Stock Sales Still Sweet for Enron's Pai

The executive who profited most before Enron's collapse may owe his vast fortune -- and his very freedom -- to a major enemy.

Lou Pai lucked out because his marriage unraveledbefore Enron itself did. The former Enron executive,blamed for some of the company's biggest flops, sold$270 million worth of Enron stock to raise money foran expensive divorce settlement in the first half of2000. But Pai cashed out only after a friend of the familybegan to plot against him.

Although he burst into the spotlight after Enron'sbankruptcy -- and remains a target in shareholderlawsuits -- Pai has attracted less scrutiny than someof his former colleagues. His name resurfaced, however,during a recent civil trial carried out as thegovernment prepared criminal charges against former Enron CEO Jeffrey Skilling.

Last month, Theodore Hasson wona multimillion-dollar jury verdict against Pai's ex-wife -- but guaranteed, in part, by Pai himself -- for his role in shaping the couple's divorce settlement. Pai's former wife, Lanna, secretly hired Hasson to evaluate her husband's real net worth and devise a scheme that would leave her with a fair share of his estate.

Pai, who was never close to Hasson himself, remained oblivious to the plot for a while. But Lanna Pai apparently relied on Hasson for a lot.

"The friendship between Lanna Pai and her children and the Hasson family became closer as the marriage between Lanna Pai and Lou Pai deteriorated and disintegrated," Hasson's complaint states. The Hassons "provided support, sympathy, encouragement and friendship to Lanna Pai and her children during this disastrous and difficult time."

Meanwhile, Hasson spent months working behind the scenes on astrategy that led Pai to sell tons of Enron stock andsplit the proceeds with his first wife. Ascompensation, Hasson expected 10% of LannaPai's settlement. According to court documents,however, Pai learned of Hasson's involvement andpushed his ex-wife to deny Hasson compensation.

Hasson then sued Lanna Pai, naming her husband as a co-defendant, in an effort to recover the fee he was supposedly promised.

While officially cleared of tortious interference in the case, Pai agreed in advance to pay up to $10 million of any judgment that went in Hasson's favor. The jury ruled that a contract did, in fact, exist between Lanna Pai and Hasson. Pai's attorney, Murray Fogler, stressed that no formal judgment has been entered and calls the case "a long way from being over." But Hasson's own attorney, Jim Moriarty, says his client has already won the right to $14 million -- plus $2 million interest -- for helping Lanna Pai.

To be sure, neither Pai stands to go broke payingthe tab.

Moriarty says that Lanna Pai walked away from hermarriage -- wrecked by Pai's affair with a toplessdancer -- with "north of $140 million." But Paihimself escaped with even more. He has his ownnine-figure fortune -- and a decent excuse for thetimely stock sales that created it.

"The stock sales relate to the divorce," Foglersaid. "They occurred in the first five months of 2000.The divorce was final in August of 2000. ... All of that preceded the problems" at Enron.

'The Sting'

Pai scored his big stock awards for leading two ofEnron's most disastrous business ventures.

Rising to power beside Skilling, Pailanded the top job at Enron Energy Services in 1997.Enron touted the new unit, which was designed to sellelectricity to retail customers in deregulatedmarkets, as a powerful growth vehicle for the company.But the division never really took off.

In a deposition for Hasson's case, Pai admittedthat EES was losing money and, therefore, lessprofitable than "just about all" of Enron'sbusinesses. A memo penned by a former Enron manager, cited two years ago by The Washington Post, goes a step further byclaiming that EES concealed nine-figure trading lossesduring Pai's last full year at the helm.

As it turns out, customers had little interest inshopping for new power providers when electricity wasalready cheap. And Enron couldn't necessarily makemoney off the deals anyway.

Instead, insiders later told the media, EES simply pretended to besuccessful. According to Dow Jones,the company even stole a plot from Hollywood to wininvestors over. In an operation dubbed "The Sting," the Post reported, Enron built a slick new tradingfloor and crowded it with secretaries -- posing astraders -- to reassure analysts who paid a visit in1998.

"They put maps on the walls to indicate more washappening than it really was," Barry Steinhart, aformer EES employee, told Dow Jones three monthsafter Enron tumbled into bankruptcy. "I was told thatthis was going to be a scene right out of TheSting."

Mike Regala, a former vice president of thedivision, corroborated the story.

"Funny thing is, there were less than two dealssigned," Regala told Dow Jones. "This is whatblew my mind."

Yet another division employee said that Enron'stop executives -- including Pai -- were involved inthe scheme. The following year, court documents claim,Pai carried out his first big stock sales. But thosetransactions, which generated $1.6 million in early1999, would look downright puny later on.

The Dancer

By the summer of 1999, when former Enron financechief Andrew Fastow hatched the now infamous LJMpartnerships that would later drag Enron down, Lanna Paihad finally concluded that her marriage was over.

Pipe Dreams: Greed, Ego and the Death of Enron, a tell-all book by Texas reporter Robert Bryce, portrays Pai as a man obsessed with money andstrippers -- "but not necessarily in that order."Apparently, however, Pai managed to hide only one ofhis passions from his ex-wife.

"The guy lived very modestly ... until he startedcashing in stock in 2000," Moriarty said. "He'd alwaystake more stock and less cash because he was trying toconceal his wealth from his wife."

