Pai pays up

Been awhile since there was an Enron-related story that interested me.

A former top Enron executive who sold nearly $300 million in Enron stock before the company cratered has agreed to pay regulators $31.5 million to settle civil allegations of insider trading.

The amount Lou Pai, 60, agreed to pay is the highest Enron-related settlement reached between an individual and the Securities and Exchange Commission, and the agency said it is one of the highest individual settlements in its history.

Other SEC fines gained in numerous Enron settlements since 2002 range from $30,000 to almost $2 million for individuals, though some higher amounts were split between the SEC and the Justice Department.

But Pai’s settlement is a fraction of the $270 million or more that shareholders who sued him and other executives say he gained from stock sales.

“I’m just shaking my head. That makes me sick to my stomach,” said Diana Peters, one of the thousands of employees left jobless when Enron collapsed in December 2001, months after Pai quit the company.

“He’ll just move down the road and it won’t even be a drop in the bucket for him,” she said. “But if you’ve got that kind of money, I guess you can afford to buy yourself out of anything.”


Pai, who was chairman and chief executive of Enron’s retail energy division, Enron Energy Services, was among the more colorful yet elusive figures at Enron.

He was known to frequent strip clubs as part of enjoying the great wealth he gained from the company’s generous bonuses and stock options, a former employee told the Chronicle for a story in 2003. Yet he avoided the spotlight while at Enron, and has done so since he resigned from the company in May 2001.

Yes, the movie “The Smartest Guys In The Room” talked a bit about Pai and his stripperphilia. He himself did not appear in the film, but there is an image of a jet plane taking off as whoever was speaking talked about how Pai cashed out and headed off to Hawaii with one of the girls from (I think) Rick’s Cabaret.

The bulk of Pai’s stock sales occurred as part of a divorce settlement more than a year before Enron crumbled. Pai has never been charged with crimes, and earlier this year was dropped as a defendant from a massive shareholder lawsuit in Houston.


The stock sales at the heart of the SEC complaint that Pai settled on Tuesday took place from May 18 to June 7, 2001. The SEC said he sold nearly 573,000 shares at $53.78 based on insider information that a division he once ran had financial troubles unknown to investors.

Specifically, the SEC complaint said Pai knew that Enron Energy Services faced substantial losses in the first quarter of 2001. The complaint notes that Enron’s CEO and senior accounting personnel, along with Enron Energy Services management, “secretly revised” division reporting to avoid disclosing those losses. That revision came about by moving the retail division’s trading arm into Enron’s larger trading franchise, Enron Wholesale Services.

That action received much focus in the 2006 fraud and conspiracy trial of Skilling and Chairman Ken Lay. Skilling testified that the retail trading arm was moved into the larger division to combine like functions for efficiency’s sake.

But David Delainey, Pai’s successor as the head of Enron Energy Services, testified that the move was intended to hide millions of dollars in losses, the disclosure of which could threaten Enron’s stock price and credit rating.

Reading this story reminds me why I was bothered less than folks like Tom were about the criminal cases that were brought against the likes of Ken Lay, Jeff Skilling, and so on. Pai was (eventually) punished through the civil process, but the punishment he received doesn’t come close to balancing the scales, in my view. He’s still a millionaire many times over – assuming he hasn’t blown it all, of course – while so many other people, employees and shareholders, got wiped out. I think the only way the civil justice system could really make these guys pay for their wrongdoings is if it left them in the same shape as the people who were affected by their actions – namely, in a situation where they’d have to work for the rest of their lives because they no longer had any accumulated wealth. Here’s a bit I wrote from my review of “The Smartest Guys In The Room”:

There’s a really poignant scene in which Portland General Electric lineman Al Kaseweter matter-of-factly states that he sold his entire retirement portfolio, which was worth $348,000 at its peak, for $1200.

PGE had been bought by Enron before the crash; like most Enron employees were encouraged to do, Kaseweter put the bulk of his retirement funds into Enron stock. Put Lou Pai in Al Kaseweter’s shoes, and I’d agree that justice had been served. Same with Skilling and the rest of that crowd. But that’s not how it works, so despite the problems associated with the Enron prosecutions, I think they were necessary.

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