Enron’s private equity saga

The unexpected death of Enron founder Ken Lay has highlighted the degree to which private equity holdings played an important role in both his conviction and his company’s collapse. By Paul Fruchbom.

The death of Enron founder Ken Lay last week added a final, cheerless chapter to a tale already tinged with cheerlessness, tragedy, greed and scandal. Yet like so many other facets of American life these days, it was also a tale intertwined with the private equity industry.

From the Byzantine, off-balance sheet structures at the heart of Enron’s collapse to the evidence used by prosecutors in convicting Lay on multiple counts of conspiracy and fraud, private equity investments played a minor, yet important, role in one of the largest corporate scandals in American history.


Lay: a tarnished legacy

Two weeks ago, federal prosecutors filed a motion to seize $183 million worth of assets held by Lay and Jeffrey Skilling, his co-defendant and successor at the Houston-based energy concern. Though most of the assets belonged to Skilling—much of Lay’s net worth was tied up in Enron stock—one of Lay’s more notable holdings was $6.3 million in a private equity investment fund held by Goldman Sachs. Though the asset was never mentioned during Lay’s trial earlier this year, the investment reached its required seven-year maturation period this month. Lay’s death, however, has complicated the government’s efforts to seize his assets, including the Goldman Sachs account.

In court, prosecutors used Lay’s private equity holdings against him, disputing his contention that he sold Enron stock only as a last resort to cover other obligations. In one instance, government lawyers showed that in August 2001, when Lay sold Enron stock to settle margin calls, he also made approximately $1 million in private equity investments. Counterbalancing that picture, however, was a 2003 New York Times article that described how Lay began to sell and even abandon some private equity deals because he would not sell Enron shares in order to come up with the necessary capital.

Private equity investments were of course at the heart of Enron’s demise. The complicated, off-the-book partnerships engineered by chief financial officer Andrew Fastow were essentially private equity vehicles used to acquire underperforming Enron assets and shield the company’s losses. When those entities came under public scrutiny, the company unraveled.

Lay’s ties to the private equity industry don’t end there. During his criminal trial, Lay testified that he originally wanted to retire from Enron in order to work for a leading private equity firm. Even when Enron began to collapse and Lay’s plans changed, he still believed that private equity could provide a lifeline for his ailing company. According to numerous press reports at the time, Enron approached several parties, including The Blackstone Group and Clayton, Dubilier & Rice, about a possible investment in Enron.

Not all of the links between Enron and the private equity industry, however, have been dubious. Earlier this year, a consortium of private equity firms agreed to acquire pipeline operator Kinder Morgan, the company founded by former Enron president Richard Kinder, for $22 billion, the second largest private equity deal of all time.