Enron executives pressed UBS PaineWebber to take action against a broker who advised some Enron employees to sell their shares in August and was fired by the brokerage firm within hours of the complaint, according to e-mail messages released (March 26, 2002) by Congressional investigators.
The broker, Charles Wu, of PaineWebber's Houston office, sent a message to clients early on Aug. 21 warning that Enron's "financial situation is deteriorating" and that they should "take some money off the table."
That afternoon, an Enron executive in charge of its stock-option program sent a stern message to PaineWebber executives, including the Houston branch office manager. "Please handle this situation," the newly released message stated. "This is extremely disturbing to me."
PaineWebber fired Mr. Wu less than three hours later.
That evening, the firm retracted Mr. Wu's assessment of Enron's stock-then about $36-by sending his clients an optimistic report that Enron was "likely heading higher than lower from here on out." A few months later, the stock was worthless and Enron was in bankruptcy court.
A PaineWebber spokesman declined to elaborate on the matter involving Mr. Wu but pointed to a letter sent to Congress. In that letter, PaineWebber said that Mr. Wu had violated a rule of the National Association of Securities Dealers requiring that sales literature be reviewed by a supervisor before being sent to clients. The firm also said that Mr. Wu's advice was hastily drafted and "raises basic suitability concerns" and pointed to his suggestion that investors who hold the stock or vested options might want to use options to hedge their exposure.
A lawsuit against PaineWebber filed by Enron investors, including some clients of Mr. Wu, argues that PaineWebber "directly lied to its clients for its own pecuniary gain by failing to reveal adverse information which it knew about Enron."
It asserts that other PaineWebber brokers in the Houston office "were selling as much Enron stock as they possibly could for highly placed Enron clients, despite the fact that inside PaineWebber, brokers commonly joked about Enron's stability."
The lawsuit also suggests another reason PaineWebber wanted to keep Enron happy. The brokerage firm had "an exclusive arrangement with Enron that PaineWebber would be the first brokerage company any Enron employee would deal with concerning the Enron employees' stock options and deferred benefits plans."
The suit also says that "getting first crack at these Enron employees paid off for Paine Webber in that about one of every three employees decided to keep their portfolios at PaineWebber."
Enron's Organizational Culture & Reward System Contribute to Its Problems
Houston energy trader Enron didn't fail just because of its entrepreneurial culture-the very reason Enron attracted so much attention and acclaim. The unrelenting emphasis on earnings growth and individual initiative, coupled with a shocking absence of the usual corporate checks and balances, tipped the culture from one that rewarded aggressive strategy to one that increasingly relied on unethical corner-cutting.
Central to forging a new Enron culture was an unusual performance review system that former CEO Jeffrey]Skilling adapted from his days at McKinsey. Under this peer-review process, a select group of 20 people were named to a performance review committee (PRC) to rank more than 400 vice presidents, then all the directors, and finally all of Enron's managers.
The stakes were high because all the rewards were linked to ranking decisions by the PRC, which had to unanimously agree on each person. Managers judged "superior"-the top 5%- got bonuses 66% higher than those who got an "excellent" rating, the next 30%. They also got much larger stock option grants.
In practice, the system bred a culture in which people were afraid to get crossways with someone who could screw up their reviews. How did managers ensure they passed muster? "You don't object to anything," says one former Enron executive. 'The whole culture at the vice-president level and above just became a "Yes-Man" culture."
Several former and current Enron execs say that Andrew S. Fastow, the ex-chief financial officer who is at the center of Enron's partnership controversy, had a reputation for exploiting the review system to get back at people who expressed disagreement or criticism.