Enron clearly puts Tauzin in an uncomfortable position. As he doggedly = pursues the hottest story in business, the southern Louisiana lawyer has ha= d to do a little backtracking of his own. Until now, he has been one of the= most unabashed defenders of the accounting industry in Congress. He took $= 57,000 in campaign contributions from accounting firm Arthur Andersen over = the past 12 years, more than any other House member. What's more, he was in= strumental in defeating former Securities & Exchange Commission Chairman Ar= thur Levitt Jr.'s efforts to clamp down on accounting industry conflicts of= interest in late 2000. ``Today,'' he says rather sheepishly, ``it's kind o= f hard to say there isn't evidence of a problem.Arthur Levitt was right.''= =20 It isn't the first time that Tauzin has dramatically reversed his position.= Colleagues--some admiringly, some not--call him Congress' ``ultimate polit= ical chameleon.'' Indeed, the Cagey Cajun has changed his political stripes= before, with no ill consequences. After the GOP took control of the House = in 1995, he not only switched parties but also negotiated his way into a po= werful subcommittee chairmanship. In one quick move, he managed to stay in = the majority and cut in front of several lifelong Republicans to head the p= anel that oversees telecommunications.=20 Tauzin's change of tune in the current controversy could have profound poli= cy consequences. Once a staunch deregulator, he now vows a thorough look at= how Big Business conducts itself. ``We're finding out that there are real = problems endemic in the structure of Corporate America that we need to deal= with,'' he told BusinessWeek. ``Enron is just the worst example.''=20 But can someone who has reversed positions and been closely tied to the acc= ounting business convince the public that he is earnest in his efforts to p= olice it? Many believe that while Tauzin is brilliant at political theater,= he's unlikely to go to the mat for tough new accounting rules. ``Things li= ke this make good television,'' says Bill Allison, managing editor of publi= cations for the consumer watchdog group Center for Public Integrity. ``But = I don't know that they're going to make good law.'' Furthermore, some criti= cs observe that while Tauzin's talk is now tougher, he has no intention of = giving back any of the industry donations he has received.=20 Even so, voters back home give the congressman a lot of maneuvering room. H= e's adored in his district along the Mississippi Delta for his panache and = his help for local business. As a result, he has run unopposed in most of h= is recent reelection races, as a Democrat or a Republican. Besides, as form= er Senator J. Bennett Johnston (D-La.) says: ``Consistency is the hobgoblin= of small minds. And Tauzin does not have a small mind.''=20 Indeed, he's hoping to use those smarts to prove doubters wrong. Already, c= ommittee staffers have interviewed former Enron CEO Jeffrey K. Skilling; Da= vid B. Duncan, the recently-fired Andersen partner who handled the Enron ac= count; as well as that firm's risk-management chief, Michael C. Odom. Tauzi= n is also negotiating to meet with former Enron Chief Financial Officer And= rew S. Fastow, who managed and had stakes in some of the risky partnerships= that caused the company to crater.=20 But there is the potential for disappointment, too. He has set the stage fo= r his own high-profile hearings by selectively releasing some of the tens o= f thousands of pages of Enron and Andersen documents his staffers have cull= ed through, and his new challenge will be to deliver something more than he= adlines. Moreover, Tauzin must also take care not to do anything that would= undercut the criminal probes undertaken by the Justice Dept.=20 For now, though, Tauzin is playing it cool. While his staff was hunting thr= ough records over the Martin Luther King Jr. holiday weekend, he was chasin= g deer in Alabama and keeping in touch with his crew via BlackBerry. ``He m= ay be hunting deer,'' one staffer laughed, ``but he's got his dogs hunting = Enron.'' After the upcoming hearings, Tauzin may have some more headlines f= or his scrapbook. Tauzin's Scorecard His earlier hearings generated headlines, but only modest action FORD-FIRESTONE Televised hearings examined tire blowouts and Ford Explorer rollover proble= ms. RESULT: A bit of money for oversight agency and modest new tire-safety legislation, but no sweeping reforms. ELECTION-NIGHT COVERAGE Headed inquiry into how cable and networks bungled vote tally. RESULT: Nothing. CALIFORNIA ENERGY CRISIS Ran probe of brownouts and price spikes in 2000. RESULT: Tauzin championed the Bush energy bill through the House, but it's = now bogged down in the Senate. Meanwhile California's problems have gone away o= n their own. Photograph: PAPER TRAIL: Digging through Enron papers, Tauzin staffers foun= d documents that may prove critical PHOTOGRAPH BY WILLIAM PHILPOT/REUTERS= =20 Photograph: BACKTRACKING: Tauzin now says SEC efforts to crack down on acco= unting were ``right'' PHOTOGRAPH BY ALEX WONG/GETTY IMAGES=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Special Report: The Enron Scandal BRACING FOR A BACKLASH After Enron, business may be subjected to a new wave= of regulation By Aaron Bernstein in Washington, with Brian Grow in Atlanta, Darnell Littl= e in Chicago, Stanley Holmes in Seattle, Diane Brady in New York and bureau= reports 02/04/2002 BusinessWeek 34 (Copyright 2002 McGraw-Hill, Inc.) During the 1990s boom, Americans had mixed views about the world of busines= s. Most applauded the bounty produced by the U.S. economy, support for dere= gulation was on the upswing, and many rushed to grab a slice of the pie by = investing in the rising stock market. For many, business simply became cool= . Yet even with the bull market and the New Economy in full swing, a backla= sh began to build as many also grew angry at the perceived high-handedness = of big corporations: the uncaring HMOs, the lousy airline and telephone ser= vice, the price-gouging drugmakers, and the sweatshops run by shoe and garm= ent makers.