Posted on 01/21/2002 10:46:05 AM PST by codeword
WASHINGTON, Jan. 20 — Kenneth L. Lay, the chairman and chief executive of the Enron Corporation (news/quote), repeatedly used millions of dollars in Enron stock to repay loans made to him by the company last year as Enron shares declined in value, his lawyer said today.
The lawyer, Earl J. Silbert, said in a telephone interview that Mr. Lay had put up shares of his Enron stock as collateral for other investments, which he said he could not identify. As the value of Enron stock plummeted last year, he said, Mr. Lay anticipated that lenders would demand additional collateral.
So Mr. Lay's decision to dispose of Enron shares late in the year reflected a need to raise cash, not a concern about the health of Enron, and was not tied to a warning about the company's finances made by an Enron vice president, Mr. Silbert said today. He added that the majority of the transactions related to the credit had occurred before August. Three months later, Enron restated earnings and began its spiral into bankruptcy.
On at least 15 occasions between February and October of last year, Mr. Silbert said, Mr. Lay returned shares in Enron to the company to repay $4 million he had received through a credit line.
Each time the loan was repaid, Mr. Silbert said, Mr. Lay subsequently borrowed the amount available and used a substantial portion of it to repay some of the money owed on his other investments. Sometime last year, the credit line was increased to $7.5 million, Mr. Silbert said, adding that he did not know if Mr. Lay still owed any money to Enron.
If Mr. Lay is facing financial difficulties, he went through an extraordinary amount of money during the years when Enron was riding high. From 1989 through 2001, the total of his salary, bonuses and profits from stock options topped $300 million, with most of that coming from 1998 through 2000.
Some of the nation's wealthiest men found themselves in trouble last year, after they either invested at the height of the market mania or failed to take profits and reduce their debt in good times, a mistake that became apparent when technology stocks in particular plunged in value.
For example, some members of the Bass family of Texas sold shares in Disney to raise some cash last year, and Craig McCaw, the telecommunications entrepreneur who foresaw the cellular phone market, has put up for sale houses, yachts, a wine collection and even an island as his holdings have declined in value.
Much of Mr. Lay's fortune was in Enron stock and options, now worthless, but his overall investment portfolio is unknown.
Late last year, he still owned about $8 million in stock in Compaq and Eli Lilly, and he has several properties. But around the time of Enron's demise, he put some property on the market and began selling some of those Compaq and Lilly shares as well.
Late last year, Mr. Lay put up for sale several houses and properties he owns in Aspen, Colo., the exclusive ski resort.
Lawmakers and Enron employees have harshly criticized Mr. Lay for promoting Enron's stock as the company's finances grew increasingly shaky last fall. In one case, Mr. Lay used an online chat on Sept. 26 to urge employees to buy Enron shares, telling them that the stock was "an incredible bargain" and predicting that the value of the company would increase 800 percent or more in the next decade.
The recent disclosure that Mr. Lay returned some stock to the company to repay a loan has fueled concern that he was exiting his position as he was encouraging others to buy.
Another lawyer, Robert S. Bennett, who represents Enron, previously disclosed that Mr. Lay used some stock to repay a loan late last year.
Mr. Lay exercised options on Aug. 20 and 21, which was shortly after a company vice president, Sherron S. Watkins, warned him that the company might "implode in a wave of accounting scandals."
She said it was in danger of being found out as an "elaborate accounting hoax."
Today, Mr. Silbert acknowledged that around Aug. 21, Mr. Lay disposed of some stock by using it to repay a loan. He emphasized that the disposal of those shares had nothing to do with the warning from Ms. Watkins. He also said that Mr. Lay exercised options to acquire 68,000 shares on Aug. 21, and he still owns those shares.
When Mr. Lay faced a financial strain, Mr. Silbert said, he took the course that showed the most confidence in the company. "When the stock of Enron went down and the value of the collateral went down," Mr. Silbert said, "you had two choices: sell the Enron stock, or pay down the loan. And he chose to pay down the loan rather than sell off his stock."
Mr. Silbert said that Mr. Lay's faith in Enron was also evident in how he had diversified his portfolio. To make other investments, Mr. Lay put up shares of Enron and borrowed against them — instead of selling the shares and paying in cash. That reflected Mr. Lay's belief that the Enron stock would appreciate, Mr. Silbert said.
The transactions between Mr. Lay and Enron will be included in regular filings with the Securities and Exchange Commission next month.
Proxies filed early last year showed that Mr. Lay had significant holdings in four companies in addition to Enron. That five-stock portfolio was a poor performer last year as the overall stock market sagged. The best stock in the group fell nearly 16 percent in 2001, while the worst two lost nearly all their value.
Mr. Lay, who recently resigned from the boards of Compaq and Eli Lilly, sold stock in those two companies, the best performers, in the final days of October.
He acquired 10,000 shares in Lilly in February at $74.13 a share and sold 10,000 shares at a small profit, for $77.75 apiece, in October. He sold nearly 125,000 shares of Compaq for $1.15 million at the end of October. Combined, those sales generated nearly $2 million.
Along with his dwindling stake in Enron, whose stock plunged from $83 at the beginning of the year to under a dollar after its filing for bankruptcy, Mr. Lay's stakes dwindled in NewPower, which Enron helped finance, and i2 Technologies (news/quote), which provides business-to-business Internet solutions. Shares of NewPower have lost nearly all of their value, and i2's shares fell 85 percent last year.
In early 2001, Mr. Lay sold Enron shares on every business day, shares he had acquired by exercising options. Cumulatively, he made a profit of $21 million on those sales. Enron's stock had fallen from a high of $90.75 to half that amount, $45.35, at the end of July, when Mr. Lay stopped selling shares.
