February 04, 2003
Kenny Boy gets sued

Ken and Linda Lay have been sued by Enron's creditors, who allege that they still owe money for loans that they paid back in Enron stock. They were doing this up into November of 2001, just before the Dynegy deal fell through and Enron declared bankruptcy. They're looking to collect over $80 million.

Between May 1999 and November 2001, Lay used company stock to repay more than $94 million in loans from Enron. Under the arrangement, Lay could sell stock -- in the form of options awarded to him as part of his compensation -- to the company without having to report it publicly for up to a year afterward. At the time, most stock sales by insiders had to be disclosed by the 10th day of the following month. A new federal law now requires disclosure within two business days for nearly all transactions.

Creditors say Lay, as company chairman and chief executive officer, knew the stock was essentially worthless and should be forced to repay the company.

"The tendering of Enron's own stock to repay loans taken in cash was not a fair exchange for Enron," says the lawsuit, signed by creditors committee lawyer Susheel Kirpalani.

This suit, it seems to me, has the potential to bolster a criminal case against Lay.

The creditors will have to prove Lay was aware of the stock's value and had reason to believe the price would drop considerably in the future, said Nancy Rapoport, dean of the University of Houston Law Center and a bankruptcy expert.

The creditors argue that Lay must have known the currency he was using to repay Enron was "overvalued."

On Aug. 14, 2001, he replaced Jeff Skilling as CEO, adding that title to his role as chairman. A day later he received an anonymous memo from vice president Sherron Watkins suggesting the company could "implode in a wave of accounting scandals."

By September, accounting firm Arthur Andersen revealed in an internal memo that it now believed Enron's value was overstated by $999 million in the first half of 2001.

At the time, Lay was continuing to use the open loan agreement. In October, he repaid the company with Enron shares valued then at $2.8 million. And in November, he received cash advances totaling $2.5 million, according to the lawsuit.

At the very least, this will dredge up a lot of unpleasant facts about the President's former bestest buddy. Get some popcorn, this should be fun.

Posted by Charles Kuffner on February 04, 2003 to Enronarama | TrackBack