=20 Now the Enron Corp. scandal--coming on the heels of a sharp recession, a tu= mbling market, and an extended stretch during which many of the most vaunte= d business success stories of the late 1990s proved to be chimeras--threate= ns to push the anticorporate button all over again. True, two-thirds of Ame= ricans still think corporations make good products and compete well in the = global economy, according to a BusinessWeek/Harris poll taken Jan. 16-21. O= nly a third, however, feel large companies have ethical business practices = and just 26% believe they are straightforward and honest in their dealings = with consumers and employees. ``The backlash is beginning,'' warned General= Electric Co. Chief Executive Jeffrey R. Immelt at a talk with BusinessWeek= Editor-in-Chief Stephen B. Shepard in New York on Jan. 15. ``Credibility a= nd trust is everything [in business]. And because of the recession, because= of Enron, that trust has evaporated.'' Will the public mood become increasingly at odds with big business and the = culture of investing? Certainly, what's emerging is a political climate tha= t appears much more open to government regulation than has been the case fo= r years. A crackdown on the accounting industry seems likely. Board directo= rs may get hit with new rules about conflict of interest, as well as new re= sponsibilities to oversee corporate audits. Companies also could face restr= ictions on the ability to fund 401(k)s with their own stock. ``I worry that= Enron will unleash a welter of restrictive new regulations,'' frets Steven= A. Raymund, CEO of Tech Data Corp., a Clearwater (Fla.)-based computer dis= tributor.=20 Even campaign-finance reform could get a lift. After all, Enron's largesse = with elected officials has left a widespread impression that it paid the co= ps on its beat to take a nap. ``The Enron scandal clearly shows that legisl= ators were influenced by campaign donations and didn't live up to their wat= chdog duties,'' says David Clay, a veteran factory hand at Boeing Co.'s air= craft plant in Everett, Wash.=20 Of course, public anger and political furor often have a way of fading quic= kly in Washington. Gun control looked like a no-brainer after the Columbine= shootings, but wound up blocked by powerful groups such as the National Ri= fle Assn. Corporate lobbyists are already working hard to head off Enron-re= lated regulation. The heat also is unlikely to affect many of the broader d= eregulatory efforts that have brought sweeping change to industries such as= banking and telecommunications.=20 Clearly there are signs of a growing disenchantment with business. While th= e BusinessWeek/Harris poll shows that a core 16% of Americans have ``a grea= t deal of confidence'' in people running major companies--up slightly from = the 15% who felt that way in 1999--the percentage who have ``hardly any'' c= onfidence in business leaders nearly doubled to 24%, from 13% in 1999.=20 Although there is no concrete evidence yet that Enron is adding to that dis= enchantment, many fear that the sordid tale will feed suspicions about self= -dealing by executives and the nexus of influence between companies and pol= iticians. The BusinessWeek/Harris poll finds that some 79% of Americans bel= ieve corporate executives put their own personal interests ahead of workers= ' and shareholders', as Enron officials are alleged to have done. Other pol= ls find similar results. For example, a Gallup Organization poll released o= n Jan. 16 shows that 61% of those closely following the Enron story believe= its executives did something illegal. Says Governor John G. Rowland (R-Con= n.), head of the Republican Governors Assn.: ``The average guy on the stree= t sees the Enron mess and says, `Oh, another corrupt corporation.'''=20 Reformers are moving to capitalize on such attitudes. Reacting to the pensi= on losses suffered by Enron employees, for example, pension-rights and labo= r groups have ambitious goals to give workers more control over 401(k) plan= s. Limiting the amount of employer stock in such plans is only the first st= ep. The AFL-CIO also argues that 401(k)s should be governed like union pens= ion funds, with boards comprising employees as well as company officials. S= uch independent oversight could resonate widely. ``There should be outside = management of retirement funds,'' says Carol Otten, an assistant vice-presi= dent in the Chicago branch of Commerzbank, a Frankfurt-based bank. ``With t= he CEO not involved and no company stock in the fund, there wouldn't be thi= s question of accountability'' raised by the Enron case.=20 Other groups cite Enron as evidence of the need for new regulatory scrutiny= of the big accounting firms. They argue that Andersen was lax because it g= ot larger fees from consulting for Enron than from auditing the company's b= ooks. This is the rule in the industry, not an exception. In fact, the larg= e accounting firms last year received just 28% of their aggregate fees from= accounting, according to a study by the Investor Responsibility Research C= enter Inc., a nonprofit group in Washington that represents institutional i= nvestors.=20 To remedy the problem, some investors want to limit or ban auditors from co= nsulting for the companies they audit, although the SEC appears little incl= ined to go along. Others want to require corporations to change their accou= ntants every seven years. ``Enron has given investors the weapon they've be= en waiting for to really make something happen,'' says Carol Bowie, the IRR= C's head of governance research.=20 In addition to reform groups, the pressure from skittish stock investors is= having at least a short-term effect on some companies. For example, Kmart = Corp.'s Jan. 22 bankruptcy filing was triggered in part by Enron-inspired f= ears. So was Tyco International Ltd.'s decision that day to split into four= business units. Tyco CEO L. Dennis Kozlowski says he took the step to reas= sure the fast-growing conglomerate's investors that its complex financial r= eporting scheme involved no risky accounting--a move that wouldn't have bee= n needed if the Enron meltdown hadn't renewed investor skepticism about its= bookkeeping.