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Lay used Enron stock to pay debts

He believed value would go back up, his lawyer says

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WASHINGTON — Kenneth L. Lay, the chairman and chief executive officer of the Enron Corp., was forced to repeatedly repay millions of dollars in loans by handing over stock to Enron last year as his various investments declined in value, his lawyer said on Sunday.

Earl J. Silbert, the lawyer representing Lay, said in a telephone interview that Lay had put up shares of his Enron stock as collateral for other investments, which he said he could not identify. As the value of Enron stock and those other investments plummeted last year, he said, lenders demanded additional collateral.

So Lay's decision to dispose of Enron shares late in the year did not reflect a concern about the health of Enron but his need to raise cash, Silbert said on Sunday. Most of the transactions related to the credit occurred before August, he said, and before Enron restated earnings and began its spiral into bankruptcy.

On at least 15 occasions between February and October of last year, Silbert said, Lay returned shares in Enron to the company to repay a $4 million credit line. Each time the credit was repaid, Silbert said, Lay subsequently borrowed the amount available and used a substantial portion of it to prop up the value of the collateral backing the other investments.

Sometime last year, the credit line was increased to $7.5 million, Silbert said, adding that he did not know if Lay still owes any money to Enron.

If Lay is facing financial difficulties, he went through an extraordinary amount of money during the years when Enron was riding high. From 1989 through 2001, the total of his salary, bonus and profits from stock options topped $300 million, with most of that coming from 1998 through 2000.

Some of the nation's wealthiest men found themselves in trouble last year after either investing at the height of the market mania or failing to take profits and reduce their debt in good times, a mistake that became apparent when technology stocks in particular plunged in value. Some members of the Bass family of Texas were forced to sell shares in Disney to raise cash last year, and Craig McCaw, the telecommunications entrepreneur who foresaw the cellular phone market, has put up for sale homes, yachts, a wine collection and even an island as his holdings have declined in value.

Much of Lay's fortune was in Enron stock and options, now worthless, but his overall investment portfolio is unknown. Late last year, he still owned about $8 million in stock in Compaq and Eli Lilly, and he has several properties. But around the time of Enron's demise, he put some property on the market and began selling some of those Compaq and Lilly shares as well.

Lawmakers and Enron employees have harshly criticized Lay for promoting Enron's stock as the company's finances grew increasingly shaky last fall. In one case, Lay used an online chat on Sept. 26 to urge employees to buy Enron shares, telling them that the stock was "an incredible bargain" and predicting that the value of the company would increase 800 percent or more in the coming decade.

The recent disclosure that Lay returned some stock to the company to repay a loan has fueled concern that he was exiting his position as he was encouraging others to buy.

Another lawyer for Lay, Robert S. Bennett, previously disclosed that Lay returned some stock to the company to repay a loan.

Lay exercised some options to repay a company loan around Aug. 21, which was shortly after a company vice president, Sherron S. Watkins, warned him that the company might "implode in a wave of accounting scandals" and be found out as an "elaborate accounting hoax."

Silbert said that when Lay faced a financial strain, he took the course that showed the most confidence in the company. "When the stock of Enron went down and the value of the collateral went down, you had two choices: Sell the Enron stock, or pay down the loan," Silbert said, "and he chose to pay down the loan rather than sell off his stock."

Silbert said that Lay's faith in Enron is also evident in how he diversified his portfolio. To make other investments, Lay put up shares of Enron and borrowed against them — instead of selling the shares and paying in cash. This reflected Lay's belief that the Enron stock would appreciate, Silbert said.

Furthermore, Lay exercised options to acquire 68,000 shares when the company was solvent late last year and still owns them, he said.

The transactions between Lay and Enron will be included in regular filings with the Securities and Exchange Commission next month.

Lay has also been selling shares of other stocks he owns, according to securities filings with regulators. Late last year, as Enron shares continued to slide, Lay put up for sale several homes and properties he owns in Aspen, Colo., the exclusive ski resort.

Proxies filed early last year showed that Lay had significant holdings in four companies in addition to Enron. That five-stock portfolio was a poor performer last year as the overall stock market sagged. The best stock in the group fell nearly 16 percent in 2001, while the worst two lost nearly all their value.

Lay, who recently resigned from the boards of Compaq and Eli Lilly, sold stock in those two companies, the best performers, in the final days of October. He acquired 10,000 shares in Lilly in February at $74.13 a share and sold 10,000 shares at a small profit of $77.75 apiece in October. He sold nearly 125,000 shares of Compaq for $1.15 million at the end of October. Combined, those sales generated nearly $2 million.

Along with Enron, whose stock plunged from $83 at the beginning of the year to under a dollar after its filing, his stakes dwindled in Newpower, which Enron helped finance, and i2 Technologies, which provides Internet solutions for business-to-business uses. Shares of Newpower have lost nearly all of their value, and i2's shares fell 85 percent last year.

In early 2001, Lay sold Enron shares on every business day, shares he acquired by exercising options. Cumulatively, he made a profit of $21 million on those sales. Enron's stock had fallen from a high of $90.75 to half that amount, $45.35, at the end of July, when Lay stopped selling shares. "The reason he stopped selling was that he thought the stock was going to go up," Bennett said earlier this month.

After turning down previous requests, Lay has agreed to testify Feb. 4 before the Senate Commerce Committee, which is investigating Enron's collapse, Silbert said on Sunday. In all, 10 congressional committees are investigating Enron, and the first hearings begin Thursday, before the Senate Governmental Affairs Committee and a subcommittee of the House Energy and Commerce Committee. The House hearing will focus on Arthur Andersen, Enron's auditor, which admitted last week that employees shredded Enron-related documents beginning in late October after the disclosure of a government investigation into Enron.