Copyright (c) 2004, 
Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.THE COMPANY that wants money back from a deposed corporate leader needs to be skilled at squeezing blood from a stone.
This week's criminal indictment of Kenneth Lay, the founder and former chief executive of Enron Corp., undoubtedly will increase pressure on him to repay some of the millions he made running the scandal-ridden energy company. Enron gave Mr. Lay about $104 million in salary, bonus, stock awards, loan advances and other payments during the year prior to its December 2001 bankruptcy-court filing, the Houston company previously revealed in court documents. A Lay spokeswoman has said the filing "grossly overstated" the amount Mr. Lay actually realized. In any case, efforts to recover money from Mr. Lay have yet to succeed.
For instance, Enron creditors sued Mr. Lay and his wife in February 2003 to regain more than $70 million in transfers. The lawsuit alleged that he used overvalued Enron common stock to repay more than $94 million in loans he received from Enron between May 1999 and November 2001. The Lay spokeswoman declined comment when creditors filed suit. The case is still pending.
Enron creditors "want to get as much money as [they] can get out of him," one person familiar with the situation says. "The problem is his resources aren't as large as the claims" cited in the suit. Mr. Lay's spokeswoman didn't return calls yesterday.
Other major companies have found it equally tough to regain huge sums from their ousted leaders. "We still give fallen CEOs respect that's totally unwarranted," suggests Paul Lapides, director of the Corporate Governance Center at Kennesaw State University in Marietta, Ga.
That may be, but excessive deference doesn't seem to be the case at Conseco Inc. Former CEO Stephen C. Hilbert owes the insurance and financial-services giant about $240 million, including interest. The company initially guaranteed bank loans that he had taken to purchase stock; Conseco repaid those loans after seeking bankruptcy protection in 2002. (It emerged from bankruptcy last fall).
The Carmel, Ind., concern hired a Chicago lawyer to dun Mr. Hilbert, unleashed private investigators to sniff out his assets, moved to foreclose on the mortgage on his 25,500-square-foot baronial estate and filed a lawsuit in state court in Indiana naming his young children as defendants. The Conseco suit claims Mr. Hilbert is in default on his debt and fraudulently transferred more than $100 million in assets to his wife in an attempt to "avoid ever paying."
Mr. Hilbert has said that he doesn't owe a dime and that no transfers "were ever made to conceal assets." In a suit against Conseco filed last September in state court in Chicago, he contends a change-of-control provision in his loan documents essentially cancels his debts to Conseco. He subsequently brought an invasion-of-privacy suit against Conseco and Kroll Inc., a company that specializes in security and risk assessment. Kroll investigators have dug up records on Mr. Hilbert's ex-wives and bank accounts, among other things.
"We are still quite confident that at the end of the day, we'll be able to recover a substantial portion of the money he owes us," insists Reed Oslan, a litigator at Chicago law firm Kirkland & Ellis who represents Conseco. "Once I get a judgment, I can execute on his assets," such as the Indiana estate and his Kentucky racehorses, Mr. Oslan continues.
If Mr. Hilbert loses the court fight, "there will be appeals," vows Dan Byron, a senior partner at law firm Bingham McHale in Indianapolis. "An appeal could take two years," he adds.
It's a slightly less fractious tale at MCI Inc., the long-distance telephone giant formerly known as WorldCom Inc. WorldCom was founded by Bernard Ebbers, who became its CEO and now faces nine criminal charges arising out of a lengthy probe into its $11 billion accounting fraud. The fraud was the largest in U.S. corporate history and helped drive the company into Chapter 11 bankruptcy protection in 2002. The company emerged from bankruptcy earlier this year.
Mr. Ebbers pleaded not guilty to the three original charges in March, but his attorneys haven't commented on the additional charges, which a federal grand jury brought in late May.
Mr. Ebbers was ousted in the spring of 2002 largely because of controversy over $408 million that he had borrowed from the company. He agreed to a loan schedule under which he would repay the sum, plus interest, by 2007. In April 2003, he failed to deliver his initial payment of $25 million plus interest. The company declared he was in default on his debt.
Since his ouster, Mr. Ebbers has worked with MCI officials to sell assets he used as collateral to secure his loans. MCI, based in Ashburn, Va., collected about $70 million by selling his yacht- building business in Savannah, Ga., and two yachts. (He bought the shipyard after gradually trading up from a 46-foot yacht to a 132- footer that could be steered from a hot tub on deck.) MCI also got more than $45 million from the sale of his 145,000-acre Douglas Lake Ranch in British Columbia.
"We've received no payments from Mr. Ebbers other than the proceeds of the liquidation of the collateral," an MCI spokesman says.
This week, MCI and more than a dozen top executives settled with employees who had sued over losses in their retirement plans that were invested in company stock. The company and insurers will pay most of the $51 million settlement on behalf of MCI and former officials. Mr. Ebbers will pay as much as $4 million, according to the settlement.
And his dealings with his former employer may turn nasty. MCI intends to take "reasonable and prudent actions to collect on the [Ebbers] note," one person close to the situation says. "We're unsure about the prospects." MCI may soon sue Mr. Ebbers to recover the rest of his debt, another knowledgeable individual adds. An Ebbers attorney didn't return calls yesterday.
If MCI sues Mr. Ebbers, the telecom carrier may face the same legal bottleneck blocking Tyco International Ltd. from recouping money from L. Dennis Kozlowski, its highly compensated former CEO. Mr. Kozlowski, and Mark H. Swartz, the former chief financial officer, have been charged with looting more than $600 million from the Bermuda conglomerate. Both have denied wrongdoing. After the men stood trial on those charges, a judge declared a mistrial in April. Their retrial is set for next January.
A civil suit that Tyco brought against Mr. Kozlowski in September 2002 is on hold, awaiting completion of the criminal case. The litigation seeks to recover more than $100 million that Tyco claims he misappropriated. Mr. Kozlowski lost a motion to dismiss the case, now pending in a New Hampshire federal court.
The suit detailed an array of questionable conduct by the longtime Tyco chief. Among other things, the company alleged, Mr. Kozlowski billed Tyco for $1.1 million in personal expenses including jewelry, clothing, wine and flowers.
(See related articles: "The 'It Wasn't Me' Defense --- CEOs From Enron to Sotheby's Blame Scandals on Underlings; Too Busy for All the Details?" and "Former Enron CEO Makes His Case on Television" -- WSJ July 9, 2004)
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