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Former Enron Corp. employees are unlikely to recover much, if anything, of what they lost when the company’s stock collapsed last year. That assessment comes from bankruptcy lawyers who said that the federal bankruptcy code considers the thousands of fired workers with Enron stock in their 401(k) accounts to be unsecured creditors. As such, they are low on the list of who gets paid. And there’s more bad news. Many employees of the Houston energy company may have hopes of compensation through the more than 50 securities class actions filed against Enron. But one bankruptcy law professor predicted that any future judgment obtained by plaintiffs’ attorneys would be just as low on the bankruptcy totem pole. “Their claims are probably losers because they are so deeply subordinated,” said Jonathan C. Lipson, a bankruptcy law expert at the University of Baltimore School of Law. “All securities class action claimants are generally at the bottom of the scale. Only if there is anything left after paying secured and general unsecured claims will anything go to them.” GETTING IN LINE Secured creditors are generally paid first after payment of taxes, administrative costs and attorney fees associated with the bankruptcy proceedings. Unlike an unsecured creditor, secured creditors may have a mortgage, lien or other financial interest as an assurance of the payment of a debt. The remaining funds are then usually disbursed among unsecured creditors. Lipson noted that, in Chapter 11 reorganizations such as these, such disbursements often take the form of a token cash payment, stock in the company that emerges from bankruptcy or a financial interest in future litigation brought by the company. But in the Enron case, lawyers aren’t sure whether there will be any money left for the employees. The estimated $1 billion owed employees with 401(k) accounts pales in comparison to the $10 billion owed secured creditors, and the $29 billion owed to other unsecured creditors. The largest unsecured creditors are Bank of New York, which Enron owes $2.4 billion, and Chase Manhattan Bank, which is owed $1.9 billion. Enron’s interim management is currently assessing the energy company’s total assets. Bankruptcy experts said that restructurings stemming from accounting irregularities, where profits were overstated, often result in very little cash for unsecured creditors. In an attempt to position Enron employees more advantageously among other unsecured creditors, attorney Scott L. Baena of Miami’s Bilzin Sumberg Dunn Baena Price & Axelrod on Jan. 29 petitioned U.S. Bankruptcy Court Judge Arthur J. Gonzalez in New York to appoint a second creditor committee constituted of former Enron employees. Baena represents the “Severed Enron Employees Coalition,” a group of 400 former Enron employees that also filed its own securities class action on Jan. 24. Baena said that the creation of a second committee is the only way to protect the interests of Enron employees. The current 15-member committee, appointed by U.S. Trustee Carolyn Schwartz, includes only one former Enron employee — in-house lawyer Michael P. Moran. Baena has asked that Schwartz create a second committee. U.S. Trustee Office Assistant General Counsel Joseph Guzinski said Schwartz is still considering the request. Gonzalez has scheduled a Feb. 27 hearing on the matter. Joel H. Levitin, bankruptcy chairman at the New York office of Dechert and a member of the American Bankruptcy Institute’s board of directors, said trustees are usually reluctant to appoint a second committee, instead preferring one committee with a diverse group of parties representing different interests. This case, however, might be an exception. “Given the magnitude of the case … I can really see there being a … committee for employees given their diverse interests,” Levitin said. One positive note for employees, Lipson added, is that despite bankruptcy rules, reorganization plans can take whatever shape the creditors and debtor desire. “The sky is the limit in the creativity of the reorganization,” he said. FEW GOOD TARGETS Enron’s bankruptcy picture will be increasingly complicated by the growing number of private securities class actions being filed against the company and other defendants. Securities lawyers are saying that the attorneys lining up to become lead counsel are already seeking wealthier targets than Enron. Third parties being targeted include Enron’s auditor, Andersen; Enron’s chief outside counsel, Houston’s Vinson & Elkins; Enron’s officers, directors and their insurers; management consultants; and investment banks associated with the company’s notorious partnerships. “Where accounting problems have surfaced and a company has gone bankrupt, shareholders’ counsel scans the horizon to see whether other pockets may be picked,” said Michael Young, a securities lawyer with New York’s Willkie Farr & Gallagher. Lead counsel candidates include New York’s Milberg Weiss Bershad Hynes & Lerach; San Francisco’s Lieff, Cabraser, Heimann & Bernstein; Boston’s Berman DeValerio & Pease; and Atlanta’s Chitwood & Harley. One plaintiffs’ lawyer said it will be hard to build viable cases against Andersen or Vinson & Elkins due to a 1995 law limiting accounting firm liability in securities class actions, and a 1994 U.S. Supreme Court ruling eliminating aiding and abetting liability in class actions. And attempts by plaintiffs’ lawyers to sue investment banks may also be difficult to maintain. “They can say, ‘We were not the experts in accounting; we relied on them,’ ” Young said. Lawyers at the firms angling for the lead counsel slot would not comment on the record since they expect the court to select a lead firm in the next few days. But one lawyer among them who requested anonymity said that, once discovery begins, more evidence will appear that will allow for major plaintiff recoveries from third parties such as Andersen and Vinson & Elkins. Securities lawyers said the ripest targets may be Enron’s officers, directors and their insurers, but some cautioned that insurers may balk at paying out on policies if willful misconduct is shown. Lipson warned of the potential for conflict on that issue between the creditors’ committee and plaintiffs’ lawyers. “In theory, only the folks who have the cause of action should be able to look to that insurance,” he said. “Creditors will say that insurance is meant to be for the company, and should go back to the … bankruptcy estate. But plaintiffs’ lawyers will say the case revolves around breach of duty, and shareholders should be the beneficiaries.”

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