Welcome to another “incomprehensible Washington Scandal,” or IWS, as the Washington Post “Style” section calls the Enron debacle. The Post said the looting of Enron may well be the perfect IWS, especially once it’s been reduced to a memorable moniker like Watergate or Whitewater.
But that’s ridiculous. Enron is totally comprehensible … if you just see it as a Houston-based pump-and-dump scheme of a very old-fashioned variety. And don’t be surprised if the Securities and Exchange Commission sees it the same way when it comes time to press charges. The SEC loves pump-and-dumps – I know, because twice they tried to pin one on me!
Go to the SEC’s Website, and you can read how “Pump and Dump” is a violation of federal law that, if there is criminal intent, can be referred to the Justice Department for prosecution. Pumping and dumping is defined as knowingly creating or promulgating a series of untrue statements designed to juice a stock to a higher level than it normally would go (the pump) with the intention of selling shares in the ensuing frenzy (the dump). Typically, the pump is not created by insiders, but it can be. And while a pump-and-dump operation can happen anywhere, it usually occurs in a thinly traded, smaller-capitalized stock.
Most pump-and-dump cases that the government brings involve online or shady bucket-shop manipulation. That’s where you get some e-mail or see something on a Website saying that a stock’s about to go to the moon because of some projection (false) from a broker or promoter. Those who remember The Sopranos episode where the gang was pumping and then dumping Wobistics saw a crude form of this kind of scam in action.
In Enron’s case, though, the pump-and-dump was much more sophisticated. Without a doubt, it was the best-greased chicanery I’ve ever come across. Everyone had a hand in it, from the Enron execs, who knew that the estimates and the actual earnings were all contrived; to the Vinson & Elkins partners, who checked off on the so-called third-party partnerships that hid big losses; to, of course, Arthur Andersen, which shredded the documents that might have detailed the intricacies of the pump-and-dump.
The only question in my mind is whether the research analysts who insisted on bulling this stock endlessly, long after the deceit was clear, were in on the pump. Not deliberately, but because Enron was one of the largest clients on Wall Street, doling out fees in return for strong buys – the quid pro quo came with the territory. These analysts, who to a person thought the trading operation alone was worth billions – it went for nothing in bankruptcy – collectively dismissed the only real asset that generated a return, that fantastic pipeline that got sold to Dynegy.
As great as the pump was, the dump was even more brilliant. Most operations of this kind happen without any disclosure – heck, most of the time, you don’t even know the promoter owned stock, let alone sold it in the falsehood-induced mania. This one, though, happened right in plain sight, with executives dumping billions of dollars in stock when the stock was still climbing – and then going silent, or, in former chief financial officer Andy Fastow’s case, actually buying a little stock at much lower prices, perhaps in order to generate a sympathetic loss while others were losing their shirts. What a cheap defense in retrospect!
Making the dump more elitist and tragic to the small fry was Enron management’s decision to switch 401(k) managers from Schwab to UBS Warburg (oh, how ironic – that’s who just purchased the trading system) just before all hell was about to break loose in July. That decision locked employees into their Enron pension holdings as the changeover was made. At that point, with the stock still in the fifties, nothing untoward had happened to disturb the pump, though chief executive officer Jeffrey Skilling was on the verge of resigning for “family” reasons. The stock dropped to the forties when he quit, and many people at the company, I believe, would have then and there sold the Enron in their 401(k) – if the plan switch hadn’t occurred. Did Enron deliberately switch plans to freeze its employees from selling? Schwab runs a darned good 401(k) administration plan, one that thousands of companies use. Seems more than coincidental that suddenly a switch needed to be made.
Why isn’t a possible pump-and-dump prosecution being discussed by journalists and talking heads? First, the government’s not going to share its case with the press. That’s stupid. Second, unless you are familiar with this kind of scam, you don’t know how vigorously the Feds pursue it.
Alas, I wish I were less familiar with it. Twice in the past six years, when I was at my hedge fund, the SEC called me in informally to see if I was pumping and dumping. The first time, I had written an article in SmartMoney praising some small-capitalization stocks I owned a ton of – and the little italic box disclosing my ownership stakes was inadvertently dropped by the magazine. A rival magazine editor suggested to the Washington Post that I sold the stocks into the run-up – totally untrue, as the Feds discovered – and that triggered the investigation. When there turned out to be no dump, and no money made, In re Cramer got tossed out. The second time, the federal government wanted to know if I had pulled off a reverse pump-and-dump, whether I got short, or bet against a stock, and then bashed it on television to profit from my reverse pump. Again, I had never even traded the stock, but the government pursued the inquiry doggedly until I proved that I had made no money from the criticism.
Both times, the zeal of the government investigators made me realize how much they view pump-and-dump schemes as slam-dunk cases, and how happy they are when they think they’ve got one in their sights. Which is why I am not buying the Incomprehensible Washington Scandal line. This one’s plain as day, and if the Washington prosecutors make their case stick, Enron will go into the record books as the greatest pump-and-dump in history.
Check out TheStreet.com’s “10 Questions” feature this week. Lisa Rapuano, of Legg Mason Special Investment Fund, is on the hot seat. Available free of charge at www.thestreet.com.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.