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December 07, 2001
At Enron: Bonuses and a DOL Investigation
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- Just days before Enron filed for bankruptcy and laid off 4,000 people, it paid out $55 million in bonuses to about 500 employees.
- The Labor Department announced the opening of an investigation into how Enron managed its employees' 401(k) retirement plans. Those accounts were heavily invested in Enron shares, and the company prohibited many employees from diversifying their holdings, even as the value of Enron shares fell through the floor.
The bonuses
Enron declined to say how much was paid out in bonuses, who received the money or what the range of payments was. But a spokesman defended them as "retention incentives" for crucial employees.
The Times noted that executives of companies entering bankruptcy often argue that such payments are necessary if there is to be any hope of reorganizing as a going concern. Yet they often prove incendiary.
For example, in 1990, when news spread that Drexel Burnham Lambert had paid key executives some $250 million in bonuses before filing for bankruptcy, creditors and the government reacted with outrage. In the end, after court hearings on the issue, the Drexel estate sued the employees to get the money back.
Bankruptcy experts told the Times that Enron's payments were almost certain to be closely scrutinized - and probably challenged - by creditors.
They're "substantially high, and that means it probably does become an issue in the bankruptcy case," said James Feder, a bankruptcy lawyer with Feder & Mills, a law firm in Los Angeles. "The question might come up as to whether there was fair consideration given for the amount of these bonuses and whether they were reasonable under the circumstances."
If creditors can convince the court that the employees were overpaid - or that the payments were made to keep money out of creditors' hands - then the judge can void the payments and order the money returned, said Lynn LoPucki, a law professor at the University of California at Los Angeles.
To tamp down disputes, a company typically will file a request, as part of its bankruptcy filing, to make payments to certain employees, and not proceed with the payments until receiving a judge's approval, LoPucki said.
Meanwhile, employees who lost their jobs after Enron filed for bankruptcy protection on Sunday were told they may receive no more than $4,500 in severance pay. They also were told to petition the bankruptcy court to cash in unused vacation days.
The DOL investigation
The Department of Labor said Enron employees have lost up to 90 percent of the value of their retirement accounts.
Enron maintains that a temporary freeze that kept some employees from shifting retirement investments had been planned for some time, to allow another company to take over the job of administering the plan.
But Labor Secretary Elaine L. Chao didn't sound sympathetic. "Enron's employees have gotten the short end of the stick in the sudden collapse of this company," she said.
To read the New York Times article, click here. Registration required.
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