Enron Corp., which saw its decimated stock free fall more than 20% on Monday on news that the U.S. Securities and Exchange Commission (SEC) was questioning some of its business practices, now also faces lawsuits from disgruntled shareholders who claim that the Enron board had breached its fiduciary duties by allowing its CFO to create and run certain limited partnerships, costing the company more than $35 million.

Early Monday Enron said in a statement that it would cooperate fully with an inquiry by the SEC into “certain related-party transactions” allegedly relating to partnerships once run by CFO Andrew Fastow (see Daily GPI, Oct. 22). The investigation comes on the heels of Enron’s third quarter announcement a week ago, in which it took $1.01 billion in charges and writedowns on poor investments.

By Monday afternoon, two lawsuits had been filed, one by an unnamed shareholder, who became the second Enron story of the day. Filed by Pomerantz Haudek Block Grossman & Gross LLP of New York City, the lawsuit claims the Enron board had lost the company and its shareholders money by allowing Fastow to run the limited partnerships and said it “presented a clear conflict of interest for the Enron CFO.”

In addition to the transactions, the lawsuit claims that the limited partnerships bought Enron assets, permitting Fastow to use his “inside knowledge of the company’s financial condition to earn millions of dollars for himself and the limited partnerships.” The lawsuit claims that because Enron had to repurchase 55 million of its shares “in order to unwind its involvement in the partnerships,” it had reduced the company’s shareholder equity by $1.2 billion.

By late afternoon, a class action lawsuit followed, filed by the Boston law firm of Shapiro Haber & Urmy LLP, which alleges securities fraud. The lawsuit, filed in the U.S. District Court for the Southern District of Texas, Houston Division, is against Enron and “certain of its officers and directors.”

Filed “on behalf of all purchasers of the common stock of Enron during the period from July 13, 2001 through October 16, 2001,” the complaint alleges that the defendants violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, alleging “that defendants’ wrongful conduct artificially inflated the price of Enron common stock during the Class Period.” It charges that the “defendants misrepresented and concealed material facts concerning the company’s financial transactions with two partnerships established by Enron’s CFO, which resulted in substantial losses to Enron and a reduction in shareholders’ equity of over $1 billion.” The lawsuit is seeking to recover damages suffered by class members.

Although it was not reported in the official release, during the earnings telephone call last week, Chairman Kenneth Lay revealed that Enron had shrunk its equity as a result of terminating a “structured finance arrangement.” He said during the call that “in connection with the termination, shareholders’ equity will be reduced approximately $1.2 billion, with a corresponding significant reduction in the number of diluted shares outstanding.” Then, on Wednesday, Enron repurchased 55 million shares.

The SEC’s inquiry into the company’s related-party transactions allegedly refers to a heading used by the company in its 1999 and 2000 annual reports on its limited partnerships with LJM Cayman LP and LJM2 Co-Investment LP, which deal in complex hedging transactions with millions of dollars of Enron’s assets. LJM Cayman is involved in energy related investments while LJM2 deals in energy and communication-related investments. Both were set up and run until last June by Fastow. He also remains with the company, and was in the earnings call with Lay last week.

In its 2000 annual report, Enron included some disclosure on the shares connected with LJM2, writing, “At December 31, 2000, Enron had derivative instruments worth 54.8 million shares of Enron common stock.” The derivative instruments apparently are typical instruments that give a counterparty the right to buy or sell stock at agreed prices.

Following the SEC’s request last week, the Enron board met on Friday and voted to release the requested information on Monday. “We will cooperate fully with the SEC and look forward to the opportunity to put any concern about these transactions to rest,” said Lay. He said, “In the meantime, we will continue to focus on our core businesses and on serving our customers around the world.”

Enron, which has declined to elaborate, said in a statement that its internal and external auditors and attorneys had reviewed the related party arrangements and that the board had been “fully informed of and approved these arrangements,” noting that the arrangements had been disclosed in the company’s SEC filings. “We believe everything that needed to be considered and done in connection with these transactions was considered and done,” said Lay.

Shares of Enron closed Monday at $20.65 after dropping $5.60 in one day. The stock fell steadily last week, and has lost more than 70% in value since the beginning of the year. However, analysts covering the global energy trader expect Enron to overcome its current problems.

Analyst Curt Launer of Credit Suisse First Boston noted Monday that the SEC’s inquiry ” is not an investigation at this point,” and said that Enron had disclosed information about LJM and related-party transactions in its audited financial statements “since their creation in 1999.” What Launer expects to be SEC’s focus will be on the “board of directors’ approvals and accounting issues.”

Enron has scheduled a conference call for 10:30 a.m. CST today (Tuesday, Oct. 23). Go to www.enron.com and click on Investor Relations for more information.

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