WASHINGTON – Insider stock selling at Enron Corp. was sporadic and nothing out of the ordinary in 1996 and 1997.

But then in 1998, executives of the energy giant started unloading shares in earnest – foreshadowing last year’s massive insider sell-off that’s received most, if not all, of the attention from federal investigators and the press.

Did senior managers at embattled Enron see the writing on the wall four years ago? Or were they just locking
in early stock gains?

In 1998 alone, 35 executives exercised stock options and sold a total of 865,000 shares, according to transactions reported to the Securities and Exchange Commission. One insider bought 500 shares.

“It’s interesting, because they missed out on two years of good appreciation,” in 1999 and 2000, when the stock shot up to almost $90 a share from about $28
a share, said Carl Kirst, analyst with Merrill Lynch Global Securities in Houston. Enron’s shares are now worth pennies on the dollar.

They were followed in 1999 by 43 top Enron managers who sold 1.87 million shares. One insider bought 2,000 shares that year.

Maybe insiders got a little excited after seeing Enron’s stock break out of a year-long slump, and wanted to cash in on the good news. The Houston-based company took a $675 million pre-tax hit in 1997 to settle a contract dispute with three competitors over gas from the North Sea’s J-Block. The settlement acted as a drag on earnings and share prices.

Or perhaps insiders saw red flags popping up on Enron’s now-tattered balance sheet sooner than Wall Street traders or individual shareholders.

There were danger signs if anyone bothered to look closely at the numbers in the company’s annual reports.

Return on equity, for one, fell precipitously from 1995 to 1998, company records show – from 15.3 percent in 1995 to 14.9 percent in 1996, and then to 10.3 percent in 1997 and 9.5 percent in 1998.

ROE, a key indicator of corporate health, is calculated by dividing net income (before extraordinary items, such as accounting changes or discontinued operations) by the average of shareholders’ equity at the beginning and end of the latest fiscal year.

Over the same period, Enron’s debt-to-equity ratio continued to climb, from 78 percent to 91 percent. Debt shares of 35 percent or 40 percent are normal.

In other words, Enron – which recently filed the biggest bankruptcy in U.S. history – was taking on more and more debt while reporting flatter earnings growth. (The company’s pre-tax profit margins, moreover, sank from 9.2 percent in 1995 to 2.8 percent in 1998).

Why? Starting in 1996, Enron invested heavily in energy projects in overseas emerging markets such as India, Romania and Croatia. Some of the deals were huge. The company’s investment in an Indian power plant, for example, was “north of $1 billion,” Kirst said.

Such investments are not unusual for energy companies, particularly one like Enron that develops power plants and pipelines.

Often their fortunes – and those of their shareholders – ebb and flow with the life of the projects. There is a period of investing while the project is being developed, and a period of reaping when it comes on line.

But Enron was doing a lot of investing, and not much reaping for a long period.

“It’s not a red flag if the corporate strategy is to invest in emerging markets,” Kirst said, with the calculation that the pay-off will come soon, and come big.

“Unfortunately,” he said, “those investments didn’t pan out.”

And that was a factor in the company’s growing debt burden, as well as declining ROE – a key yardstick of financial performance used by institutional investors and senior managers.

So, it may not be a coincidence that Enron insiders’ early sell-off of holdings came as ROE slipped into single digits (better managed companies have ROEs of 17 percent or more).

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