Warnings from the Enron Message Board

MAY 6, 2002

PR CONTACT: Pat Housley, (989) 774- 3197/164; E-mail: [email protected]

For more information, contact:James Felton, (989) 774-3269; E-mail: [email protected]

Jongchai Kim, (504) 485-5039

IMPENDING COLLAPSE OF ENRON CAME FIRST FROM INSIDERS ON MESSAGE BOARDS

MOUNT PLEASANT, Mich.-- In April 2001, four months before Enron collapsed, an anonymous e-mail warned of the impending doom of the financial giant. Recent research indicates that insiders may have warned of Enron's fall as much as four years before it actually occurred.

James Felton, a faculty member in the finance and law department at Central Michigan University, and a colleague, Jongchai Kim, assistant professor of finance at Xavier University of Louisiana, have published "Warnings From the Enron Message Board," a look at how insiders foretold the imminent demise of Enron. The four-year history tells the story through anonymous posts by apparent insiders on the Yahoo! message board.

The CMU research is not an attempt to prove these messages are true; its goal is to open the debate on the role of message boards in getting information out to the public. It also can be taken as a warning to companies and regulators to take a closer look at employee postings on message boards.

Stock message boards are not held in high regard by investment professionals. Investors are free to post anonymously and the accuracy of content is not verified.

The Yahoo! Enron Message Board began in November 1997. By June 1999, there was an average of nine posts per day. In 2000, that rose to about 15 posts per day, and by 2001, postings were averaging 33 per day but rose to 2,200 per day by December of that year.

Anonymous posts to message boards that appear to contain inside information are very detailed in their criticism of Enron management, complicated accounting practices and close ties with Arthur Andersen. There also were posts from employees who planned to retire early with gains from their Enron stock.

The SEC says it is illegal for investors to buy stock when they know nonpublic but materially relevant information is used. However, monitoring thousands of message boards for insider information is an enormous task.

For investors, it means that message boards contain better information than is widely believed. For companies and regulators, it means existing securities laws and non-disclosure agreements need to be enforced more rigorously to stop employees from posting inside information on message boards.

The document includes a sampling of e-mails from the message board. A complete text of the research is available by contacting James Felton or CMU Public Relations. The research has been accepted for publication in "The Journal of Investing," Fall 2002 issue.

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