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Lay: Have A Nice Cruise... But I'm Getting Off This Ship

Even as he was urging his employees to buy, buy, buy, Kenneth Lay quietly sold his Enron stock for millions. He saw the iceberg coming, kept it to himself, and took the only lifeboat.
 
 
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When Kenneth L. Lay resigned as Enron's chairman recently, as a Justice Department task force was intensifying its investigation of the worst corporate bankruptcy in the nation's history, the ever resilient and ebullient salesman had one final sale to close. Using his wife as his surrogate, Mr. Lay embarked on a public relations campaign to convince the public that he was not the one to blame.

Mr. Lay himself was scheduled to make the argument, in testimony before the Senate Commerce Committee, beginning on Monday, February 4. But on February 3 he informed the Senate that he would not appear. If he does eventually appear, he'll likely say that he simply knew nothing at all about the massive financial fraud taking place at Enron until it was too late for him to do anything about it. This was the thrust of Mr. Lay's proxies as they laid the groundwork for his aborted appearance on February 4.

Appearing on NBC's "Today" show on January 28, Linda Lay asserted that her husband had been "out of the loop" about the massive financial meltdown that was occurring at Enron while her husband ran the company: "There's some things that we weren’t -- that he wasn't told," she claimed.

The next morning, the equally credulous Washington Post reported on its front page: "Linda Lay's comments bluntly put into the public domain what Kenneth Lay's friends, family members and attorneys have been saying in recent weeks: The man who helped build the aggressive, innovative energy company was not involved in the day-to-day details of its operations, [instead] trusting his executives" to run things in his ever present absence.

Explaining Mr. Lay's decision before Congress, a close relative of Mr. Lay told the all too sympathetic Post: "He is far less interested in his net worth than in his reputation. It's not about money."

A report released on February 2 by a special committee of Enron's board of directors contains contradictory evidence regarding Mr. Lay's claims as to not have known about everything going on at his company. On the one hand, the report concludes that Mr. Lay was detached to some extent in running Enron, acting at times more like a director of the energy corporation than as its chief manager.

But the report also pointedly declares that Mr. Lay clearly was "captain of the ship." More specifically, it condemns Mr. Lay for putting in place a system that allowed Enron's then chief financial officer, Andrew S. Fastow, to set up for himself several questionable offshore partnerships with Enron -- which ultimately cost the company more than $1 billion and plunged it into bankruptcy. Mr. Lay, the report asserts, "bears significant responsibility for those flawed decisions, as well as for Enron's failure to implement sufficiently rigorous procedural controls to prevent the abuses that flowed from this inherent conflict of interest."

It is, of course, audacious and bold for Mr. Lay to defend himself by alleging that he was "out of the loop" at Enron, which seems implausible on the surface. But we should not sell Mr. Lay short, even as we may kick ourselves for not having sold Enron stock short.

Mr. Lay has already proven himself to be more than an adept salesman. He was, after all, able to convince his employees and stockholders to continue pumping Enron’s stock, as he himself was dumping his own shares and his company was barreling towards a financial implosion.

As for his latest sales pitch -- to portray himself as the hapless dupe of his own subordinates -- Mr. Lay has surprisingly, for now, met with some early success. Many in the press appear only too eager to uncritically do his bidding in exchange for access and an easy headline.

It was not long ago, of course, that Kenneth L. Lay was one of the most admired corporate executives in America. But that image, it turns out, was an elaborately constructed facade.

What we know about what was really going on at Enron during that period was nothing less than the systematic looting of the company by many of its top officers, an elaborate shell game to hide hundreds of millions of dollars of the company’s disappearing assets, and a systematic coverup designed to obfuscate the deteriorating financial stability of the company from it employees and shareholders. It is little wonder that Mr. Lay and other Enron top executives were eager to cash out before the bottom fell out from under them.

At least 29 Enron executives, directors, and other company insiders, between 1999 and 2001, cashed out to the tune of more than $1 billion by selling their stock in the company, according to a recently filed lawsuit by the Amalgamated Bank of New York, which had invested in Enron on behalf of a number of union pension funds. Amalgamated’s lawsuit, filed in federal court in Manhattan, alleges that Enron insiders shed their stock at often immense profits knowing full well that their company was headed for certain trouble, if not collapse.

At the time of the stock sales, however, Enron's stock was still soaring, Wall Street analysts were talking up the stock, federal regulators were asleep, and many leading financial journalists were behaving as if they were Enron public relations men.

