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With bankruptcy keeping the deep pockets of Enron Corp. out of the reach of angry shareholders, the personal assets of people who ran the once high-flying energy company — some would say ran it into the ground — are a tempting target for plaintiffs’ lawyers trying to find cash for their clients. Plaintiffs’ lawyers are going after $1.1 billion they allege 29 current and former officers and directors of Enron reaped in insider trading proceeds from Oct. 19, 1998, to Nov. 27, 2001, a time when the company has acknowledged it filed wildly inflated financial reports. To ensure the executives don’t hightail it out of the country, or spend the money, the plaintiffs’ lawyers want U.S. District Judge Lee Rosenthal of Houston to freeze the trading proceeds and put them in a constructive trust for safekeeping. The motion seeking a temporary restraining order was the subject of a lengthy emergency hearing in Rosenthal’s court Dec. 7, where many of the lawyers representing the Enron officers and directors in dozens of suits filed in Houston made their first appearances. A who’s who of Houston’s securities bar showed up for the hearing, which was somewhat of an event since another 59 securities fraud and shareholder derivative suits filed in Houston against Enron are stayed with the Chapter 11 filing. Enron is not a defendant in Amalgamated Bank v. Kenneth L. Lay, et al., but the class action suit names the 29 individuals and Arthur Andersen, Enron’s accounting firm. The suit was filed Dec. 4, two days after Enron and 13 of its subsidiaries filed Chapter 11s in bankruptcy court in New York. Defense attorneys in the suit say the request for the constructive trust is premature and unprecedented. “We say you could never get this kind of relief. Period,” says Robin Gibbs, who represents one former and seven current directors named in the suit. “Plaintiffs just can’t come in, in a case like this, and say, ‘Well, the company is bankrupt, here’s some people with some money — we’re not quite sure where it is — so let’s freeze their assets,’ ” J. Clifford Gunter Jr., who represents Enron general counsel James V. Derrick, told Rosenthal. But plaintiffs’ lawyers say the Enron situation, a financial free-fall in recent weeks that led the innovative energy trading company into bankruptcy and its stock into the pennies-on-the-dollar range, is unique. “This kind of case cries out for this kind of relief,” says Roger Greenberg, a Houston lawyer working on the suit with national class action securities firm Milberg Weiss Bershad Hynes & Lerach. “At the end of the day, with the company in bankruptcy, what will there be for shareholders to be paid if you can’t freeze those assets?” asks Greenberg, a partner in Houston-based Schwartz, Junell, Campbell & Oathout. “All we’re asking is to freeze and let us frisk them to see what they’ve got,” he says. Lawyers on both sides of the suit agree the motion is unusual. It seeks to freeze the trading proceeds of people like Ken Lay, Enron’s chairman, Jeff Skilling, its former CEO, and Andrew Fastow, a former chief financial officer who left Enron in October once the bad news about the company’s financial position started leaking. The stock of Enron has fallen by about 99 percent since the beginning of the year. Before the bankruptcy filing, the stock was repressed by revelations of some questionable financial transactions involving some limited partnerships set up by Fastow, and news of a formal investigation by the Securities and Exchange Commission. Then, on Nov. 8, in a filing with the SEC, the company said it overstated its earnings by about $600 million from 1997 through 2000 and the first two quarters of 2001. Gibbs, a partner in Houston-based Gibbs & Bruns, says he does not believe the plaintiffs would be entitled to the freeze and constructive trust, even with a judgment. “If they get to that point, you can’t go inappropriately to try to interfere with a person’s property just because you file a suit against them,” he says. But plaintiffs’ lawyer William Lerach says in his motion he’s simply asking for an order that would provide the plaintiffs with an equitable remedy. Paul Yetter, who does class action securities litigation but is not involved in any Enron-related suits, says a prejudgment freeze on assets is extremely difficult to get. “Absent extraordinary circumstances, this is not an order you would normally get. But [because of] the size of the alleged insider-trading profits, the magnitude of the alleged fraud and the enormous