=20 The biggest political question is whether the Enron backlash will suffice t= o push through campaign-finance legislation. Substantial curbs on campaign = contributions could have a big impact on the way Washington is run. However= , that's exactly why opponents are likely to stall any key votes until the = scandal has died down.=20 The outcome of that battle could feed into the November elections as well. = So far, there's no evidence that close ties to Enron executives led to any = unethical actions by the Bush Administration on the company's behalf. But D= emocrats may try to use the opportunity to taint the President for his clos= e association with Enron Chairman Kenneth L. Lay. More broadly, they may ta= p the antiregulatory mood to paint the GOP as captive supporters of unregul= ated corporate power. ``Obviously, that's the bigger political game here--t= o tie the Enron albatross around the necks of Republicans who believe that = government should be less involved in markets,'' says Jerry Taylor, an envi= ronmental expert at the Cato Institute, a free-market think tank in Washing= ton.=20 Of course, 10 months is an eternity in politics. Events may simply push Enr= on out of the public consciousness long before autumn. Still, many average = Americans were suspicious of both corporations and politicians before Enron= came along. The company's collapse, and the open question as to whether th= e government will take steps to guard against future corporate meltdowns, c= an only add to the public's growing sense of cynicism and mistrust. BusinessWeek/Harris Poll: A Growing Sense of Anger Disenchantment with Corporate America is on the rise.* Would you say you have a great deal of confidence, only some confidence, or hardly any confidence in the people running major corporations? A GREAT DEAL ONLY SOME HARDLY ANY 1999 15% 69% 13% 2002 16% 56% 24% Enron executives have been charged with putting their own personal interest= s ahead of workers' and shareholders'. Do you think this is true of many othe= r large companies, or not? Is True 79% Is Not True 14% Not Sure 6% Enron employees had a lot of their 401(k) and retirement money in the company's stock, so they lost most of it when the company's stock crashed. Do you think the government should regulate companies more closely to preve= nt this from happening at other companies, or not? Government should regulate 73% Government should not regulate 23% Not Sure 4% Decline to Answer 1% * Based on a survey of 886 adults conducted Jan. 16-21, 2002. Results should be accurate within 3 percentage points. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Finance: INSURANCE RUNNING FOR COVERAGE Suddenly, policies to cover execs are growing scarce By Heather Timmons in New York 02/04/2002 BusinessWeek 78 (Copyright 2002 McGraw-Hill, Inc.) Buck naked. That's how many executives and company board members facing mul= timillion-dollar shareholder lawsuits may feel in the post-Enron era. Feari= ng an explosion of litigation over alleged executive misdeeds, insurers are= retreating from writing Directors & Officers (D&O) policies to cover execs= against court costs and fines if they are named in suits ranging from sexu= al harassment to insider trading. Insurers were already jittery about the g= rowing number of dot-bomb class actions. Now the Enron Corp. debacle is ``m= aking everyone in the business recognize the potential severity of D&O loss= es,'' says John Keogh, president and COO of National Union Fire Insurance C= o., American International Group Inc.'s D&O unit.=20 Less than a dozen companies--including AIG, Chubb, and Great American--unde= rwrote 98% of such insurance in the U.S. in 2001. Eight insurers, including= Aegis, Lloyd's of London, and St. Paul may face claims from Enron director= s or officials. Aegis, as lead insurer, could be looking at $100 million al= one. On Jan. 18, Enron asked the Manhattan bankruptcy judge to make its ins= urers advance cash to executives and directors for legal fees. Even before Enron collapsed, all major D&O insurers in the U.S. were taking= stock of the business. Lloyd's of London, the third-largest player behind = AIG and Chubb Corp., has cut back its U.S. D&O operations since early 2001,= competitors claim. A Lloyd's spokeswoman would only say: ``We have become = extremely selective [about whom to insure].''=20 Premiums were slated to increase by 25% to 400% because of the jump in shar= eholder litigation after the Nasdaq crash, says Willis Group Holdings, a Lo= ndon insurance broker. And insurers were increasing deductibles. Now they'r= e drastically scaling back the scope of policies.=20 Typically, companies take out D&O insurance for high-profile execs and boar= d members. Costs vary by business size and industry. Premiums averaged $242= ,000 a year for utilities in 2000, reports Tillinghast-Towers Perrin, an in= surance-industry consultancy, but were just $67,000 for health-services com= panies.=20 Now, just getting coverage will be hard. Companies that a few years ago cou= ld buy all the D&O insurance they needed from one insurer may have to visit= 8 or 10 to get covered, says Mark Larsen, a consultant with Tillinghast-To= wers Perrin. Insurers are ``being very stingy with their coverage. They're = only giving a handful of policies out to their best clients.''=20 Enron is a worst-case scenario for D&O insurers. The pension holders and in= vestors who have filed suits against the company, its officials, and direct= ors know they'll get little from Enron, which is bankrupt. Instead, plainti= ffs' lawyers say, their clients hope to recoup some of their losses on the = approximately $350 million in coverage that Enron had purchased for its dir= ectors and execs--which the company had increased substantially after 1999.= The insurers will surely fight any claims in court, and it's far from cert= ain that they'll lose. As a rule, D&O insurance doesn't cover instances of = fraud or criminal wrongdoing.=20 Insurers deserve some of the blame for their rising D&O risk. After Congres= s passed the Private Securities Litigation Reform Act of 1995--which, among= other things, gave executives a legal safe harbor when good-faith projecti= ons didn't pan out--insurers thought securities litigation would all but ev= aporate. They rushed headlong into the D&O market, cutting premiums and off= ering bonuses such as longer contracts and extra coverage to companies that= upgraded their policies. Total available D&O coverage sold annually to U.S= . businesses rose 70% between 1995 and 2000, to $1.5 billion.