Man Without Qualities

Monday, April 08, 2002

Earnings, earnings, earnings.

A class action civil complaint arising out of the Enron failure, in excess of 500 pages, has now been filed by William Lerach of Milberg Weiss on behalf of the University of California, as lead plaintiff. The writing is purple and overheated in the manner typical of documents produced in that law firm’s long wars against a great many, if not most, of the public technology companies to which the State of California owes its current level of prosperity. The writing aspires to what might be called financial pornography. A document describing alleged accounting irregularities, written with the tone of a bodice ripping Harlequin Romance, might try the patience of most readers.

The complaint discloses an apparent plaintiff intent to rely on some very old fashioned and down-to-earth investment standards in regard to purchases and sales of Enron stock. Perhaps the purchasers of such stock – including the University of California – did cleave to traditional methods used by securities analysis that prized the very earnings the complaint alleges were so manipulated. But it would not be easy to find many “value investment fund” managers to agree with the picture sketched in the complaint, since such managers had the funds managed by them on behalf of exactly such institutions as the University reduced by many billions of dollars during the period in question in favor of then-trendy “growth” and “momentum” managers. And traditional methods of valuation are not exactly consistent with Enron's price-to-earnings multiples in those days.

For those who can bear such things, it is might be interesting to review the complaint while reading the excellent article by Gretchen Morgenson, today’s winner of a Pulitzer Prize for financial reporting, which correctly points out:

“Of all the hot air generated during the great bull market of the late 1990's, none propelled stock prices further than the notion that new economy stocks were a breed apart and should not be held to stringent, old economy investing standards. Internet companies and cutting-edge telecommunications concerns, after all, were revolutionizing the world. So, the thinking went, their share prices deserved equally radical valuation methods. Out went traditional methods used by securities analysis that prized earnings. In came freewheeling measures of worth …”

Somehow, the context of the Enron stock run-up – that is, the market phenomenon – isn’t fully communicated by Mr. Lerach’s otherwise hyper expressive prose. Nor does the complaint deal with the market consequences of Enron’s having been simultaneously one of the world’s largest “internet companies” and, through its broadband trading efforts, also a “cutting-edge telecommunications concern.”

No. Mr.Lerach says that investors in Enron stock were wedded to earnings. Earnings, earnings, earnings. Balance sheet earnings. None of that financial footnotes stuff for them.

Might be.

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