"J.P. MORGAN OFFERS ADVICE TO KEN LAY"

Andrew Racz

It is approximately a hundred years since J.P. Morgan was the key witness in the so-called Untermeyer Commission, which was dealing with the banking situation in New York City.

Now a hundred years later, we have to start with the preliminary statement for Ken Lay, former chairman of Enron, who will take the stand in mid-April in the trial of what is probably going to go down as one of the key corporate confrontations in American history.

In his appeal to dismiss the amended complaint against the  
unsecured creditors, against Ken Lay and Linda Lay, attorney  
Martin S. Siegel of Brown Rudnick Berlack & Israeli LLP,  
of New York City, tel. (212) 704-0100,  
the statement starts as follows:  

"The amended complaint must be dismissed in its entirety because each of the claims therein is based on the unsupported premise that Enron or its creditors may (a) retroactively rewrite the fundamental terms of legitimate agreements that Enron entered with the Lays, and (b) revalue the consideration received by Enron in connection with this agreement with the benefit of hindsight, instead of at the time of the transaction."

I am a securities analyst. I practiced in America and in some other countries, and I respectfully state that the above statement would not pass the examination of the New York Society of Securities Analysts.

The Lays made arrangement to exchange periodically $4 million cash for registered stock of Enron. The value was adjusted dollar-to-dollar. However, the rapidity of the changes really created an ATM machine out of Enron, and in the year 2001 just before the bankruptcy in December, 2001, the Lays have obtained some $88 million cash for the sale at that time of $88 million worth of stocks. What was never stated was that the shares that the Lays tendered back to the company for the $88 million did not have to be reported to the SEC, thereby the world had no knowledge that the Lays were basically selling. Had the word gone out and the shares had to be registered, the collapse of Enron would have happened maybe almost a year earlier.

The basis of securities registration, if I'm correct, is full disclosure. There is no document whatsoever that one could see that these shares, exchanged for cash, avoided federal securities registration and thereby, in a loophole, bypassed federal securities laws.

Furthermore, the transactions were what I called integrated transactions. If you take the $88 million, periodic $4 million cash exchange for stock, we have to look at it in the realm of securities analysis that it is one transaction, and the transactions basically start at the very beginning of 2001 when the first such transaction occurred.

In other words, when Ken and Linda Lay received the first $4 million in cash and tendered the Enron shares, worth $4 million that day, it should have been stated that it was their intention to continue with the process and they were fully aware that as long as the process continued, the public, the investing public, the American public would know nothing about such transactions, and therefore the sale of about $100 million worth of shares was kept secret.

It is my considered opinion that this may be the only factual transaction that Mr. Ken Lay cannot deny. No ifs and buts - Ken Lay rescued $100M, rescued in secret, rescued knowingly and willingly. What it means is that on New Year's Eve 2000, when he decided to take $4 million in cash and pay a $4 million loan with Enron stock, he could do so by avoiding registration and thereby purposefully mislead the world.

It is not necessary to interview a whole series of people--accountants, lawyers, public relations officers--to prove whether certain files entered Mr. Lay's office or not, whether certain discussions happened or not. The proof that Mr. Lay avoided registering about $100 million worth of securities indicates that out of his stated net worth of let's say $400 million, $100 million was converted into cash without alerting at least his colleagues at Enron. He didn't have to discuss this item with anybody at Enron. We can have public relations officers come in and swear that Mr. Lay did not see figures. Mr. Lay has executed a plan which had only one purpose--convert to cash about $100 million worth of stock, without reporting to the SEC--and he did so not because he really believed that the stock would go up sharply.

What he knew was in his head. Who knew about it? We don't know. But what was in his head clearly indicates that he has seen something very bad in Enron, and as chairman of the board he did something that no other employee, stockholder, pension fund owner could do except the chairman himself. This is the secret of Ken Lay.

After four decades as a securities analyst, I remember vividly reading the Untermeyer Commission. As a matter of fact, prior to the hearings in Washington, J.P. Morgan was credited with saving the banking system. Untermeyer never questioned it. He asked about the process and Mr. Morgan did say that "Nobody sold at my suggestion, sir."

Untermeyer then questioned whether he had absolute power over New York's banking system. Morgan answered "Yes." Back to Untermeyer, "Do you think, Mr. Morgan, that in this great country of ours, is this state of affairs satisfactory?"

Morgan, after a long silence, said "Not entirely."

Morgan knew that Untermeyer won his point. The House of Morgan was broken up and Morgan left Washington with a broken heart.

I repeat that a hundred years later, in this great country of ours, the head of the seventh largest company can be permitted to take about $100 million in cash and pay it off with selling shares out of a company without reporting his intention and without reporting the actual event in a manner which our corporate laws require.

If Morgan were alive, he would understandably suggest, "Ken, tell the truth. This transaction was not correct, not entirely."

(Article 25- posted April 11, 2006)

e-mail: mlikar@aol.com

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