=20 Instead, after the Nasdaq crash in spring, 2000, shareholders went on a lit= igation rampage against tech companies and their investment banks. Securiti= es class-action settlements more than doubled between 1995 and 2000, to $4.= 4 billion. Average damage awards jumped from $25 million per case to $200 m= illion in that period. Much of that money ultimately came from D&O coverage= .=20 Now that Enron makes the market look even riskier, some companies may find = that they can't afford D&O insurance at all, says Fred Podolsky, CEO of exe= cutive risk practices at London's Willis Group. If that happens, top brass = will have more reason than ever to make sure that their company is run well= . After all, their wallets will be on the line. Insuring the Boss after Enron Why Directors & Officers insurance is harder to get and more expensive: -- Shareholder class actions have more than doubled in 2001 because of the bear market of 2000, and settlements are getting bigger -- Lloyd's of London has restricted underwriting in the U.S., Reliance Insurance filed for bankruptcy, and other major players are tightening standards -- The spread of aggressive accounting is making insurers much pickier abou= t which companies they will underwrite Data: Tillinghast-Towers Perrin Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 BusinessWeek Investor: The Fine Print The Fine Print: How to Read Those Key Footnotes A new periodic series will = guide you through accounting issues By Anne Tergesen 02/04/2002 BusinessWeek 94 (Copyright 2002 McGraw-Hill, Inc.) The sudden collapse of Enron, until recently the nation's seventh-largest c= orporation, took investors by surprise. But had the Wall Street analysts, m= utual fund managers, journalists, and individual investors who followed the= company dug a little deeper, they could have had a heads-up that all was n= ot quite right at the Houston energy giant long before the bad news broke i= n October. The source of this information? The footnotes companies are requ= ired to publish with their financial statements.=20 Buried in Enron's annual report for 2000, for example, are hints of the hid= den debt that pushed the company into bankruptcy in December. A footnote on= ``preferred stock'' indicates that if Enron's share price were to fall bel= ow $48.55--which first occurred on June 14--the company would be obliged to= issue stock to a partnership called Whitewing Associates. Other footnotes = reveal similar arrangements. True, Enron never put a dollar value on its po= tential obligations, and the footnotes did not divulge the extent of the pa= rtnerships. But enough was revealed to suggest that investors were not gett= ing a full view of the company's finances. As Enron's collapse illustrates, it is vital to look behind the numbers com= panies release in quarterly and annual financial statements. That's why Bus= inessWeek Investor is launching The Fine Print, a series in which we will p= eriodically examine various sorts of footnotes you'll find in company repor= ts.=20 Footnotes often list items that can greatly affect the bottom line yet are = invisible on the balance sheet, the income statement, and the cash-flow sta= tement. That's because accountants often combine several items into catch-a= ll categories, such as ``other income'' or ``other assets.''=20 Take IBM. Nowhere does Big Blue's 2000 income statement credit its pension = fund for boosting earnings by $824 million, or 7% of pretax income. Yet the= pension fund's contribution is spelled out in a footnote. Combined with a = section of the annual report called ``Management's discussion and analysis,= '' the footnotes ``give you some powerful information about the story behin= d the numbers,'' says Lynn Turner, director of the Center for Quality Finan= cial Reporting at Colorado State University. ``If done right, footnotes wil= l also give you some good predictive information with respect to where the = company is headed,'' he adds.=20 Footnotes do not make for easy reading, however, and the numbers are often = difficult to decipher. In addition, there can be a long lag between the pub= lication of earnings and the clarifying footnotes. Why? While companies gen= erally disclose earnings in a press release shortly after the end of each q= uarter, they have up to 45 days to file quarterly 10-Qs and up to 90 days t= o release the annual 10-Ks that contain footnotes.=20 There's no cookie-cutter method to extract what's important from the fine p= rint. The footnote devoted to transactions with related parties was importa= nt at Enron, for example, but it's not relevant to every company. And you c= an't assume that one footnote contains all a company has to say about a top= ic. To investigate off-balance-sheet financing, for example, you must often= read several footnotes, including those that detail topics such as related= party transactions, minority interests, and unconsolidated affiliates. ``Y= ou have to interrelate things,'' says Bob Olstein, portfolio manager of the= Olstein Financial Alert Fund.=20 Finally, if after reading a set of footnotes you feel more confused than en= lightened, steer clear of the stock. As Enron's fall illustrates, companies= that aren't straightforward risk seeing investor confidence evaporate at t= he first sign of trouble.=20 We are inaugurating The Fine Print series by examining the footnote for pen= sion accounting. This footnote is key because, during the bull market, inco= me from defined-benefit pension plans became a significant source of profit= s for many companies. Indeed, pretax earnings were lifted by an average of = 12% at the nearly one-third of the companies in the Standard & Poor's 500-s= tock index that reported pension income in fiscal 2000, says Jane Adams, a = pension analyst at Credit Suisse First Boston. Of course, if stock market l= osses persist, this trend will reverse--with falling pension assets eroding= many corporate bottom lines.