Mr. Lay and other top Enron executives knew only too well that their company could be a corporate Titanic. But instead of warning their employees and shareholders, they told no one of the iceberg that lay ahead, as they made their way to the lifeboats, leaving the vulnerable on their own. Mr. Lay and his fellow executives ruthlessly secured their own financial safe heavens, while leaving every one else aboard to go down with the sinking ship.

To fully comprehend Mr. Lay’s perfidy, consider that he was able to sell his Enron stock for between $31 and $86 a share, pocketing more than $100 million. That's a sizable lifeboat.

Most other Enron employees were denied the same information that was available to Mr. Lay and other corporate executives. Moreover, most of the rank-and-file were also precluded from selling their stock in Enron until they retired. In contrast to Mr. Lay and other company insiders, the value of their stock is now worth about 43 cents a share, and they also find themselves unemployed, without health insurance, and stuck with now-worthless retirement accounts.

Mr. Lay’s attorneys, retainers, and public relations advisors claim that he had no greater advantage in trading Enron stock than any other company employee. Mr. Lay's wife also asserts that Mr. Lay had to sell his Enron stock to cover losses from bad investments he made in the stock market -- even though Mr. Lay earned more than $270 million from Enron during that very same time from his salary, bonuses, and sales of stock.

Meanwhile, Mr. Lay adamantly continues to insist that he did not dispose of his stock because he knew the company was potentially headed towards financial insolvency. But information already brought to light by congressional investigators, in federal court records, and from news accounts, as well as new information for this article obtained from federal law enforcement officials, raises serious questions about Mr. Lay's assertion.

Consider the facts:

On August 14, Enron's chief executive, Jeffrey Skilling abruptly resigned his position, despite having been on the job for only six months. Mr. Skilling clearly saw the threatening iceberg on the horizon, but did not sound a warning for anyone else. To do so would have made it more difficult for him to dump his own Enron stock when the price was still high. Before he resigned as Enron'’s chief executive, Mr. Skilling received $66.9 million for selling a little more than one million shares of Enron stock.

Mr. Skilling's resignation immediately set off alarm bells on Wall Street. But the same day of his resignation, Mr. Lay assured Enron employees in a company-wide e-mail: "I want to assure you that I have never felt better about prospects for the company."

A week later, Sherron S. Watkins, a vice president of corporate development for Enron, wrote a prescient letter to Mr. Lay, correctly predicting the collapse that was to come: "I am incredibly nervous that we will implode in a wave of accounting scandals," Ms. Watkins said.

Further, she warned, it was only a matter of time before someone within the company blew the whistle on the whole questionable enterprise: "They bought [Enron stock] at $70 or $80 dollars looking for $210/share and now they're at $38 or worse. We are under much scrutiny and there are probably one or two disgruntled 'redeployed' employees who knew enough about the 'funny’ accounting to get us in trouble."

Moreover, Ms. Watkins directly linked Mr. Skilling’s departure from Enron to the massive financial fraud going on around them: "My eight years of Enron work history will be worth nothing on my resume," she lamented, "the business world will consider the past success as nothing but an elaborate accounting hoax. Skilling is resigning now for 'personal reasons' but I would think he wasn’t having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now than resign in shame in two years."

Mr. Lay quietly began to shed his personal portfolio of even more of his Enron shares.

In the same letter, Ms. Watkins also asserted that questions had also been raised by then Enron vice chairman J. Clifford Baxter, regarding a series of questionable deals Enron had made with an offshore company known as LJM, that might also lead to Enron’s demise: "Cliff Baxter complained mightily to ... all who would listen about the inappropriateness of our transactions with LJM," she wrote Mr. Lay. (As it later turned out, it was indeed accounting irregularities revolving around LJM and similar offshore companies run by a senior Enron executive that lead to the company’s bankruptcy.)

On Jan. 25, Mr. Baxter committed suicide, by shooting himself in the head with a .38 caliber handgun, while parked in his Mercedes-Benz, in the privileged suburb outside Houston where he lived. Mr. Baxter reportedly resigned his position last May because of concerns that he had about the propriety of Enron’s accounting practices. There is no evidence to suggest that Mr. Baxter did anything improper, but he was said to be distraught about testifying against his former colleagues.

Federal law enforcement sources tell me that Mr. Baxter was central to determining what Mr. Lay knew and when he knew it: "Sherron Watkins wrote that Baxter was complaining 'mightily to all who would listen.'We would have wanted to know from Baxter directly if one of them he was going to with his complaints was Lay," says one law enforcement official, "It would be difficult for Lay to argue that he did not know a thing if Baxter was coming to him, and then later, Sherron Watkins was voicing the same concerns. For that reason alone, we thought he was going to be a crucial witness for us."

