WSJ on Skilling short sale  
WSJ(1/14)Heard On The Street:Enron Ex-CEO Made Bet Vs. Rival 		

01/13/2002
Dow Jones News Services
(Copyright ï¿½ 2002 Dow Jones & Company, Inc.)


  By Ken Brown 
  Staff Reporter of The Wall Street Journal 

When Jeffrey Skilling resigned as chief executive of Enron Corp. in mid-August, he said he wanted to spend more time with his three children. "I've missed too many soccer games over the years," he told his brother Tom soon after he quit. 

But instead of standing on the sidelines, Mr. Skilling stayed in the game, making a big, speculative stock-market bet against an Enron rival. 

A spokeswoman for Mr. Skilling confirms that he made the wager: a short sale initiated on Aug. 24 against shares of AES Corp., a big energy producer. A person familiar with the matter puts the trade's value at $30 million, though Mr. Skilling's spokeswoman says the estimate is "way out of the ballpark" on the high side. 

The bet came as AES's shares were tumbling, and, depending on when it was closed out, could have netted him a profit of more than $15 million. Mr. Skilling's spokeswoman, Judy Leone, confirms he did make a profit on the trade but won't say how much or when the trade was closed out. "There is a category of personal financial information that we're going to respect Mr. Skilling's privacy on," Ms. Leone says. 

As CEO of Enron, which made most of its money trading in the volatile energy markets, Mr. Skilling was used to taking on risk. He pushed the company into several unproven businesses, including the trading of bandwidth, or network capacity, a market that ultimately didn't prove successful for the Houston company. Enron itself reveled in a swashbuckling attitude that ultimately contributed to its downfall; the company has been under bankruptcy-court protection since early last month. 

But a bet of this type was exceptionally risky. In short sales, investors borrow shares of a stock and sell them, hoping the stock will fall so they can replace the shares with cheaper ones. Such trades are riskier than buying a company's shares directly, because if the stock rises strongly, an investor with a short position on the shares can be forced to "cover" the bet at a sky-high cost. 

As it turns out, AES shares, along with those of other energy companies, fell steadily in the month after Mr. Skilling's resignation. Then on Sept. 26, AES stock tanked, falling by nearly 50%, when the company announced it wouldn't meet analysts' earnings estimates for 2001. If Mr. Skilling had maintained his short bet through that date, he could have earned better than 60% on his investment. 

AES, based in Arlington, Va., blamed the earnings shortfall in part on the fall in the Brazilian currency. AES wouldn't comment on Mr. Skilling's trading. "Commenting on another company's now-departed executive's behavior is not a comment I think we ought to make," says Kenneth Woodcock, a company spokesman. 

Mr. Skilling's bet raises the question about whether he knew anything special about AES's business because of his work at Enron. Ms. Leone, his spokeswoman, says Mr. Skilling shorted the AES shares based on a July 30 page-one article in The Wall Street Journal that said AES was having trouble in its big Brazilian operations and would be hurt by the fall in the Brazilian currency. Based on information in the article and his general knowledge about how business in Brazil worked, he felt that the company's stock might fall in price. His trading decision was "absolutely not" based on any nonpublic information he had obtained while an Enron executive, she says. 

AES did trade energy with Enron, but only a small amount and only as a way to sell its output, rather than to earn a profit, according to Mr. Woodcock. He adds that there would be no obvious way for Mr. Skilling to have gained any unique or valuable knowledge about AES through Enron's dealings with his company. 

The trade was made through Mr. Skilling's account at Charles Schwab & Co., the big discount broker, and it created a buzz inside the firm's San Francisco offices. After the position was taken, "we checked up on it a couple of days later, and a couple of days after that, and said, oh, it went down," says the person familiar with the trade. 

At the time of Mr. Skilling's resignation, Schwab executives in their newly opened private-client office in Houston were trying to sell Mr. Skilling on a plan to hedge the value of his Enron stock, the person says. Schwab executives in San Francisco had created an elaborate presentation for the hedging strategy, called a collar, but Mr. Skilling never acted on it, a decision that may have cost him millions, the person says. Mr. Skilling wouldn't comment on the collar proposal. 

At the time of his resignation on Aug. 14, the 1.1 million Enron shares that Mr. Skilling owned outright were worth about $47 million. He also had 500,000 vested options that were in the money, meaning their exercise price was below the stock's share price at the time. Mr. Skilling has said he sold about 500,000 of the shares he owned outright on Sept. 17, when the stock market reopened following the terrorist attacks. That sale would have netted him about $15 million, based on that day's volatile prices. 

His remaining 600,000 shares are worth $408,000 at Enron's current share price of 68 cents, and his options are worthless. Just accounting for the 600,000 shares he owns outright, the collar proposed by Schwab could have saved Mr. Skilling more than $30 million. 

Interestingly, professional investors often will try to hedge a big positive bet on a company in any given industry by shorting shares of a rival, on the theory that if the entire industry tumbles, the gains on the short sale would offset the losses on the long position. But Mr. Skilling's spokeswoman says the trade wasn't a hedge, adding that it was the "first and only time" he made a short sale and that right now the only stock Mr. Skilling owns is Enron. "If he thought the stock price was going down he could have sold all his Enron shares; he didn't," Ms. Leone says. 

Enron and Schwab, which were often paired in magazine articles touting America's most innovative companies, had at least one minor business relationship. Schwab had handled a small portion of Enron's 401(k) called the "brokerage window," which allowed employees to buy mutual funds not offered in the company's plan, as well as individual stocks for their 401(k)s. The relationship ended in July when Enron made some administrative changes to the plan and Schwab was replaced. 

Mr. Skilling isn't the only member of his family to suffer because of Enron's collapse. His brother Tom a Chicago television weatherman, bought 750 shares of Enron at $49 early last year "because of these incredible analyst reviews" of the company. He says he sold them in the fall at $27 to buy some land. "Little did I know if I stuck with it I would have a 60-cent stock," he says in an interview from his vacation home in Alaska. 

He says his father suffered more: He bought 2,000 shares of Enron last year and still holds them. "You wonder what in God's name were the analysts doing," Tom Skilling says. "There were a lot of people lulled into, I don't know what, a comatose state." 

(END) DOW JONES NEWS 01-13-02 

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