=20 When a company promises to pay pension benefits to retirees, it takes on an= obligation, or liability. Attaching a figure to that obligation is an inex= act science that involves estimating employees' longevity and future salary= levels, among other things. To convert the pension obligation from future = dollars to a current value, accountants ``discount'' it at an interest rate= that assumes the company will settle its obligation by investing in high-q= uality bonds.=20 This number isn't on the balance sheet. Instead, it is offset by the value = of the pension plan's investments, adjusted to smooth out some stock market= volatility. Depending on whether the plan's obligation or adjusted value i= s greater, the company records a net pension asset or liability.=20 To find the pension plan's impact on net income, check the pension footnote= in the annual report. For Denver-based Qwest Communications International,= the note shows that the plan produced a ``net credit''--or addition--to in= come of $319 million in 2000 (Table 1). Despite this, Qwest lost $81 millio= n that year.=20 The same table reveals that the biggest contributor to Qwest's pension wind= fall was $1.068 billion generated by its ``expected return on plan assets.'= ' Accounting rules permit the use of an expected return because relying on = a day-to-day return would cause net income to jump around with the stock ma= rket. The bottom half of this table shows that Qwest expects its plan asset= s to gain 9.4% a year, on average. It increased that rate from an 8.8% proj= ection in 1999. Given the stock market's doldrums, it's a good bet Qwest di= dn't meet that goal in 2001.=20 In contrast to Qwest's $1.068 billion expected return, its actual return wa= s a $78 million loss in 2000, following a $2.5 billion gain in 1999 (Table = 2). If real returns continue to trail expected returns, Qwest may build up = deferred losses to the point where accounting rules require the company to = put some red ink on the income statement.=20 Partially offsetting the $1.068 billion gain generated by ``expected return= s on plan assets'' are two expenses itemized in Table 1, service cost and i= nterest cost. Service cost represents the pension benefits employees earned= during 2000. Interest cost is the annual interest cost on the pension obli= gation--a figure analogous to interest payments on debt.=20 Check the lower half of Table 1. There you'll find the ``weighted average d= iscount rate'' used to figure the current value of these expenses, as well = as the overall pension liability. When this rate--pegged to interest rates-= -falls, the pension obligation rises, says Janet Pegg, a Bear Stearns accou= nting analyst.=20 The footnote also indicates if a pension fund is over- or underfunded and t= hus potentially in need of cash infusions. In Qwest's case, the news is goo= d. At the end of 2000, its pension plan was worth $13.6 billion (Table 2). = That exceeded the $9.5 billion (Table 3) it promised to deliver in pension = benefits by $4.1 billion. (This number appears under ``funded status'' in T= able 4.) Because Qwest's pension fund is amply overfunded, the footnote sho= ws no company contribution to the plan in 2000.=20 The days of fat pension gains may be over for Qwest. In part because the pl= an's actual return for 2000 was negative, the deferred gains--technically c= alled ``unrecognized net actuarial gains''--stockpiled during the bull mark= et fell from $4.6 billion to $2.9 billion (Table 4).=20 Deferred gains can arise when actual returns exceed expected returns. Such = gains are put into a pot, along with gains and losses from other pension it= ems, such as changes in assumptions about future salaries. If the pot becom= es big enough, some of it is required to spill over into net income. In 200= 0, Qwest recognized $58 million (Table 1) of its deferred gains--technicall= y called ``net actuarial gains.'' But with deferred gains dwindling, less w= ill be available to boost the bottom line in the future, says Pegg. More tr= oublesome, if the plan's assets continue to shrink, so will the expected re= turns that nearly erased Qwest's red ink in 2000.=20 It's a good bet that Qwest is not alone. So check the footnotes in those fi= nancial statements to find out whether an ugly surprise may be lurking in t= he form of fading pension income. Illustration: Chart: Pension Footnotes: What to Look for: TABLE 1: Qwest's = pension plan contributed $319 million to its bottom line in 2000. The compa= ny also increased the projected return on its pension plan to 9.4%, from 8.= 8% in 1999.=20 Illustration: Chart: TABLE 2: Even though Qwest booked income from its pens= ion plan, the plan actually lost $78 million in 2000. That helped to reduce= the plan's value to $13.6 billion.=20 Illustration: Chart: TABLE 3: Qwest owed its employees and retirees $9.5 bi= llion at the end of 2000, up from $8.9 billion in 1999. Still the plan was = overfunded, because it had $13.5 billion in assets.=20 Illustration: Chart: TABLE 4: Qwest records a net pension asset of $894 mil= lion on its balance sheet. The table also shows unrecognized gains, a sourc= e of corporate profits in the past. This declined from $4.6 billion in 1999= to $2.9 billion in 2000.=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Economic Viewpoint ENRON: A POWERFUL BLOW TO MARKET FUNDAMENTALISTS By Robert Kuttner 02/04/2002 BusinessWeek 20 (Copyright 2002 McGraw-Hill, Inc.) The deepening Enron Corp. scandal should hose away an entire world view abo= ut how capitalism is supposed to work. But will the right lessons be drawn?= As a political scandal, Enron threatens the Bush Administration. No corpor= ation was closer to the Bush family and its Republican allies. No corporati= on was more political in gaming the system to get the rules written in its = favor. The White House damage-control machinery contends that if the Presid= ent did not try to rescue Enron on the way down, his hands are clean. The r= eal scandal, of course, is how the GOP and its broader world view helped En= ron rig the rules on the way up.