Shortly after she wrote her letter to Mr. Lay, Ms. Watkins, according to accounts she has since provided to federal investigators, personally met with Mr. Lay and detailed her concerns at some further length. What was Mr. Lay's reaction?

Within days, according to court records, Mr. Lay quietly began to shed his personal portfolio of even more of his Enron shares. On August 20 and 21, Mr. Lay exercised options to sell an additional 93,260 shares of Enron stock, which were then worth about $3.5 million.

Ordinarily, Securities and Exchange Commission guidelines require that senior corporate executives and insiders, like Mr. Lay, publicly disclose their selling of any significant quantities of shares in their own company. The reason that such disclosure rules are in place is to protect stockholders and investors: Any time senior managers of a publicly traded corporation are known to be dumping their own stock, it is often an indication that they have inside information that has made them lose faith in their company.

Mr. Lay's stock transactions, had they become known at the time, would have almost certainly raised eyebrows on Wall Street. Coming on the heels of Mr. Skilling's resignation, they certainly would have highlighted questions already being raised in some quarters about Enron’s fiscal stability, and sent the company’s stock price spiraling even lower.

In the case of these particular stock trades, however, Mr. Lay and Enron were apparently able to get away without disclosing them to their shareholders because of an obscure loophole in the securities law which they exploited to their own benefit. Mr. Lay’s attorneys assert that because he was selling the stock to repay money that he had borrowed from Enron, the federal securities law allowed him to keep the stock sales secret.

Unaware, small investors continued to purchase stock as Enron's insiders acted on the information only they knew about the corporation’s deteriorating condition. Many of Enron's corporate executives, foremost Mr. Lay, according to Amalgamated’s lawsuit, allegedly kept quiet for their own financial benefit.

Any number of watchmen could have warned about the imminent catastrophe. Many, like the Securities and Exchange Commission, and other federal regulators, were asleep at the watch. Still others, like accounting giant Arthur Andersen, were themselves earning huge fees from Enron, financial incentives that encouraged them to turn a blind eye.

On Aug. 27, only a few days after the dumping of his Enron stock, Mr. Lay sent yet another exuberant e-mail to Enron employees, reassuring them once again that all was well, and even exalting them to buy more stock: "One of my highest priorities is to restore investor confidence in Enron. This should result in a significantly higher stock price."

A month later, Mr. Lay was once again encouraging his employees to purchase more Enron stock. In an on-line chat with company employees on Sept. 26, Mr. Lay counseled them: "My personal belief is that Enron stock is an incredible bargain at current prices and we will look back a couple of years from now and see the great opportunity that we currently have."

Of course, the Enron employees Mr. Lay was encouraging to take even greater risk with their financial security didn't have the same insider information available to Mr. Lay. They did not know the real reasons that Mr. Skilling resigned as Enron’s chief executive. They did not know about Ms. Watkins' warning that Enron might implode at any moment. They did not know that the Securities and Exchange Commission had quietly begun to ask questions. And none had a clue that Mr. Lay was dumping his own Enron stock.

An unsuspecting and loyal Enron employee inquired of Mr. Lay during the same on-line chat: "In addition to working hard at our jobs to make Enron more successful, what can we, as employees of Enron, do to increase our stock price?"

Mr. Lay responded: "I believe that the other things employees can do is talk up the stock and talk positively about Enron to your family and friends. In part, because there have been so many short sellers of the stock over the last several months, there have been all kinds of reckless and unfounded rumors about Enron and the financial condition of Enron. To the extent that our employees begin repeating those rumors to other employees as well as to family members and friends out the company, it gives them a credibility that they do not deserve. And, thus damages the stock price."

Never mind, of course, that Mr. Lay was secretly engaging in his own short-selling, of a sort, of massive quantities of Enron stock.

Less than a month later, Mr. Lay made several phone calls to Secretary of Treasury Paul H. O'Neil and Secretary of Commerce Donald L. Evans, according to an account of those conversations made public in recent weeks by the White House, seeking some last minute assistance from the Bush administration to stave off Enron’s bankruptcy. By then, however, the Bush administration was no longer able or willing to bail out Enron. It was now simply too late for anyone to do anything.

The iceberg had hit. At the expense of his own employees and shareholders, Mr. Lay and other top Enron executives had made their way to the only lifeboats, taking tens of millions of dollars in profits for themselves from stock trades. For everyone else, little else could be done. You can only rearrange the deck furniture on the Titanic for so long.