Monday, August 4, 2008
On July 29 the SEC filed a civil action against Lou L. Pai, the former Chairman and Chief Executive Officer of Enron Energy Services ("EES"), a division of Enron Corp. ("Enron"), alleging that Pai sold Enron stock in May and June 2001 on the basis of material, nonpublic information concerning Enron. Pai simultaneously settled the action without admitting or denying the allegations in the Commission's complaint.
According to the Commission's complaint, shortly before his departure from Enron, between May 18, 2001 and June 7, 2001, Pai sold 338,897 shares of Enron stock and exercised stock options that resulted in the sale of 572,818 shares to the open market. Before making these sales, Pai learned from EES successor management that it had identified certain financial and operational problems and substantial contract-related losses at EES. Had Enron reported EES's contract-related losses in its Retail Energy Services segment, that 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 Form 10-Q for the first quarter of 2001. The Commission's complaint further alleges 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 approximately $53.78 per share during the time of Pai's sales, but closed at $0.40 on December 3, 2001 - the day after Enron filed for Chapter 11 bankruptcy protection.
Pai consented to the entry of a final judgment that permanently enjoins him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and bars him from acting as an officer or director of a public company for five years. Pai also 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 money penalty.