Enron's Pending Class Action Comes as No Surprise

November 21, 2001 (PLANSPONSOR.com) - It seemed inevitable that Enron Corp. would be fanning the flames of a class action suit over its embattled 401(k) plan after last month's events.

The company “locked down” its employees’ 401(k) accounts after its earnings were released. And it was reported that the firm’s executives may have had fair warning of the stock’s demise – reportedly, they dumped $136 million worth of shares over the past year.

Enron’s 21,000 employees were heavily invested in company stock. For several years, they had good reason to be. The stock had consistently performed well and on January 25 it closed at $82. A series of events quickly changed the company’s tune.


On February 12, Jeff Skilling took over as CEO for Ken Lay, who remained the firm’s chairman. On April 12, Enron disclosed that it was owed $570 million by the bankrupt California Pacific Gas and Electric Co.

On July 12, Enron released its second quarter earnings recognizing a year-over-year increase of 40% in net income. Yet, on August 14, Skilling unexpectedly resigned for personal reasons. Lay was named CEO again.

However, on October 16, Enron’s fate was sealed. In its third quarter earnings, the company reported losses amounting to more than $1 billion in relation to its investment partnerships known as LJM Cayman and LJM2 Co-Investment. Reports then surfaced that Enron’s CFO, Andrew Fastow, was responsible for a chunk of the loss.

Through his dealings with LJM he incurred write-offs on investments amounting to $35 million. Fastow was dismissed shortly after and the Securities and Exchange Commission launched an inquiry into the LJM partnerships.

Lock Down

The next day, Enron “locked down” all 401(k) accounts, making it impossible for employees including about 2700 at Portland General Electric (PGE) to make changes to their accounts. (Enron purchased PGE in 1997.) The freeze lasted until October 23. By that time, Enron’s stock had fallen below $9. A rally seemed possible when Dynergy announced its purchase of Enron, but the stock had already plunged more than 70%.

Enron reportedly said the freeze of employee accounts was not premeditated to coincide with the release of its earnings. In July the firm had decided to end its relationship with Northern Trust and pick up Hewitt Associates as its plan’s administrator. The move would require a month and employees would have their accounts frozen during this time. Peggy Fowler, CEO of PGE, went on record saying that all employees were warned of the impending lockdown per a September 27th memo.

Once the freeze was lifted, employees were still in a bind. Only employees over 50-years-old were allowed to roll their stock over into another investment. Everyone else had to accept the company’s matching contribution.

Still, Enron’s troubles did not end. On November 8, the company announced that it was restating earnings for the past five years, effectively admitting to inflating profits.