Kenneth Lay, Enron’s chairman and chief executive

analysisKenneth L. Lay led Enron as chairman of the board and, for most of the period, chief executive officer. The Senate Permanent Subcommittee report named him as Chairman and CEO among the senior officers whom Enron’s directors said they had trusted, and stated that he chaired the board from 1986 until he resigned in 2002. Sources date the start of his tenure differently: the Joint Committee on Taxation says he became Chairman and CEO of HNG in June 1984 and held both roles at HNG InterNorth and Enron until February 2001; Enron’s 2001 proxy, like the Senate report, dates his chairmanship from 1986; and a 2003 federal court opinion gives his Enron chairman-and-CEO terms as December 9, 1996 to February 1, 2001 and August 14, 2001 to January 23, 2002, with Lay only Chairman in between. The retained records do not explain the court’s 1996 date. They agree that Lay ceded the CEO post to Jeffrey K. Skilling in February 2001 and resumed it in August 2001. A Congressional Research Service chronology records that Enron announced on January 23, 2002 that Lay had resigned as Chairman and Chief Executive Officer while remaining a director, and that he resigned from the board on February 4, 2002. ^{1 2 3 4 5}

analysisEnron’s code of conduct barred full-time officers from sharing in the profits of an entity doing business with Enron unless this was disclosed in writing to the Chairman and CEO and he found that it did not harm the company. According to the Senate report, Lay approved waiving this rule for Andrew Fastow’s LJM partnerships and asked the board to ratify his decision; at a May 7, 2002 hearing directors Herbert Winokur and Robert Jaedicke contended that the board had not waived the code but had “applied” it. In its report of February 1, 2002 the Powers Committee, a special investigative committee of Enron’s board, found that Lay, as CEO for much of the period, had ultimate responsibility for ensuring that officers reporting to him performed their oversight duties, did not appear to have directed attention to oversight of the LJM partnerships, and approved the arrangements allowing Fastow’s related-party transactions as well as the Rhythms transaction and three Raptor vehicles. It concluded that “a large measure of the responsibility rests with the CEO”, an internal board committee’s conclusion, not a judicial finding. Lay was indicted on July 7, 2004; after his death on July 5, 2006 his conviction was voided by a federal judge. ^{1 2 3 4}

analysisThe bankruptcy examiner Neal Batson concluded in his final report of November 4, 2003 that a fact-finder could find that Lay, as chairman and chief executive officer, and Skilling, as president and chief operating officer, breached their fiduciary duties as officers by failing to respond appropriately to “red flags” that senior officers were misusing special purpose entity (SPE) transactions to disseminate materially misleading financial information, and that as directors they breached their duty of good faith in approving the LJM1/Rhythms hedge and certain LJM2/Raptors hedges, which the examiner described as non-economic. These are conclusions that a fact-finder could so find, not a court judgment, and the examiner noted that the weight of evidence, defences and mitigating factors differ between Lay and Skilling. Lay gave the examiner a one-day interview that was not under oath; Skilling invoked his Fifth Amendment privilege and gave neither testimony nor an interview. On October 16, 2001, when Enron reported third-quarter results including an unexpected after-tax charge of $544 million, Lay told analysts that shareholders’ equity was being reduced by $1.2 billion; the Powers Committee report stated that both related to transactions with LJM2. ^{5 2 6}

analysisIn its July 2002 report the Senate Permanent Subcommittee on Investigations stated that the Compensation Committee of Enron’s board had given Lay a $4 million line of credit, increased to $7.5 million in August 2001, and in May 1999 had allowed him to repay company loans with Enron stock. From October 2000 to October 2001, the subcommittee found, Lay used the line to obtain over $77 million in cash and repaid the loans exclusively with Enron stock. Directors interviewed said they had been unaware of these transactions, which, being treated as loan repayments rather than stock sales, escaped quarterly insider-sale reporting. These are congressional findings based on interviews and subpoenaed records, not a court judgment. A footnote in the report cites a June 2002 Enron bankruptcy filing stating that the company loaned Lay over $81 million in 2001; that figure covers calendar 2001 and differs in period from the $77 million. ¹