"The reason he stopped selling was that he thought the stock was going to go up," Mr. Bennett said earlier this month.
After turning down previous requests, Mr. Lay has agreed to testify on Feb. 4 before a Senate Commerce subcommittee, which is investigating Enron's collapse, Mr. Silbert said yesterday.
In all, at least 10 Congressional committees are investigating Enron. The first hearings begin Thursday before the Senate Governmental Affairs Committee and a subcommittee of the House Energy and Commerce Committee. The House hearing will focus on Arthur Andersen, Enron's auditor, which admitted last week that employees shredded Enron-related documents beginning in late October, after the disclosure of a government investigation into Enron.
Today, Senator Carl Levin, Democrat of Michigan and chairman of one subcommittee investigating the company, said on the CBS program "Face the Nation" that in the wake of Enron's collapse, Congress would have to "significantly tighten" the nation's securities laws, giving the S.E.C. broad new powers.
Citing the disclosure last week that Enron paid no income taxes in four of the last five years, Mr. Levin also said, "We've got to change our tax laws."
On NBC's "Meet the Press," Andersen's chief executive, Joseph F. Berardino, said that Enron had collapsed because "its business model failed."
In an interview today, the lawyer for Ms. Watkins, Philip Hilder, said his client had been contacted by federal officials about testifying. Mr. Hilder said no date had been set, and he declined to elaborate on which government authorities had contacted her. In addition to Congress, the Justice Department and the S.E.C. are also investigating Enron's collapse.
Mr. Hilder said his client had initially complained to Mr. Lay by anonymously dropping a one-page note into a suggestion box. Mr. Lay had invited employees to leave their concerns in the box after Jeffrey Skilling, the chief executive, had unexpectedly resigned on Aug. 14. Those concerns were discussed at an employees' meeting led by Mr. Lay on Aug. 16 at a downtown Houston hotel.
But Mr. Hilder said his client had not been satisfied that her complaint had been fully addressed so had taken up Mr. Lay's offer to meet personally with any employee. According to documents released by Congressional investigators, her meeting with Mr. Lay was scheduled by Aug. 20, and they met on Aug. 22.
"His response was that he would have the matter investigated," Mr. Hilder said. "He treated her with courtesy and was very professional."
By the end of October, Mr. Hilder said, Ms. Watkins had two meetings with Mr. Lay in his 50th-floor office of the Enron skyscraper in Houston. During one meeting, Mr. Lay told her the company had created a special committee to investigate its financial problems. Mr. Hilder, while declining to offer details, suggested that the primary topic of conversation had been Ms. Watkins's memorandum.
"They were following up with concerns that she had previously raised," he said.
If he had to pay off loans, he should have used his Compaq stock ($8 million !!!!). He should not have used the Enron stock he knew would be utterly worthless once the SEC forced him to tell the truth.
He's just a rick with a p in front.
Don't misunderstand. I'm not defending Ken Lay but the heading is incorrect. Lay didn't say this. His lawyer said it. We all know how lawyers lie.
Yep. Trouble is, he will probably end up in one of those "nice" federal institutions, like the one at Allenwood, PA, where John Dean (of Watergate fame) became tennis champ. Anyone for tennis? Wouldn't that be nice?
this is accountingese for PONZI SCEME!!!! ROFLMAO
Flat Tax. 10%. No deductions, everyone pays. Simple as that.
Over the period of Jan 2001 through July 31, Lay made approximately 360 (yeah - three hundred sixty) trades in Enron stock. It was like he was day-trading in his own company! Then suddenly on August 1st, the trade flurry stopped -- a couple more trades on Aug. 20-21, and that was the end of the list (there's a delay before listings are made, so one can't be certain of trades after October, but clearly something happened to slow the tide of trades after July).
So it's pretty obvious that something wierd was going on -- that's a crazy amount of trading. It's really to the point at which one would have to question whether the CEO/Chairman of the Board was paying any attention to his primary job... but certainly he knew (above anyone) exactly where the stock price stood -- probably on an hourly basis!
And, unfortunately for the other investors, those insider trades are reported monthly.
A more likely reason is that his stock options were probably no longer "in the money", meaning the strike price was above what the current trading price of the stock was.
As far as these loans from Enron, I think it will be revealed that these were actually a disguised form of compensation. I don't know for sure, but I imagine it worked this way:
You issue a "loan" to Lay, along with stock options sufficient to repay it. The stock options aren't taxed until they're exercised, and you don't pay tax on money you've borrowed. If the "loan" is used for investment purposes, you even get to deduct the interest from your income tax.
It's a sweet deal that most of us don't get from the company we work for.
But to all those who say that Ken Lay belongs in jail, I have just one question. For what crime?
It may not be as easy to pin anything on him as some here believe. It's not at all clear, for example, that the phony accounting was illegal. It's not going to be easy to prove that his stock sales were insider trading, especially if they were part of "program sales" in which he announced his irrevocable intention to sell shares in the future.
Don't misunderstand me. I'm not trying to defend this creep, and I think the political pressure will be strong enough that he gets indicted for something. But don't be shocked if it doesn't stick. He may be liable civilly for some damages, but criminal charges will be much more difficult to show unless we uncover some new damning evidence.
Jail time is appropriate - but unlikely.
Lay will probably be on the lecture tour in a couple of years.
Example:
5-Sep-01 RUBEN, LAWRENCE 10% Beneficial Owner * 40,400 ENE Acquired at $33.59/Share
29-Nov-01 RUBEN, LAWRENCE 10% Beneficial Owner * 700,000 EXG (ACES % 1998) Sold at $0.40/Share.
The employees should get a class action lawsuit and sue Lay and any of the other executives that are involved. If only to tie them up with legal fees for years to come.
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