Risk & Compliance

Enron Creditors Sue Lay; Enron Sues Customers

Lenders want $70 million from former Enron CEO and his wife; meanwhile, Enron wants customers to pay up. Plus: More charges for Tyco's ex-counsel. ...
Stephen TaubFebruary 4, 2003

Former Enron chairman and chief executive Kenneth Lay and his wife, Linda, have been sued by creditors seeking to recover more than $70 million, according to the Associated Press, citing court papers.

The committee representing unsecured creditors in Enron’s Chapter 11 case filed the suit last Friday with the U.S. Bankruptcy Court in Manhattan, said the report.

In the year prior to the Houston energy trader’s Chapter 11 filing, Lay allegedly used Enron stock to repay loans he had received from the company, according to the AP’s account. The committee charged that “the tendering of Enron’s own stock to repay loans taken in cash was not a fair exchange for Enron,” the AP reported.

The committee also alleged that the Lays temporarily assigned their interest in two annuity contracts to Enron in exchange for $10 million in cash, according to the AP story. Trouble was, the annuities were only worth $4.7 million, the committee charged.

As a result, the creditors want to void and recover the transfers as fraudulent transfers under bankruptcy and state laws.

The committee reportedly alleged that “despite his knowledge of Enron’s deteriorating financial condition,” Lay continued to take enormous cash loans from Enron and repay them with overvalued stock. The committee is claiming that Lay had information that showed Enron was in “dire financial condition.”

In addition, the committee said Lay used Enron’s stock to repay more than $94 million in cash loans from May 3, 1999, through November 27, 2001. More than $74 million of the repayments occurred within the year before Enron’s bankruptcy filing, said the AP.

In a related story, the AP also reported Enron and some of its affiliates filed seven lawsuits in their Chapter 11 cases, seeking to collect more than $200 million, citing court papers.

One of the suits was filed against Public Utility District No. 1 of Snohomish County in Washington, which had agreed to buy wholesale power at a certain price from an Enron unit. The Enron companies charge that the county opted to end the parties’ contract early, which entitled the Enron companies to an early termination payment of $116 million due to a decline in forward market prices as compared with prices in the parties’ contract, according to the published account of the suit. The Enron entities are seeking $116 million.

In another suit, the Enron companies are trying to collect $13.4 million from Reliant Energy Services Inc. Apparently Enron had entered wholesale transactions to buy, sell, and exchange multiple commodities, but abruptly terminated the agreement just a few days before Enron’s bankruptcy filing.

The Enron companies also reportedly sued the City of Palo Alto, California, for a total of $48 million. And Enron Power Marketing sued GPU Service Inc. for $21.6 million in connection with the early termination of energy transactions following the Enron bankruptcy filings, said the AP. That related company also reportedly sued United Illuminating Co. and UIL Holdings Corp.

At least the lawyers are happy.

More Charges for Ex—Tyco Lawyer

Federal prosecutors have turned up the heat on Tyco International Ltd.’s former general counsel Mark Belnick, accusing him of stealing $12 million.

On Monday prosecutors added three charges against the 56-year-old, including a felony larceny charge stemming from a bonus he allegedly received in the form of $2 million in cash and 200,000 Tyco shares.

Belnick also is accused of failing to disclose a $2.5 million related-party transaction that resulted in a payment to a Tyco director, identified as Lord Michael Ashcroft. Ashcroft resigned from Tyco’s board last year, according to Manhattan District Attorney Robert Morgenthau, who unveiled the updated indictment at a press conference in New York.

The indictment supersedes a September indictment, which accused the onetime Tyco lawyer of hiding $14 million in loans to himself.

The speculation among some observers is that prosecutors may be trying to pressure Belnick—who once helped conduct the U.S. Senate probe into the Iran-Contra scandal—into helping them with their cases against former Tyco chief executive Dennis Kozlowski and ex—chief financial officer Mark Swartz. Kozlowski and Swartz were indicted for allegedly stealing more than $600 million through stock fraud and illegal compensation.

“The DA is looking at Belnick as a ticket to bigger fish at Tyco,” former prosecutor Jacob Frenkel told the wire service.

