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

for a risk-adverse executive, or (2) outside the range of rational option exercises. Where the option
exercises appear to be irrational, these option exercises may be rationally explained when inside
information is taken into account. For example, prematurely exercising an option with a strike price
close to the market price of a stock would be irrational unless the executive had inside information
which led him or her to believe the company would soon be in bankruptcy.
412. The literature reveals that normal risk premiums on executive stock options of similar
securities with similar trading restrictions typically range from 3%-6%. At the far extreme range,
for extremely risk-adverse executives who are also highly undiversified, this risk premium can range
as high as 10%.
413. Dr. Hakala's analysis in this case reveals that Enron executives rarely if ever exercised
their options in a manner which exceeded this 10% threshold prior to the Class Period. By contrast,
during the Class Period, this limit was continually exceeded. This analysis demonstrates defendants
used and possessed inside, non-public information. In particular, as the Hakala Decl. details, many
of the option exercises by Lay, Skilling, Pai and Rice exceed the 10% risk premium limitation which
rationally bounds the limits of even a very risk-adverse, liquidity constrained executive.
414. Dr. Hakala's analysis concludes that the option exercises of those defendants provides
strong evidence that these insiders were trading on insider information, as no rational executive
would have made these transactions absent the use of inside information.
415. Dr. Hakala has also conducted a statistical analysis of defendants' trading patterns in
this case. The results of his study demonstrate that there is less than 1 chance in 1000 that Lay, and
less than 1 chance in 100 that other Enron officers traded in a manner that was independent of the
possession and use of material adverse non-public information. In other words, Dr. Hakala's study
concluded that the probability that the Enron officers traded on inside information is between 99%
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