January 7, 2002 UC joins federal class-action suit against Enron executives By Charles McFadden The University of California today joined a federal class-action lawsuit on December 21 against 29 senior executives of the Enron Corp. and the international accounting firm of Arthur Andersen LLP. "The alleged financial fraud losses from the retirement plan's Enron position in no way affects the ability of the retirement plan, which is in a strong overfunded position, to meet its obligations to the beneficiaries." --David H. Russ, treasurer to the University of California Board of Regents. The suit is pending in the U.S. District Court for the Southern District of Texas in Houston. It alleges that investors who purchased Enron securities between October 19, 1998, and November 27, 2001, were the victims of a fraudulent scheme whereby the defendants disseminated false financial statements that artificially inflated the price of Enron securities and allowed the defendants to engage in $1.1 billion of illegal insider trading. Among the Enron senior executives named in the suit are Jeffrey K. Skilling, former president and chief executive officer, and Kenneth L. Lay, former chief executive officer and chairman of the board of directors. The complaint alleges that during the period specified, "defendants engaged in massive insider trading while issuing false financial statements and making false and misleading statements about the company's purportedly 'record' results and strong operating performance. As a result of these false statements, the company's stock traded as high as $90.75, allowing defendants to dump 17.3 million of their own Enron shares for proceeds of $1.1 billion." Among other things, the suit asks for "disgorgement" (refund) of defendants' $1.1 billion or more of insider-trading proceeds as well as compensatory damages. The aggregate total loss across all University of California portfolios is $145 million, representing approximately three-tenths of one percent (0.30 percent) of the university's total investment funds. The current market value of the UC portfolios was $54 billion as of Nov. 30, 2001. "Even with the demise of Enron occurring in November, the UCRP (University of California Retirement Plan) equity portfolio recorded a return of 7.70 percent, which was within 0.08 percent of its performance benchmark," said David H. Russ, treasurer to the University of California Board of Regents. "The alleged financial fraud losses from the retirement plan's Enron position in no way affects the ability of the retirement plan, which is in a strong overfunded position, to meet its obligations to the beneficiaries," Russ added. UC has petitioned the court to be named as a lead plaintiff in the lawsuit, which would allow the university to participate in the management and oversight of the litigation on behalf of itself and all other members of the class. UC is also seeking to have its counsel, Milberg Weiss Bershad Hynes & Lerach LLP, appointed as counsel for the class. Milberg Weiss is the nation's largest law firm whose practice is focused on class action litigation and specializes in representing institutional investors damaged by corporate malfeasance, securities fraud and insider trading. Questions and answers on Enron and the UC retirement plan Q. Did the University of California own stock in Enron? A. Yes. At its peak, the highly diversified UC Retirement Plan owned $116 million in Enron stock in active portfolio investments and Enron shares in the university's passive index funds. Across all UC funds, the investment totaled $155 million. Q. Was there a loss to UC's investment portfolio because of the plunge of Enron shares? A. Yes. The aggregate total loss across the entire UC investment portfolio was approximately $144.7 million. Of that amount, the loss to the UC Retirement Fund is approximately $94 million. This change in value did not occur all at once. The position was market to market daily over the entire 18-month holding period from the initial purchase in May 2000 to the final sales in late November 2001. Q. That sounds like a lot of money. What does it mean to the university's investment picture and the retirement fund? A. While $144.7 million is indeed a sizable sum, it represents approximately three-tenths of one percent (0.30 percent) of the university's total investment funds. The retirement plan is in what financial experts call "a strong overfunded position" to meet its obligations to its beneficiaries. The Enron stock plunge will not affect the retirement plan's ability to meet its obligations. In fact, the total retirement fund portfolio has grown by more than three percent since September 30, 2001. Q. Then why is the University of California filing this lawsuit? A. There have been reports that Enron's stock was artificially inflated and that the company's officers concealed information about losses that may have given investors greater ability to evaluate Enron's stock. The University of California is participating in this class-action lawsuit to recoup loss to its investment portfolio and to seek compensation for others, including Enron employees, who have been victimized by the actions of Enron's senior management. All investors in index funds such as the S&P 500, the Russell 3000 and the Wilshire 5000 would have been exposed to Enron stock as well. Q. What does the lawsuit seek? A. Among other things, the suit asks for "disgorgement" (refund) of defendants' $1.1 billion or more of insider-trading proceeds as well as compensatory damages. Q. Does that mean the UC retirement system will recoup the $116 million loss? A. The university's Office of the General Counsel and outside counsel, along with allied major plaintiffs, intend to wage a vigorous legal effort to recover the proceeds realized by senior Enron management through insider trading and concealment of Enron's true financial situation. The lawsuit will seek to recoup losses to UC's investment portfolios, including the UC retirement fund. Q. Why isn't the lawsuit against the Enron Corp.? A. Enron is in Chapter 11 bankruptcy proceedings. Q. It seems that UC and others were taken completely by surprise -- how was this possible? A. Along with other sophisticated institutional investors across the nation, UC relied upon Enron's official statements and material filed with regulatory agencies, audited by the Arthur Andersen accounting firm, prior to making investment decisions. It now appears that the material did not reflect the company's true financial position. Accordingly, UC and its fellow plaintiffs have gone to federal court to remedy the situation. Return to Front Page