Ken Lay's Nest Egg Thousands of former Enron
employees saw their retirement funds disappear when the
energy giant collapsed -- but Kenneth Lay has millions
socked away in lawsuit-proof investments.
by Bill Hogan Feb. 21, 2002
Late last month, the wife of
former Enron chairman Kenneth
Lay tearfully told a national
television audience that she and
her husband were struggling to
avoid personal bankruptcy
following the collapse of the
Houston energy-trading
company. What Linda Lay failed
to tell viewers of NBC's Today
show, however, was that she and
her husband had shifted millions
in personal assets to
investments that are beyond the
reach of creditors or legal
judgments.
In February 2000, Mother Jones
has learned, the Lays paid about $4 million -- an amount greater
than Lay's entire salary from Enron that year -- to buy variable
annuities that will, starting in 2007, guarantee the couple an
annual income of about $900,000. While stocks and most other
ordinary investments are open to attack by creditors, life
insurance policies and annuities are protected in many states.
Variable annuities of the sort purchased by the Lays are basically
tax-deferred investments wrapped in insurance policies.
Six states -- including Texas, where the Lays live -- provide the
maximum degree of protection to investments in variable
annuities, leaving them virtually impervious to attack by creditors.
"There are a lot of people in Texas, with a lot of spouses and
family around them, who are scared of having it all sued away
from them," says Ben Baldwin, Jr., the president of Baldwin
Financial Systems, Inc., an investment advisory firm in
Northbrook, Illinois. "It may well have been the creditor protection
that drove interest in the annuity. It would have been a natural -- I
could see that happening very easily. Litigation is all over the
place. The higher visibility a person is, the higher the likelihood of
lawsuits."
Texas law stipulates that the proceeds of annuity contracts "are
fully exempt from creditors and from all demands in any
bankruptcy and from execution, attachment, garnishment, or other
legal process unless a statutory exemption, such as fraud, is
applicable."
"We tell people that whenever you do asset protection planning,
the time to do it is when the seas are calm and there's not even a
hint of a storm on the horizon," says David Lampe, the president
of Houston Asset Management, Inc., a financial consulting and
investment advisory firm. Apparently, the Lays heeded similar
advice.
In her Today show appearance, Linda Lay said that she and her
husband were "fighting for liquidity," adding: "It's gone. There's
nothing left. Everything we had mostly was in Enron stock."
Once the annuities reach maturity in February 2007, Kenneth and
Linda Lay will be guaranteed monthly payments of $43,023 and
$32,643, respectively, for life.
"I know of no case where the amounts are that substantial," says
Gideon Rothschild, a partner in the New York City law firm of
Moses & Singer, who specializes in estate planning and asset
protection for high-net-worth individuals.
The Lays purchased the annuities almost two years before Enron
filed for Chapter 11 bankruptcy protection on December 2 of last
year and nearly 18 months before an Enron executive warned Lay
of serious accounting problems at the company.
As has been widely reported, Lay disposed of Enron stock after
receiving that warning but encouraged Enron employees to
continue buying the company's stock. The company also actively
discouraged employees from using the investment strategy
employed by Lay and his wife, advising them against selling
Enron stock to purchase variable annuities.
A little more than a year after Lay and his wife bought the variable
annuities, Enron reportedly warned its employees, through a
company newsletter, against "salesmen from the Tampa area
[who are] trying to move your retirement money into a variable
annuity." The newsletter went on to offer this advice: "Enron
employees should also be aware of opportunities in buying more
Enron shares. Several employees have bought and sold shares
through our services and many are making some huge gains.
Enron [stock] went to 64 last week and many shares were bought
by employees. As you know, Enron is now at 72."
Lay, who was Enron's chairman and chief executive officer, is
among the former executives of the company who are targets of
shareholder lawsuits. But under Texas law, the variable annuities
are untouchable unless those suing him could prove fraudulent
intent.
"Obviously it's a facts-and-circumstances test," says Rothschild,
chairman of the American Bar Association's committee on asset
protection. "If they did this months before Enron went into Chapter
11, obviously that's a much better fact than if they did this after the
lawsuits had commenced against them. And it would depend on
the trier of fact, the jury or the judge, to determine what the
situation is. A court might be able to find an exception in view of
the amount that's involved -- not just the timing of it, but the
amount."
Lay has provided information about the variable annuities to his
attorney, Earl J. Silbert, the former Watergate prosecutor. Kelly
Kimberly, a spokeswoman for the Lays, declined to answer
questions about the annuities. "We have decided that we won't be
discussing his personal finances," she told Mother Jones. What
do you think?
Bill Hogan is Mother Jones' Washington, D.C. editor
Correction: An earlier version of this story undervalued the total
initial investment by Kenneth and Linda Lay and overvalued the
nominal total value of the annuity.
motherjones.com
Email This Story
To A Friend |
