WorldCom & Enron: Wheels of Justice Turn Slowly
By Andrew L. Jaffee, September 12, 2003
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WorldCom and Enron were the poster-children of the bursting of the U.S. stock market bubble in 2000 and 2001. Some people (including the "little people") made great profits. Some lost their shirts. But remember that for every seller, there was a buyer. For every buyer, there was a seller. So the "burst" was not simply everyone losing money, it was some people losing money, some people making money -- i.e., a massive transfer of wealth. But there were some criminal corporate manipulations during the bubble, and the slowly turning wheels of justice are beginning to catch up with the perpetrators. The stock market has also self-regulated by punishing the stocks of companies which engaged in illegal and/or manipulative activities.

Some corporate executives, like at Enron and Worldcom, engaged in all sorts of financial manipulations during the run-up to the burst. This was nothing but pure evil. Just because these guys wore white shirts, ties, and suits doesn't mitigate the evils they perpetrated against their own shareholders and employees. If you owned WorldCom and Enron, and held, you lost your shirt. Just look at the following 10-year stock charts of Enron and Worldcom, respectively:

Charts courtesy of

When these stock's were climbing up the mountain, nobody was complaining. When the stocks fell off the cliff on the other side, everyone started screaming.

Enron executives and board of directors schemed and created "partnerships" which enabled the company to keep debt off the company's publicly distributed balance sheet -- in other words, hide the debt from shareholders, investment analysts, and employees holding the stock in their pension fund. The company's board decided to "waive Enron's ethical code" to enable creation of the partnerships. On September 26, 2001, Enron's Chief Executive officer (CEO) Ken Lay held a company-wide meeting in which he cheered Enron's stock price and urged company employees to hold onto their stock. Here are Lay's comments from the meeting:

Talk up the stock and talk positively about Enron to your family and friends...

The third quarter is looking great...

I would guess 10 years from now our net income will be four-to-six fold what it is today and our market cap will be eight-to-10 times what it is today...

My personal belief is that Enron stock is an incredible bargain at current prices and we will look back a couple of years from now and see the great opportunity that we currently have.

Just a month earlier, Enron employee

Sherron Watkins ... warned [Lay that] "we will implode in a wave of accounting scandals" unless Enron halted the kinds of financial practices that eventually led it into bankruptcy.

Just three weeks after Lay's company stock price cheerleading meeting, Enron reported its worst financial results in history. Enron's executives' words didn't match their actions. They were getting out of the stock before their employees had the chance to:

Overhanging everything, however, was the steep fall in the stock, in which workers were heavily invested through their retirement plans. Executives had been large-scale sellers of Enron from 1999 through 2001, provoking one employee to ask Lay why top management was not being encouraged "with muscle" to buy shares.

"I'm sure you can understand that many of our senior management, as well as many of our employees, have been badly damaged financially by the drop in Enron's stock price," he replied.

Lay did spend about $3.6 million to acquire about 168,000 Enron shares in July and August, according to public filings analyzed by Thomson Financial. These involved the exercise of options that allowed him to buy shares at as much as a 43% discount from open-market prices. It is possible Lay exercised the options with the intent of selling the shares, but he has not yet reported to the Securities and Exchange Commission if and when he disposed of them.

Some reports have suggested that he exercised some of the options to repay a loan from the company.

Any stock purchases by Lay would have been unusual among Enron officers and directors. Since fall 1992, according to Michael Painchaud of Market Profile Theorems, a Seattle firm that analyzes trades by corporate insiders, sales by Enron executives outstripped purchases by a ratio of 74 to 1. That is in contrast to the situation at most public companies, at which purchases outnumber sales by an average ratio of 2.27 to 1.

WorldCom executives also engaged in financial manipulations to pump up their stock's price. They used accounting magic to overstate company profits by at least $3.8 billion. As you can see from the charts above, Enron and Worldcom are virtually worthless now. So have any of these companies' executives paid for their evil deeds? One of the reasons its taken awhile for justice to catch up with these guys is the slick and complicated nature of the financial manipulations they used. They didn't intend to get caught. They used nuances in financial laws to try to hide what they were doing. Because of the complexity of accounting standards and laws (sometimes politically motivated), its not always easy to prove wrongdoing. But the wheels of justice are catching up with these crooks.

WorldCom's Controller David Myers and Chief Financial Officer Scott Sullivan were handcuffed and arrested by federal agents on August 01, 2002. They were charged for involvement in WorldCom's profit overstatements. Oklahoma authorities arrested and charged WorldCom's former CEO Bernie Ebbers on September 4 of this year. And what about Enron?

On January 25, 2002 Former Enron executive J. Clifford Baxter committed suicide. He sold a whole lot of his Enron shares before the sh*t hit the fan. Former Enron Chief Financial Officer Andrew Fastow was arrested and indicted on 78 counts on October 31, 2002. Also in October 2002, Timothy Belden, Enron's former head West Coast energy trader, pleaded guilty to conspiracy charges. Former Enron executive Jeffrey Richter also pleaded guilty to conspiracy in February this year. Just this Tuesday, former Enron executive John Forney was arrested on fraud charges. Ken Lay is still roaming free, but I'm convinced justice will catch up with him, too.

It is interesting to note that state governments have moved faster than the U.S. Securities and Exchange Commission (SEC) in pursuing corporate wrongdoers. For example, New York Attorney General Eliot Spitzer has moved against fraud at big banks and mutual funds often before the SEC has gotten involved, causing much consternation at that agency. But that's just states' rights in action. Spitzer is keeping the SEC on its toes.

The lessons from all this are actually quite simple. After the bubble burst, a relative of mine exclaimed:

You can't expect me to read the quarterly and annual reports of the companies and mutual funds I own! It takes too much time!

Quite the contrary, you have to be an informed investor. Wall Street's a rough place. If you can't take the heat, then stay out of the kitchen. In 1999 and 2000, too many people made the wrong decision of jumping in at the top, while the news was already old news. They paid the price. It was too exciting. There was too much greed. The stock market pendulum tends to swing between fear and greed. They key is to buy when no one wants stocks, and all the mavens are telling you to sell, and to sell when everyone wants stocks and the mavens are telling you to buy. Do your own research at Yahoo!, Google, Bloomberg,, etc. You can't buy into a mutual fund before they send you a prospectus. Ask the company for an annual report. When you get proxy statements from your funds and stocks, vote. Keep emotion at a minimum and, above all, buy low and sell high.

Paradysz Matera

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