What investors can learn from the Enron mess; the largest bankruptcy in U.S. history offers valuable lessons on how you should invest in today's market - Investing - Statistical Data Included

Black Enterprise, April, 2002 by Matthew S. Scott

JOYCE BARRETT DIDN'T DIE, BUT SHE LOST HER life. The former human resources professional was one of the casualties of the largest corporate bankruptcy in history: the fall of Enron. Last November, Barrett, a 12-year employee for the Houston-based energy trading company, discovered that it grossly overstated its earnings by about $1.2 billion and was on the verge of collapse. By the month's end, Enron's stock price had plummeted to a mere 36 cents.

After working 14-hour days with extensive travel and little time off for vacation, Barrett didn't have much show for her years of service. By the time the company filed for bankruptcy, she was wiped out, losing more than $65,000 from her 401(k), another $80,000 in stock options, and more than $65,000 in severance pay to which she was entitled. "My life has changed. Financially, I'm ruined," laments the single mother of two adult children. "[I lost] everything I had tied up in that company. I have no medical insurance and no dental coverage. For the first time in my life I have nothing, I feel like a loser, a second-class citizen."

Struggling to maintain her composure, Barrett adds, "This is a lot more criminal than white collar crimes. I feel betrayed."

She's not alone. Tens of thousands of Enron employees have had their lives, aspirations, and retirement plans destroyed. These workers--many who once held shares valued at $87--must now figure out a way to pick up the pieces.

Don't think for a moment that because you didn't work for Enron this crisis doesn't affect you. Scores of pension funds, endowments, and mutual funds had substantial positions in the entity that was once the seventh largest corporation in America. Moreover, hundreds of thousands of workers--including many African Americans--have invested in 401(k) plans and company retirement programs structured like Enron's. And you just may be among them.

A NEW DAY IN THE FINANCIAL MARKETS

Over the past few months, Enron has become synonymous with corporate duplicity and fiduciary failure. At the heart of the matter is how a corporation used a slew of "off-balance sheet" partnerships to hide enormous losses, and, as the stock took a nose-dive, forced employees to hold on to shares in retirement accounts while top management, including former CEO Kenneth Lay, made millions by exercising stock options. To make matters worse, Andersen, the accounting firm charged with auditing Enron's financial statements, became an alleged participant in the subterfuge by shredding documents.

The meltdown at Enron has produced congressional hearings, investigations by the U.S. Securities and Exchange Commission, and several legislative proposals to protect the accounts of 401(k) investors. In short, it has served to undermine investor confidence and roil the financial markets. "Enron was the light that came on and showed corporations that inefficiencies will eventually catch up with you," says John Ripoll, senior vice president at the Atlanta-based Jackson Securities (No. 5 on the 2001 BE INVESTMENT BANKS list with total managed issues of $29.397 billion). He maintains that corporate accounting practices will continue to be heavily scrutinized by individual and institutional investors alike. "And auditors will force companies to adhere more closely to GAAP (generally accepted accounting practices)," he says.

Stocks from a number of companies that have restated earnings have been hammered on Wall Street. Such blue chips as Procter & Gamble (NYSE: PG), AOL Time Warner (NYSE: AOL), and General Electric (NYSE:GE) have been among them. It appears that the more complex the entity, the bigger the sell-off from investors. Take Tyco International (NYSE: TYC), the industrial conglomerate that was once the darling of the Go-Go '90s. The stock plunged to a staggering 49% in the first four weeks of 2002, due in part to its complicated structure and questions about its accounting practices. Adds Ripoll: "The question [is whether] investors see Enron as an isolated incident or will they feel that the system has been abused for years."

WHAT ENRON MEANS TO YOU

The Enron mess provides solid lessons on investment decision making and portfolio protection in today's environment. Heed the following:

* Lesson No. 1: Diversify your investments

There's one rule of risk management--diversification. Before you think about making an investment decision, clarify your investment goals and then structure an asset-allocation model to help you achieve them. Your diversified portfolio should extend across a range of asset classes, including stocks and bonds. (See "Getting the Scoop on Investing," this issue.) The most devastated Enron employees were those who neglected to hold a mixed bag of assets. "The notion of diversification has won out because portfolios that were properly diversified have not been experiencing these pains," says Garry Bridgeman, a certified investment-management analyst with Merrill Lynch. "The more evenly your funds are diversified, the less risk is built into the portfolio. Maybe you don't have the maximum upside potential, but you'll stay in the ball game and have a much more [consistent] rate of return over time."