Warnings from the Enron Message Board
James Felton Central Michigan University – Department of Finance and Law
Jongchai Kim affiliation not provided to SSRN
As Enron collapsed in the Summer and Fall of 2001, most Wall Street analysts maintained either buy or strong buy recommendations for Enron common stock. The largest bankruptcy in U.S. history was often described as coming without warning, as $60 billion in market capitalization vanished. We searched postings on the Yahoo! Inc. (NASDAQ:YHOO) ! Enron Message Board between 1997 and 2001 for warnings of a crash to come. We found a compelling four-year history of Enron as told by apparent insiders through anonymous posts. Excerpts of 129 posts from Enron’s Yahoo! message board, describing a disturbing corporate culture at Enron, include repeated warnings to investors to get out while they can.Warnings from the Enron Message Board – Introduction
On August 15, 2001, Enron employee Sherron Watkins wrote a letter  to Enron’s President and CEO Ken Lay warning that Enron “will implode in a wave of accounting scandals.” Four months earlier, in April 2001, an anonymous post (by “enron is a scam”) on Enron’s Yahoo! Message board [2002a, message 11,460] warned “It will soon be revealed that Enron is nothing more than a house of cards that will implode before anyone realizes what happened. Enron has been cooking the books with smoke and mirrors. Enron executives have been operating an elaborate con scheme that has fooled even the most sophisticated analysts.” In October 1999, “Johnmanfrengenson” [2002a, message 1,967] wrote: “Lots of inside trades lately. Look at the lease obligations in the footnotes of the 10K. There are a lot of liabilities that are not included in the balance sheet numbers. If you included the lease obligations to the balance sheet, you might think differently about the valuation of ENE.” There were many other messages from 1998 to 2001 by apparent insiders advising investors to take notice of Enron’s problems.
There are currently three topics hitting Wall Street simultaneously due to the fall of Enron. First, companies’ financial statements are being scrutinized in much more detail than usual by investors, analysts, and the SEC. The dual role for accounting firms such as Arthur Andersen as both auditors and as consultants is being questioned. Second, investment bankers are under attack for their dual role as both brokers and bankers. Sell-side analysts had mostly “buy” and “strong buy” recommendations for Enron at the same time that their firms sought banking relationships with Enron. Third, the lack of diversification for many companies’ 401(k) plans is being investigated following the devastating losses for Enron employees in their retirement plans that were heavily weighted with Enron stock.
We believe that a fourth topic from the collapse of Enron is going unnoticed. It appears that employees at Enron disseminated information to the public through anonymous posts on the Yahoo! message board. Some of the posts appear to contain inside information. Many of the posts are very detailed in their criticism of Enron management under Ken Lay and Jeff Skilling, and they complain of Enron’s complicated accounting practices and close ties with Arthur Andersen. Of course, the posts are all anonymous, and we cannot prove who wrote them. Our goal is to open the debate on the role that message boards play in disseminating inside information to the public.
There are several implications of having insiders posting on message boards. For investors, it means that stock message boards contain better information than is widely believed.
For companies and regulators, it means that existing securities laws and non-disclosure agreements need to be enforced more rigorously to stop employees from posting inside information on message boards. The SEC increased its surveillance of the Internet in 2000 with a “Cyber Patrol” of employees who search web pages and message boards for securities fraud, and the SEC  makes it clear that it is illegal for investors to buy stock when they are aware that material nonpublic information is used. However, monitoring thousands of message boards for insider information is a daunting task. It does appear that someone within Enron management monitored the Yahoo! message board. A message [2002a, message 184] in May 1998 by “EI Police” says that Enron’s e-mail and Internet are for “Enron business purposes. . . Enron can, and does, electronically monitor the use of its equipment. . . Failure to abide by these restrictions may subject individuals to disciplinary action as well as civil and/or criminal prosecution.”
Message Boards and the Dissemination of Information
Stock message boards are not held in high regard by investment professionals. A large percentage of the posts can be categorized as either cheerleading, bashing, or “spam.” Cheerleading includes posts such as “This stock’s going to $100!” without giving any justification for the rise. Bashing a stock involves spreading negative, usually untrue, information about a company. “Spam” usually refers to unwanted e-mail, but on message boards it refers to off-topic messages that are attempts to sell a product or hype a stock.