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December 6, 2001
Enron Paid Out 'Retention' Bonuses Before Bankruptcy Filing
By RICHARD A. OPPEL Jr. and KURT EICHENWALD
Yesterday evening, an Enron spokesman confirmed the bonuses, describing them as "retention incentives" for crucial employees. Bankruptcy experts said that the payments were almost certain to be closely scrutinized — and probably challenged — by Enron's creditors.
Separately, the Labor Department said yesterday that it had opened an investigation into how Enron managed its employees' 401(k) retirement plans. Those accounts were heavily invested in Enron shares, and company rules prohibited many employees from diversifying their holdings. The Labor Department said that employees had lost up to 90 percent of the value of their accounts.
"Enron's employees have gotten the short end of the stick in the sudden collapse of this company," said Labor Secretary Elaine L. Chao. Enron has said that a temporary freeze that kept some employees from shifting retirement investments was long planned and allowed another company to take over the job of administering the plan.
Enron declined to say how much was paid out in bonuses, who received the money or what the range of payments was.
Executives of companies entering bankruptcy defend such payments as necessary if there is to be any hope of reorganizing as a going concern. But they often prove to be incendiary. For example, in 1990, when it was disclosed that Drexel Burnham Lambert had paid key executives some $250 million in bonuses before filing for bankruptcy, creditors and the government reacted with outrage. In the end, after court hearings on the issue, the Drexel estate sued the employees to get the money back.
The payments by Enron "are substantially high, and that means it probably does become an issue in the bankruptcy case," said James Feder, a bankruptcy lawyer with Feder & Mills, a law firm in Los Angeles. "The question might come up as to whether there was fair consideration given for the amount of these bonuses and whether they were reasonable under the circumstances."
If creditors can convince the court that the employees were overpaid — or that the payments were made to keep money out of creditors' hands, a much more difficult argument to prove — then the judge can void the payments and order the money returned, said Lynn LoPucki, a law professor at the University of California at Los Angeles.
To tamp down such disputes, a company typically will file a request, as part of its bankruptcy filing, to make payments to certain employees, and not proceed with the payments until receiving a judge's approval, Mr. LoPucki said.
Yesterday, Mark Palmer, an Enron spokesman, defended the payments as necessary "in order to protect and maintain the value of the estate." Such payments "are done in every bankruptcy," he said, adding that the payments were made to employees "at all levels of the organization."
Employees who lost their jobs after Enron filed for bankruptcy protection on Sunday were told they may receive no more than $4,500 in severance pay. They also were told to petition the bankruptcy court to cash in unused vacation days.
In another legal slap at Enron, a shareholder lawsuit filed late Tuesday accused 29 Enron officers and directors of engaging in "massive insider trading" and making "false and misleading" statements about the company's financial performance while selling about $1.1 billion worth of stock over the last three years.
An Enron spokesman declined to comment on the suit, which was filed by Amalgamated Bank, which is known to be an activist shareholder.
Copyright 2001 The New York Times Company | Privacy Information
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