losses to investors, it is certainly something that the judge is going to look at,” says Yetter, a partner in Yetter & Warden in Houston. Rosenthal took the motion under advisement and asked for briefs to be filed by Dec. 20. LIMITED DISCOVERY? The suit alleges the 29 insiders sold more than 17 million shares of Enron stock during the class period, reaping proceeds of more than $1.1 billion. “Every single share of stock sold and every single dollar of proceeds obtained occurred during a time period where this company has admitted they were falsifying their financial statements by hundreds of millions, if not billions of dollars,” plaintiffs’ lawyer Lerach, a partner in Milberg Weiss in San Diego, told Rosenthal. But Jacks C. Nickens, who represents 15 current and former officers named in the suit, says the $1.1 billion figure is way too high because it doesn’t take into account what the defendants paid for the stock they sold. “If you would sell an option, you would get the difference between the strike price and the market price,” he notes. The suit alleges Lay’s proceeds were more than $101 million during the class period, Skilling’s were nearly $67 million and Fastow’s were more than $30 million. The suit also alleges Lou Pai, former chairman and CEO of Enron Accelerator, reaped nearly $354 million in proceeds during the three-year period. But Nickens told Rosenthal that Pai sold stock on two principal occasions — on his divorce and when he left Enron. Nickens, a partner in Houston’s Clements, O’Neill, Pierce, Nickens & Wilson, says the plaintiffs will have real trouble proving his clients engaged in insider trading. “Does it matter to anybody that Mr. Frevert has lost $60 million from the demise of this company? What kind of insider trading was that? Stand around with $60 million and let it go down to zero?” Nickens said during the hearing. (Mark Frevert is vice chairman.) The plaintiffs’ lawyers also want Rosenthal to allow limited discovery, but defense attorneys say that would be problematic because of the stay on litigation involving Enron. While Gibbs represents former and current directors and Nickens represents 15 of the former and current officers, some of the defendants have hired lawyers to represent them individually in the ever-growing docket of litigation that’s been filed largely in state and federal courts in Houston. Most have Houston counsel, including Skilling, who resigned as CEO in August. Ronald Woods, a former U.S. Attorney in the Southern District of Texas, represents Skilling, while Fastow’s lawyers include Craig Smyser, a partner in Smyser, Kaplan & Veselka of Houston. Derrick is using Gunter, a partner in Houston’s Bracewell & Patterson, where Derrick’s wife is a partner. Others with individual lawyers are Ken Harrison, the former CEO of Portland General Electric, an Enron subsidiary, and Rebecca Mark-Jusbasche, a former director. Lay, the chairman and CEO, reached out to Dallas and hired James Coleman Jr., a veteran litigator and partner in Carrington, Coleman, Sloman & Blumenthal. Coleman told Rosenthal during the hearing the plaintiffs were trying to place the cart before the horse by asking to freeze the trading proceeds and for discovery. CORNYN CHIMES IN Despite this hearing, most of the action in litigation involving Enron is in bankruptcy court in New York. Lawyers representing numerous creditors of Enron and its bankruptcy subsidiaries have filed motions asking U.S. Bankruptcy Judge Arthur J. Gonzalez to move the bankruptcy, the largest-ever for a U.S. company, to Houston. The state of Texas, which is owed millions by Enron and its businesses, joined that effort. On Dec. 11, Texas Attorney General John Cornyn filed a motion asking Gonzalez to change the venue to the Southern District of Texas because it would better serve the interests of the state, Texas taxpayers, witnesses and other parties with a stake in the bankruptcy. He suggested it would be too costly for the AG’s office to send lawyers to New York for hearings in the bankruptcy. Wrote Cornyn: “Although large institutional creditors may prefer for reasons of their own convenience that these cases remain in New York, it is respectfully submitted that large institutional creditors — who chose to lend money to a Texas-based debtor with mostly Texas-based assets — are in a far better position to protect their interests in a bankruptcy case in Houston than are individual Texans and small- or medium-sized Texas businesses in cases pending in New York.”

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