Broker's Tale Probed For Link to Enron
By Frank Ahrens
Saturday, March 16, 2002
HOUSTON -- A stockbroker here who claims he was fired for warning
clients about Enron Corp.'s failing health is at the center of a congressional
committee inquiry and a class-action lawsuit alleging that his brokerage engaged
in securities fraud.
The House Committee on Government Reform has requested brokerage
records from UBS PaineWebber related to the firm's dismissal of broker Chung Wu.
The action comes after Wu filed a statement with his industry's self-regulatory
body saying Enron pressured his brokerage to push him out because his advice to
clients was contrary to the firm's "strong buy" recommendation.
UBS PaineWebber had several ties to Enron at the time. It underwrote
IPOs for two Enron spinoff firms -- water company Azurix and New Power Co. UBS
PaineWebber brokers also handled the accounts of several Enron executives and
employees -- including former chief executive Kenneth L. Lay.
In an e-mail dated Aug. 21, 2001, Wu wrote to clients: "Financial
situation is deteriorating in Enron and price drops another $7.00. . . . I would
advise you to take some money off the table even at this point."
Wu was fired within hours and escorted from his office. Later that day,
his boss -- Patrick Mendenhall, the brokerage's branch manager -- e-mailed a
rebuttal to Wu's clients: "Mr. Wu's statements are contrary to UBS PaineWebber's
current recommendation concerning Enron stock."
Wu's e-mails came a week after the resignation of then-Enron chief
executive Jeffrey K. Skilling. At the time, Enron was trading for about $36 a
share, less than half of its peak price earlier in the year.
In an Aug. 31, 2001, filing to the National Association of Securities
Dealers, Wu said Enron pressured UBS PaineWebber to force him out. The brokerage
disputed the allegation and said Wu was fired because he violated company rules
by sending out e-mails to 10 or more clients without approval from his
supervisors.
Wu's firing caught the attention of the House Committee on Government
Reform, which has sent the brokerage two letters, one earlier this month, the
second on Thursday. In the first letter, the committee asked if Wu was
improperly fired and requested company records and client transactions to
determine if UBS PaineWebber purposely inflated the ailing Enron stock.
The House investigation is being led by the committee's minority
office, chaired by Rep. Henry Waxman (D-Calif.), author of the letters to UBS
PaineWebber.
"I expect they will comply with our request but if Paine Webber is not
forthcoming, we will request a subpoena," Waxman said yesterday. "I think they
know how serious this whole Enron business is. We've seen Arthur Andersen
accounting run into a great deal of controversy and it looks like Paine Webber
has some answering to do as well."
Yesterday, a UBS PaineWebber spokesman in New York said: "UBS
PaineWebber is in the process of responding to Congressman Waxman's letters
regarding former employee Chung Wu." Waxman has set a deadline of next Friday
for a response.
The committee said it interviewed another former UBS PaineWebber
broker, who was not identified, who backed up Wu's assertion that the
brokerage's ties to Enron may have affected its advice to clients who held Enron
stock.
"This former Paine Webber employee indicated that advisors in the
Houston office were instructed by supervisors not to encourage Enron employees
to exercise their stock options and diversify their holdings, even if the
employees were overly concentrated in Enron stock," reads the committee's letter
to Mendenhall. "The former employee indicated that the close business
relationship between Enron and PaineWebber might have affected the judgment of
PaineWebber advisors when they discussed the exercise of stock options with
Enron employees."
On Thursday, the committee sent a letter to UBS PaineWebber's New York
headquarters that included part of one of Wu's e-mails. In this letter, Waxman
asks the brokerage if it discouraged Enron employees from diversifying their
portfolios and if any other brokers gave their clients advice contrary to the
firm's stock recommendations. Further, Waxman asks if Enron pressured UBS
PaineWebber to fire Wu and requests any correspondence between the brokerage and
Enron pertaining to his firing.
"To not advise your clients to diversify their holdings is financial
malpractice," Waxman said.
Wu's lawyer, Houston's Bonnie Spencer, has filed a class-action
complaint in U.S. District Court in Houston on behalf of Enron stockholders,
alleging that the brokerage knew the stock was in trouble and forced its brokers
to keep selling it.
"Paine Webber had clear conflicts of interest in supporting Enron by
keeping silent on the worsening financial picture of Enron because Paine Webber
did not want to lose this lucrative partnership with Enron," the suit reads. "In
fact, PaineWebber directly lied to its clients for its own pecuniary gain by
failing to reveal adverse information which it knew about Enron."
The suit is led by Enron stockholders Kevin Lamkin and Janice Schuette
and has about 15 parties so far, Spencer said. Wu was Schuette's financial
adviser. Spencer's firm has a history of securities litigation. Wu hired her to
represent him before a New York Stock Exchange investigation of his firing.
Of the class-action suit, the brokerage spokesman said: "The suit is
completely without merit and UBS PaineWebber will vigorously defend itself."
Spencer called Wu "a sacrificial lamb." Wu, now employed by A.G.
Edwards & Sons Inc. in Houston, declined to comment for this report.
The suit alleges that Enron employees who exercised their company stock
options were required to do so through the Houston UBS PaineWebber office.
The top earner in the Houston UBS PaineWebber office was the Emery
Financial Group, headed by Rocky V. Emery, who was Lay's financial adviser.
Emery built up his practice after meeting an Enron executive at a
Houston gym and eventually signed on several sizable accounts. By last July,
however, Emery left UBS PaineWebber for the Houston office of First Union, which
had courted his million-dollar accounts, and took several of his group's brokers
with him.
In response, UBS PaineWebber filed a suit against Emery that was
settled in arbitration, the terms of which were sealed. After the Enron
collapse, Emery took out a full-page ad in the Houston Chronicle, thanking Lay
and Enron for their business.
Emery did not respond to phone calls and e-mails seeking comment.
However, in January, he sat for a brief interview with Institutional Investors
Newsletters, saying Enron comprised "50-60 percent" of his business a year ago.
Most of the Enron executives whose portfolios he managed had "70, 80 or 90
percent of their net worth tied up in [Enron] stocks," Emery said. Nevertheless,
he added: "Most of them were diversified or used their money and investment to
buy a boat or a house."
Emery has posted his e-mail address on a Web site run by laid-off Enron
employees, offering his investment counseling for free.
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