Lawyer explains Lay's stock sales
Enron figure returned shares often in 2001 to cover loan collateral
01/21/2002
By RICHARD A. OPPEL JR. / New York Times News Service
WASHINGTON – Kenneth L. Lay, chairman and chief executive officer of Enron Corp., reportedly was forced to repay millions of dollars in loans by handing over stock to Enron last year as his various investments declined in value, his lawyer said on Sunday.
Earl J. Silbert, the lawyer representing Mr. Lay, 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 and those other investments plummeted last year, he said, lenders demanded additional collateral.
So, Mr. Lay's decision to dispose of Enron shares late in the year did not reflect a concern about the health of Enron, but his need to raise cash, Mr. Silbert said Sunday. Most of the transactions related to the credit occurred before August, he said, and before Enron restated earnings and began its spiral into bankruptcy.
Stock returned
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 a $4 million credit line. Each time the credit was repaid, Mr. Silbert said, Mr. Lay subsequently borrowed the amount available and used a substantial portion of it to prop up the value of the collateral backing the other investments.
Sometime last year, the credit line was increased to $7.5 million, Mr. Silbert said, adding that he did not know whether Mr. Lay still owes any money to Enron.
If Mr. Lay is facing financial difficulties, then he went through a lot of money during the years when Enron was riding high. From 1989 through 2001, the total of his salary, bonus and profits from stock options topped $300 million, with most of that coming from 1998 through 2000.
Lay not alone
Some of the nation's wealthiest men found themselves in trouble last year, after either investing at the height of the market mania or failing to take profits and reduce their debt in good times, a mistake that became apparent when technology stocks in particular plunged in value. Some members of the Bass family of Fort Worth were forced to sell shares in Disney to raise cash last year, and Craig McCaw, the telecommunications entrepreneur who foresaw the cellular phone market, has put up for sale homes, 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.
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 coming 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.
Mr. Lay exercised some options to repay a company loan around Aug. 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" and be found out as an "elaborate accounting hoax."
Mr. Silbert said that when Mr. Lay faced a financial strain, 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, you had two choices: Sell the Enron stock, or pay down the loan," Mr. Silbert said, "and he chose to pay down the loan rather than sell off his stock."
Faith in Enron
Mr. Silbert said that Mr. Lay's faith in Enron is also evident in how he 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. This reflected Mr. Lay's belief that the Enron stock would appreciate, Mr. Silbert said.
Furthermore, Mr. Lay exercised options to acquire 68,000 shares when the company was solvent late last year and still owns them, he said.
The transactions between Mr. Lay and Enron will be included in regular filings with the Securities and Exchange Commission next month.
In related news:
• Enron fired at least two employees in the last two months after they posted information or negative opinions about the company on Internet message boards. One of the fired employees, Clayton Vernon, had asked Kenneth L. Lay, Enron's chairman, during an earlier internal online discussion whether Enron had used aggressive accounting to overstate its profits. It is unclear whether Mr. Vernon's question to Mr. Lay – which came in September, two months before he was dismissed – played any role in his firing. But a coarsely worded message critical of Mr. Lay that Mr. Vernon posted in November under a screen alias reportedly was traced back to him in less than a day. Mr. Vernon said he had been fired for postings that the company viewed as offensive.
The second fired employee, according to Enron, was the person who revealed on the Internet that Enron had paid $55 million in retention bonuses to top managers and executives just before it filed for bankruptcy protection Dec. 2. Enron declined to identify the second fired employee. The company also declined to comment on any other details of the two firings, and it would not say whether it had dismissed any other employees because of Internet postings. • Nearly 200 former Enron workers have united to demand severance pay from the bankrupt energy giant that abruptly laid them off last month. "We're about getting just due compensation for former employees," said Rod Jordan, 63, one of 4,500 employees who lost their jobs. He said the group, the Severed Enron Employees Coalition, wants U.S. Bankruptcy Judge Arthur Gonzalez to approve a separate creditors' committee comprised solely of former Enron workers.
• Executives at Arthur Andersen LLP may have to pay hundreds of millions of dollars to settle litigation over the Enron debacle because the accounting firm probably does not carry enough insurance to satisfy what are expected to be massive claims. Andersen's 4,700 top managers, known as partners, may lose some or all of their personal investments in the firm, which range from about $100,000 to more than $5 million, experts said.
"The [total] claims are likely to be somewhere in excess of $10 billion ... and may be $30 billion," said Mark Cheffers, chief executive of AccountingMalpractice.com, which advises accountants on insurance issues. Andersen's insurance coverage "is not remotely close to what the potential exposure is here," he said. "I'm not sure it's even enough to pay legal fees."
Andersen representatives declined to comment about the firm's insurance arrangements.
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The Associated Press and Los Angeles Times contributed to this report. |