=20 The deeper scandal here is ideological. Enron epitomized an entire philosop= hy about the supposed self-cleansing nature of markets. Republicans are the= more devout practitioners of this ideology, but both parties are implicate= d. Enron, as a trading enterprise, claimed to be the quintessence of a pure fr= ee market. In practice, it was up to its ears in cronyism, influence-peddli= ng, rigging the rules to favor insiders, and undermining the transparency o= n which efficient markets depend. Transparency, in turn, demands regulation= in the public interest.=20 There is no getting around the need for regulation, since capitalism itself= requires rules that govern everything from rights to financial and intelle= ctual property to constraints on opportunistic practices that undermine the= efficiency of a market system. If you think capitalism can operate in the = absence of vigorous, competent, and public-minded government, look at Mosco= w or Buenos Aires. And government requires politics not corrupted by briber= y. For it is democratic politics that elects the officials who make and enf= orce efficient rules--or don't.=20 But for three decades now, the dominant strain of economics from the Univer= sity of Chicago has been teaching gullible undergraduates and journalists t= hat there is no such thing as the public interest. Efficient outcomes are j= ust the aggregation of selfish private interests, and government's main job= is to get out of the way. Well, after Enron, these theorists should learn = some other useful trade.=20 Even conservatives who reject other forms of government intervention grudgi= ngly concede the need for a Securities & Exchange Commission. Entrepreneurs= and traders are not saints. Deregulation is no cure-all, because decisions= about which rules to waive are every bit as politicized as the decisions t= o regulate. We've seen the corruption of deregulation in every imperfect-ma= rket realm from electricity to banking to copyright law to airlines, hospit= als, and telecom. None of these is an absolutely efficient free market; eac= h one requires rules. And in all of these realms, whether they are regulate= d or deregulated, corporations seek to game the system and rig the rules.= =20 But Enron took the prize. It not only cooked its books. It used its extensi= ve political influence to cook the regulatory system itself. When a public-= minded chairman of the Federal Energy Regulatory Commission stood in Enron'= s way, Chairman Kenneth L. Lay paid a call and the offender disappeared. We= ndy Gramm went from being head of the Commodity Futures Trading Corp. under= Bush I to the Enron board. Her husband, Senator Phil Gramm (R-Tex.), helpf= ully ensured legislation allowing Enron to evade policing either from the C= FTC or the SEC.=20 At the SEC, Arthur Levitt spent eight years trying to toughen regulation so= that corporations would keep honest books and auditors would not also be r= etained as business strategists and spin-doctors. For this public service t= o capitalism, Levitt was widely vilified. His successor, Harvey Pitt, came = directly from lobbying for the accounting firms who were against Levitt's p= roposed rules.=20 The difference between the Enron scandal and the superficially similar Long= -Term Capital Management affair is that LTCM essentially operated beneath e= veryone's radar. Enron, by contrast, worked to take out the radar stations.= The Houston company systematically used its ample political connections to= rig the rules--on trading, audits, disclosure, and the mechanics of energy= markets. The other difference is that LTCM's dupes were ostensibly sophist= icated consenting adults. In the Enron case, a lot of innocent people got b= adly hurt.=20 None of this is new--only the particulars are different. The last time we l= earned the broad lesson that capitalism is not self-regulating, it took a G= reat Depression that was followed by a reformist Democratic Administration.= This time, there are no catastrophic wider effects (yet), and the incumben= t Republican Administration still champions the ideology of laissez-faire a= nd the politics of cronyism. But Enron is to the menace of market fundament= alism what September 11 was to the peril of global terror--a very costly wa= ke-up call. Our political leaders should pay as much attention to this assa= ult on the very heart of capitalism as they paid to the other one. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Special Report: The Enron Scandal: COMMENTARY A Regulator with His Own Conflicts of Interest By Gary Weiss 02/04/2002 BusinessWeek 39 (Copyright 2002 McGraw-Hill, Inc.) In his two decades of dedicated service to an array of corporations, Securi= ties & Exchange Commission Chairman Harvey L. Pitt won renown as a legal sc= holar. But that expertise came at a price--a close identification with the = interests of his clients. Controversy rages over Pitt's history of legal wo= rk for Big Five accounting firms, including Enron auditor Arthur Andersen, = which threatens to undermine his leadership in formulating accounting refor= ms. And Pitt's conflict-of-interest nightmare may only be just beginning.= =20 As a partner in the Washington law firm of Fried Frank Harris Shriver & Jac= obson, he represented firms and individuals throughout the financial-servic= es industry. Although most previous SEC chairmen had worked on Wall Street = or were securities lawyers, Pitt's practice was unique in its sheer size an= d scope. Securities lawyers say that Pitt thus faces actual or apparent con= flicts of interest--either can be just as troubling--on a host of issues. A= nother constraint is equally daunting: Legal ethics forbid him from acting = on information he obtained from ex-clients. ``It's impossible to see Harvey= Pitt as anything but Prometheus bound. Pitt is shackled to a rock, and the= harpies are going to come and pick his guts out,'' says Bill Singer, a New= York securities lawyer. The heart of his future difficulties can be found in a single-spaced, six-p= age document that Pitt filed with the U.S. Office of Government Ethics on M= ay 24, 2001, after he was nominated to the SEC. It lists Pitt's 112 clients= during the preceding two years. Apart from the Big Five accounting firms, = the list includes major banks, the mutual-fund and securities industry trad= e groups, brokerages such as Bear Stearns and Morgan Stanley Dean Witter, t= he New York Stock Exchange, hedge fund titan Dawson Samberg, and corporatio= ns such as media giant America Online and its Chairman Stephen M. Case.