Bear Left!

The Lay Away Plan
Tim Francis-Wright

Last week, the "Today" show had one of the most bizarre interviews of this or any year. In it, Linda Lay explained that she and her husband faced financial ruin despite $200 million in compensation over the past three years. Her cries of poverty met immediately and properly with derision from Enron employees facing loss of their jobs and their comparatively modest retirement savings.

While Enron's stock fell precipitously during 2001, Kenneth and Linda Lay sold many thousands of shares. Ken Lay even exulted to Enron employees in October that the company was undervalued and that Enron stock was a wonderful investment. Not surprisingly, Ken and Linda Lay now face lawsuits by stockholders alleging improper insider trading.

Let us give Ken and Linda Ray the benefit of the doubt for a moment, and assume that they are innocent of any illegal insider trading. Linda Lay's interview alone provides damning evidence on its own: not of illegal acts, but of greed and incompetence so vast that they should cast doubt on everything that Enron's management did.

In the "Today" interview, Linda Lay explained that "we've had long term investments and those investments have cash calls." This statement is particularly telling. The Lay family earned a huge amount of money from Enron in the past few years, in the forms of cash salaries, cash bonuses, and Enron stock. While the Enron stock became less and less valuable, it did not require cash calls.

As the New York Times reported almost two weeks ago, the Lay family has borrowed against its stake in Enron to make investments in technology companies like i2 Technology, Compaq, and New Power Holdings. When the Enron stock as well as the other stocks fell in value, the Lays faced a double bind. Selling the new investments would lose money for them, and the collateral for the loans—some of their Enron stock— was worth less then before. So the Lays decided to provide additional collateral.

How the Lays raised the additional collateral is telling. Like many executives of large company, Ken Lay could borrow money from his company. But Ken Lay had an advantage that many executives did not. He could borrow up to $7.5 million at a time through a line of credit, and then pay the loan back with shares of Enron stock at the current market price.

The Lays took advantage of a loophole to hoodwink investors and raid the Enron treasury. Normally, SEC rules require notice of sales of stock by insiders by the tenth day of the next month. In theory, these rules allow knowledgeable investors to decide whether insider sales portend badly for any particular company. But by selling the stock to the company in payment of a loan, Ken Lay postponed the required disclosures until 14 February 2001, or 45 days after the end of Enron's fiscal year. So, in practice, investors had no idea that Lay was selling stock so quickly. Earlier this month, the New york Times reported that Ken and Linda Lay drew on his line of credit several times in 2001 and raised a total of $60 million in cash. When Enron faced its gravest time of crisis, its founder was draining cash out of the company to save his own failing investments.

If Ken and Linda Lay faced dire financial straits because they had kept the bulk of their assets in Enron common stock, then their pleas for sympathy would hold some merit. Many employees owned Enron stock in their 401(k) plans that would make them comfortably affluent, if they could ever sell it. The rules of the Enron 401(k) plan prohibited any sales of the Enron stock in that plan until employees reached 50 years old. And no Enron employees could sell Enron stock for 28 days when the firm changed 401(k) administrators on 16 October. But even top executives had only limited amounts in their 401(k) plans, because contributions to any 401(k) are limited (the current limit is $11,000 per year).

Executives like Ken Lay instead receive much larger amounts through other "non-qualified" retirement plans, and through large grants of stock options. While rank-and-file employees at Enron needed the company to be a long-term success for their retirement plan assets to be useful at retirement, executives like Ken Lay required only short-term success for their stock options to be worth millions of dollars. Some of those profits from stock options became a $7 million penthouse in Houston. Other profits became four separate luxury properties in Aspen. Those real estate holdings alone would ensure that the Lays will have an easier financial lot than any of their former employees.

But the Lays were not content with merely being filthy rich. They were not content with four properties in Aspen. They were not content with the demands and altruistic pleasures of running a $50 million charity set up with appreciated Enron stock. Instead, they invested in other ventures, not with cash, but with borrowed money. And when those ventures started to fail, they tried to hide their failure by selling some of their Enron stock in ways that would be invisible to the public until 2002.

While Ken and Linda Lay were making their leveraged technology investments, Ken Lay was chairman of Enron. He remained CEO of the company until last February. At the same time that the Lays were making huge gambles on outside investments, gambles that required Enron stock to do well, the business press regarded Kenneth Lay as a financial genius. The evidence now shows, however, that the financial genius was just a gambler who did not know when to fold. It should not surprise anyone that he and his associates took a gambler's mentality with them into their Houston offices each day. Enron was Ken Lay's baby, and the baby looks an awful lot like Dad.