analysisIn his final report (November 4, 2003) the examiner concluded that a fact-finder could find that Lay’s repayment of more than $94 million of Enron loans with Enron stock was not duly authorized by the board and was voidable, obliging Lay to repay that amount against return of the stock, with an alternative claim of $74.025 million under section 548(a)(1)(B) of the Bankruptcy Code; he reached the same conclusion on Skilling’s repayment of more than $2 million of loans with stock. His second interim report (January 21, 2003) had described a claim of approximately $81.5 million for loans Lay repaid with stock when Enron was presumed insolvent. These are the court-appointed examiner’s conclusions, not a court judgment; his amounts rest on different periods and legal bases from those in the Senate, SEC and creditors’ committee documents and are not cumulative with them. ^{2 3}

analysisOn January 31, 2003 the Official Committee of Unsecured Creditors of Enron Corp. sued Lay and his wife Linda P. Lay in the U.S. Bankruptcy Court for the Southern District of New York (Adv. Pro. No. 03-02075) to avoid and recover more than $80 million of allegedly fraudulent transfers. The committee alleged that in the year before the bankruptcy Lay used artificially inflated Enron stock to repay over $74 million of cash loans from Enron, and that on September 21, 2001 the Lays sold Enron two annuity contracts worth only $4.69 million for $10 million in cash, a windfall of more than $5.3 million; the pleaded totals cover both the loan repayments and the annuity transfer, and the examiner’s third interim report describes the same suit as asserting $84 million in fraudulent-transfer claims. The Lays moved to withdraw the case from the bankruptcy court, with a view to its transfer to the Southern District of Texas, and demanded a jury trial. On June 23, 2003 District Judge Sidney H. Stein of the Southern District of New York denied the motion, holding that the fraudulent-transfer claims were core bankruptcy proceedings. The retained records do not show the final outcome of the suit. ⁴

analysisOn September 29, 2003 the SEC filed a subpoena enforcement action against Lay, Enron’s former chairman and chief executive officer, who had refused to produce documents, invoking his Fifth Amendment privilege (Litigation Release No. 18372). A Congressional Research Service chronology records that Lay had also invoked the privilege when called before the Senate Committee on Commerce, Science, and Transportation for its “Enron Collapse” hearing on February 12 of the previous year. On November 7, 2003 Lay agreed to a stipulation and order requiring him to produce the records (Litigation Release No. 18449). ^{1 2}

analysisOn July 8, 2004 the SEC charged Lay with fraud and insider trading (Litigation Release No. 18776), filing, subject to Judge Melinda Harmon’s approval, a proposed second amended complaint that added him to its pending action against Jeffrey K. Skilling and Richard A. Causey. It alleged that Lay joined a scheme to falsify Enron’s reported results and made false and misleading public statements, and that his 2001 stock sales while in possession of material non-public information yielded unlawful proceeds of more than $90 million: over $70 million of stock sold back to Enron to repay advances on an unsecured company credit line and $20 million sold in the market under two trading plans he had amended. The SEC sought disgorgement, civil penalties, an officer and director bar and an injunction. These allegations were not adjudicated: Lay died on July 5, 2006, and the retained records do not show how the SEC’s claims against him were resolved. ^{3 1 4}

analysisThe SEC’s complaint alleged that from January 25 to November 27, 2001 Lay drew advances of $77,525,000 on his non-collateralized $4 million Enron credit line and repaid them in twenty transactions by selling $70,104,762 of Enron stock back to the company, among them 918,104 shares sold for $26,066,474 after Skilling resigned on August 14, 2001. It also cited withdrawals of $7.5 million between October 24 and November 27, 2001, and said shareholders learned of the sales only in February 2002. Under two Rule 10b5-1 plans set up on November 1, 2000 and amended, according to the SEC, while he held material non-public information, Lay sold over 350,000 shares for more than $20 million. These are unadjudicated allegations; the SEC’s advance and repayment figures cover January 25 to November 27, 2001 and differ in period and measure from the Senate subcommittee’s and the bankruptcy examiner’s figures. ³