=20 Virtually all could be affected by SEC work in the coming years. The NYSE i= s vitally interested in issues affecting its heated competition with Nasdaq= and electronic trading networks. Charles Schwab and Datek Online closely f= ollow issues affecting online trading, and Nasdaq market making giant Knigh= t/Trimark Group has pressed the SEC not to curtail payments for order-routi= ng, and weighed in on other trading issues.=20 Pitt has dealt with potential conflicts by hewing strictly to the law. His = spokesperson, Christi Harlan, notes that ``people can always believe that t= here is the appearance of a conflict of interest, but in [Pitt's] agreement= with the Office of Government Ethics he has agreed not to be involved in a= ny matter involving former clients for a year [ending in August], which is = what the law requires.''=20 But potential conflicts won't go away just because Pitt is following the ru= les. If he takes action concerning former clients--even clients from years = ago, not on the list--after August, lawyers say he may be seen as either fa= voring them or bending over backwards to do otherwise.=20 Either way, you ``lose the moral high ground,'' says one securities lawyer.= ``You want to avoid the appearance of a conflict as well as a real conflic= t,'' says Ira L. Sorkin, a former SEC regional administrator and now a New = York securities lawyer. Sorkin notes that while he has confidence in Pitt's= fairness, ``you don't want to create any issues that will call into questi= on a particular decision. It's something that judges and senior people in g= overnment avoid.''=20 Pitt has already lost the moral high ground in the No.1 issue on the SEC's = agenda. His credibility is open to serious question on many other subjects = vital to the markets. And if Pitt's baggage reduces public confidence in th= e SEC, it may be time to consider if the price of his expertise is too high= . Possible Minefields SEC Chairman Harvey Pitt's many former law clients could pose ethical dilem= mas during future proceedings. Among them: CORPORATIONS America Online Dell Computer El Paso Natural Gas General Instrument Humana Louisiana-Pacific SECURITIES & INVESTMENT Bear Stearns Charles Schwab Datek Online Dawson-Samberg Gruntal Investment Company Institute Knight/Trimark Merrill Lynch Montgomery Asset Management Morgan Stanley Dean Witter New York Stock Exchange PaineWebber Securities Industry Assn. TIAA-CREF Tiger Management BANKS & INSURANCE Bank of America Bank One Cigna Lincoln National Life Lloyds of London Securities Investment Protection Reliance Group Data: U.S. Office of Government Ethics Photograph: ``We are encouraging the accounting profession to take full res= ponsibility for helping to solve this....'' -- HARVEY PITT, Chairman, SEC P= HOTOGRAPH BY DANIEL ACKER/BLOOMBERG NEWS=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Finance: INVESTING SHOULD YOU FOLLOW THE INSIDERS? Mimicking their trades in company stock is = no sure road to riches By David Henry and Timothy J. Mullaney in New York 02/04/2002 BusinessWeek 74 (Copyright 2002 McGraw-Hill, Inc.) Most surefire tips for beating the stock market have short lives. They fizz= le out as soon as people figure out that there is no magic formula for maki= ng money from stocks. But one concept has had a remarkable run: shadowing t= he trades of those who have the inside scoop on a company--its executives a= nd directors. A small industry of publications and Web services has sprung = up to track their required disclosures to the Securities & Exchange Commiss= ion since the late-1990s tech boom, when stock became a key part of executi= ves' compensation. It was not lost on the market at large that many people = got rich by investing in their own companies. And all the publicity about p= rescient selling by Enron Corp. brass before the energy company's demise ha= s given the idea a new push.=20 The idea has broad currency. Many mainstream publications cover the topic, = including BusinessWeek, which prints data from Vickers Weekly Insider Repor= ts. Numerous academic studies support the view that an increase in insider = buying or selling across a sector tends to point to a switch in the market'= s direction. Insiders at tech and scientific companies in particular seem t= o have a much better knack for timing the market than ordinary investors. I= n the months before the Nasdaq hit its March, 2000, peak, techies were sell= ing actively. Since then, they've sold into shallow, short-lived rallies. A= study by researchers from the University of California at Los Angeles and = New York University shows that a group of insider buyers, most from tech an= d pharmaceutical companies, beat broad market indexes by an average of 9.6%= in the six months following their purchases. But for individual companies--which is what the bird-doggers really care mo= st about--there's little solid evidence that insider transactions convey mu= ch useful information about the near term prospects for a company's stock. = A close analysis by BusinessWeek of a series of trades shows why: Many fact= ors, from regulatory restrictions to the ebb and flow of executives' person= al finances, control the timing of an insider's transactions and mask the m= otivations. Arguably, an executive who is buying is probably enthusiastic a= bout his company's prospects, but a big repeat seller could be raising cash= for a tuition bill at Harvard University or the downpayment on a ski lodge= in Aspen, Colo. And with companies paying an ever-larger part of compensat= ion in stock options, insiders have more incentive to sell shares to cover = expenses.