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Enron Paid Out 'Retention' Bonuses Before Bankruptcy Filing

December 6, 2001

By RICHARD A. OPPEL Jr. and KURT EICHENWALD




Just days before Enron (news/quote) filed for bankruptcy
and laid off 4,000 people, it paid out $55 million in
bonuses to about 500 employees, according to several people
who had dealings with the company.

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.

http://www.nytimes.com/2001/12/06/business/06ENRO.html?ex=1008791402&ei=1&en=3f3df31ea6577ab2



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