Chief Used Stock to Repay Enron Loan, Lawyer Says
The New York Times
January 15, 2002
THE TRANSACTION
By FLOYD NORRIS
Kenneth L. Lay, the chairman and
chief executive of Enron
used his company stock
to repay a loan sometime last year, a
lawyer for Enron disclosed last night.
That indicated that Mr. Lay had shed
more of his holdings than had
previously been disclosed.
The lawyer, Robert S. Bennett, said
that Mr. Lay was repaying a loan extended by the company. He declined to say how
large the loan was, how much of it was repaid or just how many shares Mr. Lay
returned to the company, but he said the details would be disclosed to the
Securities and Exchange Commission next month.
Mr. Bennett also declined to say when Mr. Lay's loan repayment transaction took
place, so it could not be determined what value the company placed on the shares
he used to repay the loan.
Details of the transaction could challenge the impression created by Mr. Lay's
previous regulatory filings, which suggested that he decided to hold onto the stock
as undervalued after it fell below $45. The filings show that Mr. Lay was a big seller
of Enron stock but stopped selling on July 31, well before the company collapsed.
In late August, after the sudden resignation of Mr. Lay's chosen successor as chief
executive forced him to return to that job, he told employees that the stock was
cheap, and he bought shares by exercising options. "As I mentioned at the
employee meeting, one of my highest priorities is to restore investor confidence in
Enron," Mr. Lay wrote in an e- mail message to employees dated Aug. 21. "This
should result in a significantly higher stock price."
Also in late August, an Enron employee anonymously sent
Mr. Lay a letter detailing ways that Enron had hidden
losses, it was disclosed yesterday. That letter described
hidden losses in partnerships and issued a warning that
now appears prescient. "I am incredibly nervous that we
will implode in a wave of accounting scandals," according
to an excerpt from the letter released yesterday by
Representative Billy Tauzin, the Louisiana Republican
who is chairman of the House Energy and Commerce
Committee.
The 2001 proxy for Enron, released last March, showed
that Mr. Lay had paid off a $4 million line of credit from
the company in 2000 and made no mention of an
additional loan. That would indicate that the loan was
made sometime in 2001.
Executives of Enron were major sellers of stock when
Enron was flying high but had generally stopped selling
by last summer, after the shares had fallen sharply but
well before an erosion of confidence led to the collapse of
the company late last year.
In early 2001, Mr. Lay sold Enron shares on every
business day, shares he acquired by exercising options.
Cumulatively, he made a profit of $21 million on those
sales.
That profit pales next to the money he made in earlier
years. According to company filings, he made $49 million
from exercising options in 1999 and $131.7 million from
exercising options in 2000.
The stock price 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 yesterday after
talking to Mr. Lay.
Wall Street was shocked on Aug. 14 when Jeffrey K.
Skilling, whom Mr. Lay had made chief executive earlier in
the year, resigned. A week later, according to reports Mr.
Lay later filed with the S.E.C., on Aug. 20 and Aug. 21,
Mr. Lay exercised stock options, thereby buying 93,620
shares at prices of $20.78 to $21.56. He did not report
selling the shares.
The transaction appeared to be a $2 million bet by Mr. Lay
that Enron was undervalued at precisely the same time he
was saying that it was a good investment to the public and
to Enron employees.
If those shares were used to repay a loan from Enron, that
transaction would not necessarily reflect confidence in the
company's future.
In a separate transaction, Andrew S. Fastow, who was then
Enron's chief financial officer, bought 10,000 shares for
$36.98 each on Aug. 16, two days after Mr. Skilling resigned. He never sold them,
nor did he sell a substantial block of other shares and options that he owned. Thus
he suffered major losses when the company collapsed.
Mr. Fastow is said by the company to have made $30 million from two partnerships
that he organized and that traded with Enron. Questions about those partnerships
led to the collapse of confidence in Enron and to its eventual filing for bankruptcy.
Mr. Skilling was a major seller of shares, raising $15 million from January through
June and an equal amount on Sept. 17, a month after he had left and the first
trading day after the Sept. 11 attacks. But he, too, ended up owning a substantial
stake when Enron went under.
Regarding the disclosure yesterday of the letter to Mr. Lay in late August warning
of the company's problems, Mr. Bennett said that Mr. Lay had promptly ordered an
investigation. "He acted in a very responsible way," he said.
The investigation, by an outside law firm, concluded that nothing was really wrong,
although there was "a serious risk of adverse publicity and litigation," according to
Mr. Tauzin.
Whether Mr. Lay took action to protect his own financial situation, by paying off
the loan with stock after he received that letter, will become clear only when the
details of the loan payment are disclosed.
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