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Chief Pay200 M Mnot Enuf Enron Norris*

January 22, 2002

For Chief, $200 Million Wasn't Quite Enough Cash


ver three years starting in 1999, Kenneth L. Lay has reported receiving more than $200 million either from Enron (news/quote) 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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