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USA Today, July 9, 2004

How Lay sold stock kept public in the dark

By Matt Krantz, USA TODAY

Ken Lay's hyperactive stock selling in 2001 has taken center stage in the government's suit against the disgraced former leader and head cheerleader of Enron (ENRNQ).

The debate over whether Lay was cashing in on inside knowledge of Enron's impending doom, as prosecutors claim, or whether he was simply selling to meet margin calls, as he claims, could be the X-factor that determines whether he is determined a culprit or victim of the fraud.

Lay did have great timing, selling well before the worst of the scandal unfolded. During the months before Enron filed for Chapter 11 bankruptcy-court protection on Dec. 2, 2001, Lay sold 71% of his stock in 287 transactions privately or in the open market, according to Kevin Schwenger at Thomson Financial. The Securities and Exchange Commission is seeking the return of $90 million it says Lay reaped from stock sales that year.

Adding to the intrigue, most of those proceeds, $70.1 million, resulted from private sales in which Enron bought the shares from Lay. That allowed Enron and Lay to avoid disclosing the transactions to investors until February 2002.

The first such private sale, in February 2001, allowed Lay to unload shares at $78.79 each, reaping more than $4 million in proceeds, Thomson says. The shares were worth just 60 cents each at the end of the year. If he had sold on the open market, investors could have known as early as March 2001.

According to the SEC complaint, Lay was conducting the private sales while telling Enron investors, employees and debt-rating agencies that the company was strong and that the stock price could return to the $70s or $80s.

But suspicious as the stock sales may seem, Lay says there was nothing underhanded. During his press conference Thursday, Lay said he sold stock only to meet loan margin calls that forced him to cover the dwindling value of Enron stock he pledged as collateral. "I sold as little as possible," he says.

That may sound plausible, but Steven Huddart, professor of accounting at Penn State University, says the explanation ignores the fact that by conducting the sales privately, Lay deprived the public of an important signal of potential problems at company: heavy selling of stock by a CEO.

"The complaint is pretty damning," Huddart says.

Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 863-0048
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