The Nature of Insider Trading At Enron

Almost every executive accused of crimes was accused of insider trading; it was like a tax for working there. Prosecutors believed it was an easy allegation to make; executives, by virtue of their position, do have insider information, and many did sell. Because the stock did so well for so long, and since, their theory goes, everyone and every project was corrupt from the C-Suite to the mail room, insider trading must have been part of the bundle of malfeasance.

After reading various indictments, however, from Broadband to Corporate, it would appear that the prosecution believes that people sell their stock while it is rising. Some do, I suppose, but if you’re trading on insider information, usually that means you know some material information which will force the stock to decline, thus you save yourself the expected loss. A good example of this is Martha Stewart, who – the theory goes – sold when her friend, the CEO of ImClone, told her that they did not receive FDA approval for an experimental drug and thus, the stock would decline. Stewart sold her stock on the information that nobody else had, and avoided a sharp decline in the value of her stock. That’s what the prosecution says, and I frankly tend to doubt it, but the example is a pretty classic case of insider trading.

Yet if you read what the executives at Enron did, it was generally the exact opposite – they sold when the stock was still rising. Imagine a case in which I told you to sell Cara Ellison Corp. stock because tomorrow we’re announcing a cure for cancer.

Would you sell? If you were wise, no, you’d hold on to those puppies because they’re about to make you a lot of money. In this case, my insider tip to you is worthless. You’re not about to do anything at all but watch your bank account get fat.

Prosecutors can not convict a defendant for declining to sell his stock as stock rises. Yet it appears that in the cases of Jeff Skilling, Ken Rice, Ken Lay, Cliff Baxter, Rex Shelby, Joe Hirko, and Scott Yeager, they all sold when they were still making money. (Sidebar: Ken Rice did make one trade illegally – when Skilling revealed that he was going to leave. But Rice was not convicted of that and it is worth noting that Rice did not dump all his stock – just some.) Most executives wanted to diversify their portfolios. Even Ken Rice said that 80% of his fortune was tied to Enron. It makes sense to diversify (just ask those poor, helpless Enron employees whose retirements accounts vanished because they were too stupid to spread their retirement income over several investments.)

I would like to explore Jeff Skilling’s September 14 stock sale a little more.

On August 14, 2001 Jeff Skilling left Enron.

Almost a month later, on September 6, Jeff called his broker and asked to sell some stock. If he was trading on insider information, as the DOJ alleges, why did he wait a month after he left to sell on insider information? The DOJ alleges that his “insider information” was that Enron was corrupt (ie, the “secret side deals” with LJM.) If indeed that was true, why not start dumping it while he was still CEO? His indictment alleges that the conspiracy was hatched in September 1999. So why did he buy so much stock during the period between September 1999 and August 2001, only to decide to sell it after he’d left. If he knew it was a “house of cards”, why not sell it on August 15? August 14 was a Tuesday, his broker was open, but he didn’t sell anything. He did not sell on Wednesday. Not on Thursday, or that Friday. Instead, he waited three weeks, in which time the stock was in freefall. Why? WHY NOT SELL ON HIS SUPPOSED INSIDER INFORMATION during those weeks? Why wait?

In any case, he was not able to sell because his broker needed confirmation that he was no longer an executive of the company, and thus the sale did not have to be reported.

Skilling said okay and hung up. The next day, Friday, September 7, 2001, his broker received the confirmation he needed. Yet Skilling did not call him back. He did not call him over the weekend with an urgent appeal to sell first thing on Monday. He did not call him back on Monday. On Tuesday, September 11, 2001, the markets closed. On the first day the markets were open again, September 17, he called and sold a much larger block of stock than he had originally planned. Why? Because all the markets were tanking. He still did not sell all of his stock. He sold some. If Skilling possessed insider information about a conspiracy at Enron, September 11, 2001 would have been a fine opportunity to sell off most of the stock. But he didn’t.

After September 17 – his last Enron stock sale – he still netted more Enron stock than he’d had the year before. He was a net Enron investor.

Jeff Skilling did not trade on insider information. It’s true he had plenty of insider information – he knew what the company was doing. But he had no knowledge whatsoever of any conspiracy at Enron.

The same holds true for the other defendants who are accused of selling on insider information. Indeed, the pattern of stock sales shows that most Enron defendants sold when things were good.

The allegation of insider trading at Enron simply doesn’t stand up to scrutiny.

Cara Ellison

One Comment

  1. excellent points Cara. Here’s what I don’t understand. Why does everyone look at these insiders selling and immediately think it’s insider trading? Top executives with large holdings at most publicly traded companies have scheduled sales sales of stock. Look at any insider roster and their sales and you will see a ton of sales at various points in time. Most don’t have a specific “reason” to sell, they sell because they have so many shares and it is routine. His 9/14 sale had nothing to do with “inside information” it had everything to do with a smart businessman selling off after the biggest terror attack on American soil which was profoundly impacting our markets – plain and simple.

    As you noted, the evidence (and common sense) doesn’t add up when it comes to Skilling being guilty of insider trading.

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