Belnick, free on $1 million bail, pleaded not guilty to the new charges after reportedly being led into the courtroom of State Supreme Court Justice Michael Obus with a raincoat covering handcuffs on his wrists.

Morgenthau admonished Belnick for not protecting shareholders, charging him with participating in a scheme to defraud the company. “The watchdog is in the chicken coop chasing the chickens,” he reportedly said.

According to accounts of an earlier Tyco filing, in 1998 Belnick began using no-interest Tyco loans to move from the New York suburbs to an apartment in the city. In 2001 he used Tyco loans to build a home in Park City, Utah, even though Tyco did not have a corporate office in that city. Belnick set up an office in the house, billing Tyco $1,600 per month for rent, according to the company.

SEC Probing SkillSoft

On Monday management at SkillSoft PLC said the company is being investigated by the Securities and Exchange Commission. The probe stems from SkillSoft’s November announcement that it would restate financials of SmartForce PLC from 1999 through June 2002.

SkillSoft said the investigation concerns SmartForce’s financial disclosure and accounting during that period, as well as compliance with rules governing reports required to be filed with the commission.

SkillSoft said it continues to cooperate with the SEC on this matter.

SkillSoft merged with a subsidiary of SmartForce PLC last September, with SmartForce officially being the acquirer. After the merger, SmartForce changed its name to SkillSoft PLC.

The merger was accounted for as a reverse acquisition, with SkillSoft as the acquirer.

It Pays to be Nice

Does it pay to be nice to your employees? Apparently, yes, according to Watson Wyatt’s Human Capital Index studies in Europe, the Asia-Pacific region, and North America.

The management consultancy concluded that companies with superior human capital practices can create more than double the shareholder value of companies with average human capital practices.

“The findings provide the first-ever documentation that the strong link between human capital practices and shareholder value creation stretches across several continents,” said Watson Wyatt in its report.

The HCI studies of companies in Europe, the Asia-Pacific area, and North America report on the impact of human capital practices on business performance. Their combined database includes more than 2,000 major companies globally and tracks shareholder performance from 1994 to 2002.

“While each regional study carries some cultural differences, the results demonstrate that great HR practices can be a true competitive advantage,” said J.P. Orbeta, global director of Watson Wyatt’s Human Capital practice, in a statement. “Now we have seen that superior human capital practices prevail, regardless of economic conditions or geographic location.”

The studies report that companies have better total returns to shareholders or growth in shareholder value if they have the following superior human capital practices:

  • Clear rewards and accountability. Watson Wyatt says a 16.5 percent to 21.5 percent increase is associated with such practices as broad-based stock ownership, paying above the market, and effective performance management.
  • Excellence in recruitment and retention. A 5.4 percent to 14.6 percent increase is associated with such practices as an effective recruiting process, a positive employer brand, and a focus on key skills retention.
  • A collegial, flexible workplace. A 9 percent to 21.5 percent increase is associated with such practices as employee input into how the work gets done, higher trust in senior management, and a lack of workplace hierarchy.
  • Communications integrity. A 2.6 percent to 7.1 percent increase is associated with such practices as effective use of employee surveys, sharing of strategy and financial data with employees, and employee input into decision-making.
  • Focused HR technology. A 4.2 percent to 6.5 percent increase is associated with such practices as using technology to improve service and accuracy or to cut costs.

On the other hand, Watson Wyatt warned companies to make prudent use of their resources.

The firm found that some HR practices actually had a negative effect. For example, a 14.5 percent to 33.9 percent decrease is associated with such practices as development training for career advancement, 360-degree feedback programs, and using HR technology for such softer goals as improved culture and/or communication.

“Great people management travels well,” points out Orbeta. “And it is a true source of competitive advantage.”

One caveat to the survey, however: Watson Wyatt provides HR and human capital consulting services to corporate clients.

Short Takes

  • Several days after Dynegy Inc. announced its second major restatement in three months, the energy company named Jim Horsch vice president of internal audit. Horsch will be responsible for assessing Dynegy’s system of internal controls and business-unit compliance with the policies and procedures of the company. He will report to CFO Nick Caruso.
  • American International Group Inc. said it will take an after-tax charge of $1.8 billion in the fourth quarter of 2002 related to an increase of general insurance net loss and loss adjustment reserves.