Enron CEO’s Contract Is Challenged
The Securities and Exchange Commission asked a Bankruptcy Court judge Friday to toss out a proposed $1.32-million employment contract for Enron Corp.’s new acting chief executive, Stephen F. Cooper, as too rich, filled with loopholes and rife with potential conflicts of interest.
In a strongly worded court filing, the SEC declared that the terms of Cooper’s agreement “cast doubt on the fairness of Enron’s handling of its bankruptcy case and on the bankruptcy process as a whole.”
An Enron lawyer said many of the provisions that alarmed the SEC have been removed from a new version of the contract that will be filed soon with the U.S. Bankruptcy Court in New York, where the Enron case is being handled.
The SEC said the contract should not be approved because Cooper and his turnaround associates would be paid large fees with little court oversight. And, because they are hired as independent contractors but are indemnified by Enron, they would be protected from lawsuits without a corresponding fiduciary responsibility to the company, regulators said.
In addition, Cooper would have potential conflicts because some of the members of Enron’s creditor committee are current or former clients of Cooper’s New York consulting firm, Zolfo Cooper, or are investors in an equity fund that Cooper controls, which invests in distressed companies, the SEC said.
The SEC also objected to a $5-million bonus that Cooper would receive if he crafts a reorganization or liquidation plan that wins creditor approval. The agency pointed out that he would be eligible for the bonus even if the plan fails to win court approval. Fees to Cooper and associates, who get a minimum of $864,000 a year, could be adjusted without the court’s approval, the filing said.
“We are not in the business of telling public companies who to hire. However, we do object to the terms of this contract,” SEC lawyer Alistaire Bambach said in an interview.
“I certainly haven’t seen this type of agreement proposed in a large corporate bankruptcy case,” she said. “It seems to me to be extremely overreaching.”
Although the SEC filing contends “we do not pass on the wisdom of Enron’s choice of Cooper as CEO,” the document cited a 1994 dispute in which a bankruptcy judge denied Cooper nearly $750,000 in fees and expenses in his handling of the restructuring of CF Holdings Corp.
The SEC said the court denied the fees because Cooper was slow in disclosing that he personally invested $2 million into a partnership that was planning to buy CF Holdings. Cooper was a financial advisor to CF Holdings at the time, the SEC said.
Cooper was not available for comment and a call to Zolfo Cooper was not returned.
But Martin J. Bienenstock, a partner at New York’s Weil, Gotshal & Manges law firm and the head of Enron’s legal team, said the contract terms have changed substantially since the document was filed with the court and many of the SEC’s objections already have been addressed.
Bienenstock said there was “a regrettable lack of communication” between the SEC and lawyers involved in the bankruptcy. A phone call to Bienenstock or creditors committee lawyers would have headed off many of the errors in the SEC’s objection, he said.
“How they could have hauled off and done this [without making such calls], is really unfortunate,” Bienenstock said.
The attorney said the revised contract clearly establishes Cooper as a corporate officer with fiduciary duties to the company, and not an independent contractor.
As to Cooper’s alleged conflicts of interest, his ties to creditor committee members would only pose a problem if he tried to lead investigations or lawsuits against Enron creditors, Bienenstock said.
He said Enron realized early on that the taint from the scandal would keep the company--no matter who ran it--from having any credibility in suing its former customers or creditors, so it petitioned the court to have that job carried out by outside examiners.
Elizabeth Warren, a bankruptcy law professor at Harvard Law School, said it was unusual for the regulators to intervene so forcefully.
“I’ve never seen the SEC weigh in this way in similar circumstances,” she said.
One SEC jab at Cooper in the filing notes that he must work only 35 hours a week to earn his $1.32million a year. Enron spokeswoman Karen Denne said Cooper is putting in 16- to 18-hour days, four days a week in Houston before heading home to New York each weekend.
Bienenstock, addressing any concerns about Cooper’s work habits in light of the 35-hour workweek clause in his contract, said: “He works 35 hours in two days.”
Rivera Brooks reported from Los Angeles and Mulligan from New York.
