UC joins federal class-action suit against Enron officials
Fraudulent financial statements led to retirement-plan losses, complaint says

16 January 2002 |

The University of California on Dec. 21 joined a federal class-action lawsuit against 29 senior executives and directors of the Enron Corp. and the international accounting firm of Arthur Andersen.

The suit, filed in the U.S. District Court, alleges that during a three-year period beginning in mid-October 1998, the Houston-based energy-trading giant issued false financial statements that artificially inflated the price of Enron securities, allowing senior management to engage in $1.1 billion of illegal insider trading.

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.

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. It now appears that the financial statements issued by Enron misrepresented the company’s true financial position.

The complaint alleges that the company reported “record” financial results and strong operating performance during the time period in question. The false statements, it says, helped to inflate the price of Enron stock and allowed the defendants to dump $17.3 million of their own Enron shares before the company went bust.

Among other things, the suit asks for a refund of the defendants’ $1.1 billion or more of insider-trading proceeds, as well as compensatory damages.

For UC, the aggregate total loss across its portfolios was $145 million, representing approximately 0.3 percent of the university’s total investment funds. The market value of the UC portfolios was $54 billion as of Nov. 30, 2001.

The alleged financial fraud loss from the retirement plan’s Enron investments “in no way affects the ability of the retirement plan, which is in a strong, overfunded position, to meet its obligations to the beneficiaries,” UC Treasurer David Russ told the Board of Regents.

“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,” Russ said.

The university has petitioned the court to be named as a lead plaintiff in the lawsuit, which would allow it to help manage the class action litigation.

Enron filed the largest bankruptcy case in U.S. history Dec. 2. Because it is in Chapter 11 bankruptcy proceedings, the lawsuit names top Enron officials, rather than the corporation itself.

The U.S. Department of Justice has opened a criminal investigation into whether Enron defrauded its investors and its employees. Also scrutinizing the company are the Securities and Exchange Commission, the Department of Labor, and more than half a dozen congressional committees.