Enron Scandel Lawsuit

Purpose of Enron Bonuses at Issue: Suits Claim Plot for 'Favored Few'
By ERIC BERGER
Copyright 2003 Houston Chronicle

Enron scandel did not pay $105 million in bonuses on the eve of its bankruptcy to retain workers, as it has claimed, but to let a select few cash in before a court padlocked the till, according to lawyers suing for the return of the money.

This 11th-hour effort was given a typically Enronian name: Project 911.

It's unclear whether this was an allusion to an imminent emergency or gallows humor that Enron's two towers would soon come crashing down as the World Trade Center had two months earlier.

Whatever the meaning of 911, lawyers representing about 4,000 employees fired days after the bonuses were paid are suing to recover most of the bonus money. The bonuses infuriated laid-off workers, who received severances that were a pittance in comparison.

In interviews Tuesday, the lawyers sketched a much broader picture of the bonuses.
" We intend to hold 11th-hour bonus recipients accountable for their self-dealing as Enron fell into bankruptcy," said Richard Rathvon, co-chair of the employee committee. "Even as thousands of regular Enron employees and retirees were facing the loss of life savings, health benefits, their jobs or pensions, these favored few were scheming to get millions more for themselves."

There were two categories of bonus recipients: a group of about 75 commodity traders and a larger group of about 500 other traders, their support staffers and other key employees. The idea was to retain the key ingredients of the commodity-trading business.
All agreements required the employees to remain at Enron for 90 days or forfeit 125 percent of the bonuses, which ranged from $5,000 up to $8 million. Everyone named in the four lawsuits filed by employees remained at Enron for 90 days or longer.

But lawyers for the employee committee say a majority of the traders in the first group and some other employees already had contracts that required them to stay at Enron for longer than the 90-day period.

Perhaps the most prominent defendant, Jeffrey McMahon, who became chief financial officer after Andrew Fastow stepped down in October 2001, had such an agreement, according to the employee committee.

McMahon signed a contract on Oct. 25 and received a $300,000 payment in exchange for a commitment to stay at Enron for six months, the lawsuit states. Yet a month later, on Nov. 29, McMahon received $1.5 million to stay 90 days with Enron, through February.
A lawyer for McMahon said such payments to key employees are standard in bankruptcies and McMahon was arguably the most important executive remaining at Enron until Stephen Cooper was named chief executive officer several months later.

"Mr. McMahon took the bonus payment as a contemporaneous exchange of value for his professional services in stabilizing and coordinating the early stages of Enron's reorganization," said his lawyer, Tom Kirkendall.

One contract that is representative of many traders' is that of Mark Davis, a vice president. Signed in April 2001, it included a bonus payment of $150,000 that he was required to forfeit if he left before April 2003, according to the employee committee.
In late November, about 16 months before his contract was to expire, he received a $1.8 million bonus to stay 90 days.

His lawyer, Duane Morse, said Enron felt it necessary to pay these employees for their continued contributions, notwithstanding their existing contracts.

"We think the bonuses were legitimate retention bonuses paid for a valid business purpose," said Morse, who represents about 160 Enron workers named in the lawsuits by the employee committee.

Enforcing the original contracts with the Enron employees may have proved problematic, in part because Enron had so many other issues to litigate as part of its bankruptcy. Forcing an employee to return to the company may have been counterproductive.
Further, the bonuses could have helped ensure the workers who received them would remain loyal in a time of immense stress.

One lawsuit names McMahon, one names James Fallon, former president and CEO of Enron Broadband Services, one names 56 traders, and the final lawsuit names 228 traders and other employees.

Fallon's lawyer, Paul Dobrowski, also dismissed the notion that the employee committee has any valid claims against his client.

The rest of the 575 employees who received the retention bonuses were protected by a bankruptcy court order last summer that exempts them from the lawsuits because they were still with the company at that time.

Cooper argued that allowing them to be sued for the return of the bonuses would have harmed employee morale companywide.

The employee committee, which negotiated an increase in severance payments for fired employees to $13,500 with Enron last summer, won the right to pursue the bonus payments as part of the deal.

Lawyers for the employee committee, who are working on a contingency basis, sent letters demanding repayment of the bonuses this spring. Any recovery will be shared with laid-off workers entitled to severance claims higher than $13,500.

Although the employee committee settled with a few bonus recipients earlier this year, the majority joined an action led by Morse in Enron's New York bankruptcy court to declare the employee committee claims invalid.

The employee committee is seeking to have that effort tossed out of the New York court so its lawsuits, filed in bankruptcy court in Houston, can proceed.

A key question is whether the bonuses will be deemed "fraudulent transfers," a term for improper payments made by a company on the verge of bankruptcy or that are worth more than the service received.

If Enron had valid contracts with some of the employees requiring them to remain with the company for a period of time beyond February 2002, then it was "gratuitous" of Enron to make an additional bonus payment, said Nancy Rapoport, dean of the University of Houston Law Center and a bankruptcy expert.

A more appropriate means of securing the bonuses would have been waiting until the first day of bankruptcy, asking for the bonuses then and obtaining support of creditors and the judge, Rapoport said.

She said she was "stunned" when she learned of the bonus payments made prior to the filing of bankruptcy.

"It just seemed like a heck of a lot of money to be leaving the estate without a judge's blessing," she said.

The commodity-trading business that Enron spent the bonus money to keep intact was later sold to UBS Warburg for a share of future profits.

There have been none so far.

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