February 19, 2002

Enron Employees, in a Court Victory, Are Allowed to Form Creditors Panel

Enron Corp. workers scored a first-round victory in court when they were allowed to form their own creditors' committee to represent their interests in the energy-trading company's bankruptcy-court proceedings.

The decision, which is unusual in bankruptcy-court cases, means Enron employees will have a seat at the bargaining table alongside bankers and other creditors as Enron's assets and liabilities are unwound in court. The employees, who claim to be owed around $1 billion, are seeking restitution for lost retirement savings and unpaid wages.

Separately, a judge in a Houston court named class-action law firm Milberg Weiss Bershad Hynes & Lerach LLP as lead counsel to represent investors suing Enron and its auditor Arthur Andersen LLP for fraud. That means investors, who lost billions of dollars as Enron's stock tumbled from nearly $90 to pennies a share prior to the company's Dec. 2 bankruptcy-court filing, will have a forceful and controversial plaintiff's attorney arguing on their behalf.

Ruling in favor of the Enron employees, Carolyn Schwartz, a U.S. trustee with the Department of Justice, said Friday that she "determined that separate representation was warranted" for the employees apart from the full unsecured creditors' committee, because Enron's benefits plans covered more than 20,000 workers and retirees. The employees argued, in a Dec. 19 petition to Ms. Schwartz, that a 15-member committee of unsecured creditors didn't adequately represent them as claimants, since they held only one seat on that committee.

Enron employees have received an unusual amount of attention in the bankruptcy-court case, because so many lost their pension savings through 401(k) plan holdings that were heavily invested in Enron stock. In addition, many employees say they are owed money for back wages, terminated employment contracts and bonuses.

The recognition of a distinct employees' committee, while unusual, is not without precedent. Employees of now-defunct Montgomery Ward, for example, were granted separate committee status in the department-store chain's bankruptcy-court case.

David McClain, an attorney representing Enron employees in pleadings, said that Enron's recent sale of its trading operation to UBS AG's UBS Warburg exposed the problem of nonrepresentation for many employees. "Nobody negotiated with the purchaser to seek a continuation of benefits for employees transferred over," said Mr. McClain. "It wouldn't have cost the creditors anything to have done that," but it simply wasn't a priority.

In the Houston case, U.S. District Court Judge Melinda Harmon named the University of California Regents as lead plaintiff in a class-action suit brought by investors, thrusting Milberg Weiss to the forefront of the legal battle. The San Diego-based law firm, which lobbied aggressively for the position, is separately under investigation by a Los Angeles grand jury over whether it violated federal laws by improperly soliciting investors to serve as plaintiffs in class-action suits. That investigation isn't related to the Enron suits. Milberg Weiss has denied any wrongdoing.

The lead-plaintiff role doesn't give the University of California special status vis-à-vis other creditors, which will split whatever proceeds remained according to their shareholdings at the time of the bankruptcy-court filing. But it does give the Regents, which are claiming losses of about $145 million, a big role in directing the course of the proceedings and potentially will provide Milberg Weiss with huge financial gains, should it succeed in court.

As lead counsel in a case involving 60 big pension funds and other institutional investors that claim Enron used misleading financial statements to pump up its stock price, Milberg Weiss could reap the lion's share of fees generated.

Write to Rebecca Smith at rebecca.smith@wsj.com²

Updated February 19, 2002 12:45 a.m. EST