analysisOn July 7, 2004 a federal grand jury in Houston returned a superseding indictment, unsealed on July 8 when Lay surrendered to the FBI, charging him with conspiracy to commit securities fraud, four counts of securities fraud, two of wire fraud, one of bank fraud and three of making false statements to a bank. It joined Lay to the case before U.S. District Judge Sim Lake against Richard A. Causey, indicted in January 2004, and Jeffrey K. Skilling, added in February 2004; Causey pleaded guilty on December 28, 2005. As the DOJ described the indictment, the bank counts concerned four personal lines of credit worth over $60 million: Lay allegedly promised three banks that the loans would not be used to buy stock, obtaining far larger loans than they would otherwise have extended, but repeatedly used the lines to buy stock; the lines were collateralized mainly by Enron shares and repaid with them. At a separate bench trial on May 25, 2006, the day of the jury verdict against Lay and Skilling, Judge Sim Lake convicted Lay of one count of bank fraud and three counts of making false statements to banks; after Lay’s death that conviction was voided in October 2006. ^{1 2 3 4 5}

analysisThe indictment, as summarized by the DOJ, alleged that between 1998 and 2001 Lay received approximately $300 million from sales of Enron stock options and restricted stock, netting over $217 million in profit, and more than $19 million in salary and bonuses; that in 2001 alone he received a salary of over $1 million, a $7 million bonus and $3.6 million in long-term incentive payments; and that from August 21 through October 26, 2001 he sold 918,104 Enron shares to repay advances totalling $26,025,000 from his Enron credit line, shares the SEC’s complaint values at $26,066,474 in sales made after August 14, 2001. It also alleged that on September 26, 2001, in an online forum with thousands of Enron employees, many of them shareholders, Lay stated that Enron was going to “hit [its] numbers” and created the false impression that he had increased his personal holdings of Enron stock over the past two months, when during that period he had bought $4 million of Enron stock while selling $24 million through nonpublic transactions; the SEC’s complaint made a similar allegation. These were charges, not proof. Lay was convicted on May 25, 2006, and after his death his conviction was voided by a federal judge in October 2006. ^{1 6 4 5}

analysisOn May 25, 2006 a federal jury in Houston, after 56 days of trial proceedings before U.S. District Judge Sim Lake, convicted Lay on all six counts with which he was charged at trial: conspiracy, two counts of wire fraud and three counts of securities fraud. At the separate bench trial Judge Lake also convicted him on the bank counts. At trial Lay and Skilling maintained that there had been no fraud at Enron and that negative publicity and diminishing market confidence caused its collapse, as a February 2006 press account reported. In its press release on the verdict, the Justice Department characterised the convicted scheme as one in which Lay, Skilling and other Enron executives, at various times between at least 1999 and 2001, deceived investors and the SEC about Enron’s true performance, artificially inflating its share price from about $30 in early 1998 to over $80 in January 2001 and stemming its decline during the first three quarters of 2001. Lay died on July 5, 2006, and in October 2006 a federal judge voided his conviction; Skilling, after several criminal appeals, waived further challenges to his convictions and sentence under a May 2013 sentencing agreement and was resentenced to 168 months in prison. ^{4 7 5 8}

analysisOn October 23, 2006 the DOJ announced a civil forfeiture action to recover property it described as proceeds of the fraud proven in the criminal case against Lay: his condominium in Houston, property associated with a Lay family investment partnership and a bank account holding more than $22,000. Lay’s estate was also named as a defendant in the third amended complaint of August 2011 in the suit that Silvercreek Management Inc. and affiliated funds, which had invested in Enron notes in October 2001, brought on November 7, 2002; the estate of Kenneth Lay had not responded to the complaint. ^{5 9}