U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20658 / July 29, 2008
U.S. Securities and Exchange Commission v. Lou L. Pai, Civil Action No. H-08-2338 (SDTX) (July 29, 2008)
SEC Charges Former Chairman and Chief Executive Officer of Enron Energy Services with Insider Trading
Lou Pai Agrees to Pay $31.5 Million in Disgorgement, Prejudgment Interest, and Civil Money Penalties, and is Barred From Serving as an Officer or Director of a Public Company for Five Years
The Securities and Exchange Commission today filed a civil action against Lou L. Pai, the former Chairman and Chief Executive Officer of Enron Energy Services ("EES"), a division of Enron Corp. ("Enron"). The Commission's complaint, filed in the United States District Court for the Southern District of Texas, alleges that Pai sold Enron stock in May and June 2001 on the basis of material, nonpublic information concerning Enron. Pai simultaneously settled the action without admitting or denying the allegations in the Commission's complaint.
According to the Commission's complaint, shortly before his departure from Enron, between May 18, 2001 and June 7, 2001, Pai sold 338,897 shares of Enron stock and exercised stock options that resulted in the sale of 572,818 shares to the open market - yielding millions of dollars in proceeds. Before making these sales, Pai learned from EES successor management that it had identified certain financial and operational problems and substantial contract-related losses at EES. Had Enron reported EES's contract-related losses in its Retail Energy Services segment, that segment would have shown a quarterly loss of at least $60 million, rather than a profit of $40 million as falsely reported in Enron's Form 10-Q for the first quarter of 2001. Pai knew or should have known that he could not sell Enron stock without first disclosing such material, nonpublic information. By selling Enron stock without disclosing this information, Pai breached his fiduciary duty to Enron shareholders.
The Commission's complaint further alleges that Pai avoided substantial losses from these sales when the price of Enron stock collapsed in the fall of 2001. Enron's stock price averaged approximately $53.78 per share during the time of Pai's sales, but closed at $0.40 on December 3, 2001 - the day after Enron filed for Chapter 11 bankruptcy protection. By selling his shares in May and June 2001 before the collapse of Enron's share price, Pai avoided millions of dollars of losses.
Pai has consented to the entry of a final judgment that permanently enjoins him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and bars him from acting as an officer or director of a public company for five years. Pai also agreed to pay $30 million in disgorgement and prejudgment interest (subject to a $6 million offset based on his prior waiver of insurance coverage for the benefit of Enron investors), plus a $1.5 million civil money penalty.
