Enron Corp. - University of California | Office of The President

plans were not entered into in good faith, but rather, were part of a scheme to evade the prohibition
against insider trading contained in the 1934 Act.
406. There is also statistical evidence of the scienter of certain of Enron's officers and
directors. Expert analysis of the timing of an insider's exercise of stock options can provide strong
evidence that the transactions were based on non-public information. Therefore, plaintiffs have hired
Dr. Scott D. Hakala, an expert in security market econometrics and insider trading, to analyze the
timing of defendants' option exercises and stock sales. Plaintiffs hereby incorporate the contents of
the Declaration of Scott D. Hakala ("Hakala Decl.") which recounts Dr. Hakala's findings in this
regard, attached as Ex. B to Lead Plaintiff's Appendix of Exhibits in Support of Consolidated
Complaint filed 4/8/02. A detailed summary of his qualifications, including prior testimony and
publications, is provided on the curriculum vitae attached to his declaration.
407. Dr. Hakala's analysis is based on the common sense notion that executives will not
irrationally, and needlessly, waste large amounts of their wealth. In particular, where option
exercises produce expected financial losses far beyond the traditional losses associated with
executive risk aversion and can only rationally be explained by considering inside information, there
exists strong evidence that inside information was utilized to conduct the transaction.
408. Options are valuable rights because an option allows its owner to preserve the
opportunity for upside gain without any capital commitment and without any risk of loss. At any
time prior to its expiration date, the market value of an option has two components: (1) "intrinsic
value," the amount of money that one could obtain by exercising the option as of today (stock price
less the strike or exercise price of the option); and (2) "time value," the value from any potential
increase in the stock price during the term of the option. Premature sales of stock options are non-
optimal, except for limited periodic sales for diversification or liquidity purposes. In sum,
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