For Chief, $200 Million Wasn't Quite Enough Cash
The New York Times
January 22, 2002
By FLOYD NORRIS
Over three years starting in
1999, Kenneth L. Lay has
reported receiving more than
$200 million either from Enron
directly or through
exercising stock options. Yet, his
lawyer now says, he was forced to
borrow millions more from the
company last year to meet his
obligations.
The disclosure of Mr. Lay's
financial problems, made by Earl
Silbert, his personal lawyer, was
aimed at countering the
impression that Mr. Lay, Enron's
chairman and chief executive,
might have disposed of Enron
stock in late August because he
feared a collapse of the company.
Instead, the new information
could leave an impression that
his personal investments
produced very large losses that
he was unable to support despite
his large income from Enron.
Assuming that Mr. Silbert is
correct, Mr. Lay joins a short list
of chief executives whose pay in
the 1990's was astronomical, and
who ended up with severe
financial problems because they
borrowed too heavily against
assets whose high value proved to
be temporary. The others known
to have such problems are
Bernard J. Ebbers, the chief
executive of WorldCom
(news/quote), whose margin
loans were guaranteed by the
company and whose shares are
now worth less than he owes, and
Steven Hilbert, the former chief
executive of Conseco
(news/quote), who bought
Conseco shares with money
borrowed from the company
before the stock price collapsed
and he was fired.
Mr. Lay appears to have parlayed
his paper gains in Enron to buy
other securities that also declined
in value. His known investments,
which are no doubt only a
fraction of the actual investments,
were concentrated in areas that
did well when the stock market
was soaring and have since
suffered. They include stakes in
Compaq Computer (news/quote),
i2 Technologies (news/quote) and
NewPower Holdings
(news/quote).
In fact, Mr. Silbert indicated that
Mr. Lay first repaid a company
loan with stock last February.
Enron was then selling for more
than $68 a share, so it appears
that the sale was forced by the
declining value of Mr. Lay's other
investments.
Just how much Mr. Lay is now
worth is unclear. Nor is it clear
how much, if any, money he still
owes, or just what expenditures
would have caused him to go
through so much money so
quickly. But his stake in Enron,
which consists mostly of stock
options, is now worthless after
the collapse of the company.
Mr. Lay had a $4 million revolving
line of credit from Enron, which
Mr. Silbert said was raised to
$7.5 million at some point in
2001. He said that Mr. Lay took
out money from that loan, and
then repaid it, on 15 separate occasions from February
through October.
In each case, he repaid it by turning over stock to Enron.
He appears to have obtained some of those shares by
exercising options, while in other cases he returned
shares he already owned. Mr. Silbert said Mr. Lay took
out the loans from the company when he expected that he
was likely to face margin calls from other lenders.
If those 15 repayments averaged $4 million, then they
totaled $60 million, which would represent the value of
stock he returned to the company. Mr. Silbert declined to
give exact figures, and formal disclosure of the
transactions is not required by Securities and Exchange
Commission rules until Feb. 14.
From 1999 through 2001, Mr. Lay received salary and
cash bonuses from Enron totaling more than $17.1
million. That figure does not include a salary for 2001,
although he was supposed to earn $1.3 million.
Presumably, it was paid until the company filed for
bankruptcy on Dec. 3.
But he brought in far more from cashing in his stock and
options in the company. In 1999, Enron filings show, he
realized $43.8 million from cashing in stock options. The
next year, he realized $123.4 million from that source.
And his filings show that he earned a profit of $20.7
million from cashing in options and selling stock in the
first seven months of 2001.
All told, that amounts to about $205 million over those
three years. But that was not enough. According to Mr.
Silbert, the loan proceeds from the company were needed
when other loans needed to be paid.
Mr. Lay has also sought to raise cash from other sources.
Late last year Mr. Lay put up for sale several houses and
properties he owns in Aspen, Colo.
Functionally, disposing of stock by using it to pay off loans
is the same as selling the stock. But legally it differs in
two ways, although it is not clear which, if either, was
important to Mr. Lay.
The first is that while normal sales of stock by a top
corporate official must be disclosed quickly, within 10
days of the month in which the sale was made, the return
of stock to a company to repay a loan need not be
disclosed until the next year.
The second concerns the sanctions against insider
trading. In general, an executive is barred from buying or
selling his company's stock when he has material
nonpublic information. But transactions are not barred if
the entity on the other side of the trade has the same
information.
"If he is selling it back to the company, the company may
have the same information he had," said Jack Coffee, a
securities law professor at Columbia. He said that while a
prosecutor could argue that the board did not have the
information, and therefore the company did not have it, it
would be a difficult case to prove.
There is one other exception to insider trading rules,
stemming from a rule issued by the S.E.C. in 2000. An
executive may adopt a plan to sell stock regularly and
then sell stock pursuant to it even after learning of
material nonpublic information. But no such plan can be
filed by an executive after he or she obtains such
information, unless the information is made public.
Mr. Lay took advantage of that rule repeatedly in 2001,
filing plans to sell stock for three-month periods. His last
plan expired at the end of July, by which time he had
taken in $29.9 million from selling shares and earned a
profit of $20.7 million. The share price had fallen to
$45.35 by the end of the month.
After that, Mr. Lay did not file a new plan and has not
reported selling any additional shares in public markets.
"The reason he stopped selling was that he thought the
stock was going to go up," a lawyer for Enron, Robert S.
Bennett, said last week.
After July 31, there was no shortage of news affecting
Enron. On Aug. 14, Jeffrey Skilling resigned as Enron's
president and chief executive, leading to Mr. Lay's
reassuming the chief executive title he had surrendered
earlier in the year. The next day, Sherron S. Watkins, an
Enron employee, wrote to Mr. Lay of her concerns about
the company's accounting, expressing the prescient fear
that "we will implode in a wave of accounting scandals."
In October, the last month that Mr. Silbert said Mr. Lay
repaid a company loan by turning in stock, Enron's report
on third-quarter results set off an avalanche of bad
publicity that led to the company's unraveling over the
next month. The S.E.C. inquiry also began in October.
By repeatedly borrowing from Enron, and then turning in
stock to repay the loan, Mr. Lay was taking out cash
directly from the company when the company's need for
cash was growing.
Had he exercised options and sold the stock to the public
as he sought to pay his debts, Enron would have gained
cash that now could be used to pay creditors. As it is,
there is less cash available for that.
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