=20 Besides, SEC filings on insider traders aren't disclosed to the public unti= l several weeks after deals occur--when the optimum time to buy or sell may= be past. In addition, brokers are increasingly helping insiders camouflage= their transactions by offering them private contracts to stop losses or se= cretly capture gains. Or they may help them schedule trades months in advan= ce, a tactic permitted by a recent SEC ruling. Moreover, many companies, co= ncerned about impressions of impropriety, limit when their execs can trade = so they can't time the market.=20 Studies, such as the one from UCLA and NYU, that appear to support investme= nt strategies based on insider tracking turn out on closer analysis to be l= ess-than-rousing endorsements. For instance, the reported 9.6% six-monthly = lift was skewed by outsize gains at a few companies. When researchers looke= d at all companies reporting insider trades, buyers only beat the market by= 3.6% on average. And that average was also unrepresentative. In each case,= only half of all insider buyers outperformed the market by more than a tin= y margin. The study shows that investors would need to mimic hundreds of in= siders' trades to lock in above-market returns, according to one of its aut= hors, UCLA Assistant Finance Professor David Aboody. ``You would need an in= sider fund. An individual investor would lose his pants,'' says Aboody.=20 Even those in the insider-tracking business are willing to acknowledge that= their data are ambiguous at best. ``You see investor services promoting th= at Bill Gates sold a large amount'' of Microsoft stock, says Lon Gerber, re= search director at Thomson Financial/Lancer Analytics. ``And it generally m= eans nothing.''=20 Indeed, even when executives call their company's stock just right, it's of= ten as much dumb luck as anything else. That became clear in interviews wit= h a number of insiders identified by Lancer Analytics as having had astonis= hingly prescient trading patterns over the past 15 years, measured by retur= ns over the six months following their trades (table).=20 Consider the case of David M. Kies, a director of ImClone Systems Inc., a c= ompany whose shares plunged after a much-ballyhooed cancer drug failed to p= ass muster with the U.S. Food & Drug Administration. Kies bought ImClone sh= ares 19 times after joining the board in 1996, and all but once, the stock = climbed in the next six months. Last October, Kies made his first sale, at = $70, near the stock's high. Nearly three months later, ImClone shares fell = below $20. A scared insider bailing? Hardly. Kies sold only 8% of his holdi= ngs into a $1 billion tender offer by Bristol-Myers Squibb Co. to raise tax= money. ``If I didn't have the tax liability, I just would have held on,'' = says Kies, adding that he's still a believer in the drug, even though ``I c= an't say I fully understand the science.''=20 The examples also show that many smart-looking buyers never sell--with unfo= rtunate results. William A. Friedlander, a money manager who sits on the bo= ard of telecom carrier Broadwing Inc., made out fabulously for a while. Aft= er each of his 10 purchases, Broadwing shares rose an average of 23% in the= following six months. The 24,000 shares he bought in July, 1999, at $21 ro= se 80%. Friedlander still owned those shares at $10. Why didn't he sell? He= says he was mistakenly convinced that demand for broadband services would = outstrip supply.=20 Others, like Paul A. Frame, simply got lucky. The CEO of oil services compa= ny Seitel Inc. sold shares that he had acquired earlier, mostly through opt= ions, over a decade on 16 different occasions--and in 13 cases the shares w= ere down six months later. But, he says, he sold on a schedule determined b= y the company's restrictions on when he could trade, according to company s= pokesman Russell J. Hoffman.=20 Even many tech insiders get it wrong. Far from being the first to jump ship= , Nortel Networks Corp.'s execs and directors bought 34 times in the months= since October, 2000--a period when the stock plunged by 90%. At Gateway Co= mputer Inc., insiders have bought a half-dozen times since mid-2001, but mo= st did so long before Gateway released a weak sales forecast on Jan. 8, whi= ch pushed the stock down nearly 30% in one day. It has continued to fall. A= nd Yahoo! Inc.'s ex-CEO Timothy A. Koogle sold $25 million of Yahoo stock l= ast year, much of it before the shares took off on a 65% rally.=20 The bottom line: Insider tracking is a lot of work, and it's hardly a sure-= fire technique for making money. A pattern of buying or selling might give = investors a hint that something's up at a company. But it's still no substi= tute for dogged research. Insight or Dumb Luck? BUYERS COMPANY NUMBER TIMES STOCK UP PERIOD OF BUYS SIX MONTHS LATER BROADWING 10 7 1986-2001 William A. Friedlander, Director: He never sold as the stock soared; stock is down 64% since Jan. 1, 2001 APPLICA 15 14 1987-2000 David M. Friedson, CEO: Hasn't sold since '95, while stock tripled to $36; stock is now at $6.40 IMCLONE 19 18 1996-2001 David M. Kies, Director: Sold 8% of his stake to pay taxes before the share= s fell 70%; stock is now under a cloud due to a drug approval problem ZIXIT 10 10 1996-2000 Antonio R. Sanchez, Director, Never sold as the stock rocketed past $90; stock is now at $5.15 SELLERS COMPANY NUMBERS TIMES STOCK DOWN PERIOD OF SALES SIX MONTHS LATER SEITEL 16 13 1991-2001 Paul Frame, CEO: Lucky. Sold on company-restricted schedule; stock is now a volatile market laggard HEALTH NET 8 8 1994-2000 Roger F. Greaves, Director: Sold heavily above $29 when he lost CEO job; stock is stalled around $20 XICOR 12 11 1987-2000 Klaus G. Hendig, Senior VP: Looks smart. Big sales in $20s near stock peak; stock is now around $10 Data: Thomson Financial/Lancer Analytics; BusinessWeek Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Editorials THE POST-ENRON WORLD 02/04/2002 BusinessWeek 108 (Copyright 2002 McGraw-Hill, Inc.) A post-Enron era is beginning to take shape, and those chief executive offi= cers and politicians who miss this change in the culture may find themselve= s suffering deeply. Enron Corp. clearly crossed the line--but it was a line= that much of the country has been walking for a decade. The hyperbolic for= ecasts that various chief executives fed investors about their companies' p= rospects became sweeping deceptions by Enron officials. T
|