Lanna Pai apparently knew more about her husband'ssex life. According to Hasson's complaint, the pairultimately parted over Pai's long, "sordid affair"with a topless dancer who gave birth to Pai'sillegitimate child. Lanna Pai ultimately gave up onher husband and set out to capture half his fortuneinstead.

"Hasson and Lanna Pai agreed that their strategy would be 'tough' or 'hard' but 'fair,'" Hasson's complaint states. "Hasson agreed ... to wear whatever 'hat' Lanna Pai asked Hasson to wear in achieving the ultimate goal of the best property division and settlement possible."

Pai himself was moving on as well. He created NewPower, another risky Enron venture, near the end of1999. That company, later propped up by a shakyfinancing vehicle, would play a material role inEnron's demise.

Shortly after launching New Power, Pai went on tosell more stock than even former Enron CEO KennethLay. Lanna Pai, coached by Hasson, had just persuadedher husband to cash in the options he'd been hoardingfor so long.

The Fortune

With his first wife paid off -- and his own bankaccount bulging -- Pai quickly tied the knot with hisfavorite nightclub dancer.

That marriage, carried out just four months afterPai finished cashing in, coincided with yet anotherunion. According to the Powers Report, a scathingevaluation of Enron's self-dealing, New Power hookedinto Fastow's web of financial partnerships inSeptember 2000. The company, dubbed Pai's"brainchild" by the Seattle Post-Intelligencerin late 2001, also offered shares to Enron executivesas Pai headed up to the alter. (Fastow pleaded guiltyto fraud in January and agreed to testify againstother top execs at Enron.)

Pai himself snagged an even better deal.

"I received restricted shares," Pai explained in adeposition for Hasson's case. "Approximately 2 millionwas associated with my working and developing NewPower ... and approximately 500,000 was a result of myinvesting in the company. ...I paid approximately $10"a share.

New Power also awarded Fastow's LJM2 partnership24 million shares of the cheap stock in exchange forso-called hedging support from a new financingvehicle known as Raptor III. In a clear detour from accounting rules,however, Raptor III's creditworthiness dependedentirely on the value of New Power's stock.

Nevertheless, the execs behind the deal struck itrich almost immediately.

LJM2 "received a rate of return of $39.5 millionin only one week," the Powers report states. "LJM2calculated its internal rate of return on thisdistribution as 2,500%."

Fastow and friends cashed in big on New Power'sfirst day of trading. New Power closed at $27 a share,nearly triple what LJM2 had paid, allowing thepartnership to recoup its mandatory investment andenter into a second transaction that brought stillmore profits and triggered a $370 million accountinggain for Enron itself.

But other investors were doomed.

"By mid-November, New Power stock was tradingbelow $10 per share," the Powers Report notes. "RaptorIII's assets had therefore declined substantially invalue, and its obligation to Enron had increased. As aresult, Raptor III also had negative credit capacity."

Enron bought time with temporary fixes for a fewmore quarters. But accounting maneuvers couldn't helpNew Power's actual business -- or lack thereof. Enronhad banked on deregulation to create amultibillion-dollar retail power market that nevermaterialized. The California power crisis, now largelyblamed on Enron, actually slowed deregulation instead.

Pai left Enron shortly after California's largestutility -- rocked by soaring power prices -- filed forbankruptcy in the spring of 2001. He stepped down aschairman of New Power a few months later.

When Enron spiraled into bankruptcy in late 2001,Pai raised eyebrows because of his giant insidersales. He has long since faded into the background,however, even as his former colleagues fight offcharges and continue to capture headlines. The Houston Chronicle actually portrayed Pai as abit of a victim when it took a close look at him inthe months after Enron's collapse.

Specifically, the newspaper pointed out that Paihad lost millions of dollars on New Power stock --which he held all the way down -- even as he sold hisEnron shares.

"Those amounts are small compared to the sums hecashed out in 2000 and 2001," the Chronicleconceded. "But they do leave Pai among the ranks ofinvestors stung by the Enron legacy."

Some viewed Pai's investment in New Power as ashow of faith in the company. But Moriarty suggestsotherwise. Through his investment in New Power,Moriarty said, Pai had found a new way to hide hisreal net worth from his first wife.

"He had 2 or 3 million shares he didn't tell herabout," Moriarty stated.

If so, Pai's strategy obviously backfired in theend. But he still barely got singed, relativelyspeaking. He owns, among other things, an upscale Houston residence and ranches in Colorado and Texas. His second wife, Melanie, nowmanages racehorses in a thriving new career.

Pai's ex-wife isn't exactly hurting, either.According to Hasson's complaint, Lanna Pai beganspending millions of dollars on real estate --particularly in Hawaii -- even before shescored her formal divorce settlement. She alsodemanded an extra $5 million toease the "mental and emotional anguish, embarrassmentand humiliation" caused by Pai's affair.

To be sure, all the involved parties fared a lotbetter than ordinary shareholders.

"The market value of Enron stock has declinedsignificantly since May of 2000, when Lou Pai made hislast sale for purposes of making distributions to Lanna Pai," Hasson's complaint states. "Hasson'sefforts saved Lanna Pai millions of dollars by ...getting Lou Pai to exercise stock options and sellEnron stock, at high prices, and by securing cashdistributions to Pai based on the sale s."

According to Moriarty, Pai no longer works for aliving. He severed all ties with Enron just threemonths before Enron collapsed, destroying the dreams-- and the fortunes -- of so many.

As originally published, this story contained an error. Please see Corrections and Clarifications.

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