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Lay's riches-to-rags reversal parallels Enron's unraveling

For Kenneth L. Lay, it has been a true reversal of fortune - and not just in the courtroom.

Once at the pinnacle of Houston's financial and political elite with a fortune worth as much as $400-million, Lay, the former chairman of Enron Corp., is now facing financial ruin.

While he has talked about his shrinking wealth since Enron's collapse, he has managed to keep up appearances, continuing to live in a full-floor apartment in the city's affluent River Oaks section.

But already, according to personal financial records obtained by the New York Times, Lay has fallen out of the ranks of the city's millionaires, with a stated net worth of less than $650,000.

And that financial assessment is probably on the optimistic side. His assets, for example, include $1.9-million held in a trust that is almost certain to be eaten up by legal fees.

In addition, Lay, 63, faces potential liability from lawsuits that were filed against him by shareholders and others after Enron's collapse that almost certainly would force him into personal bankruptcy.

Lay also may be forced to forfeit his remaining home, along with some other assets, if he is convicted in the criminal fraud trial now taking place in Houston.

Not everyone involved in the Enron debacle, of course, has fared as poorly as Lay.

Jeffrey K. Skilling, his co-defendant and onetime successor as chief executive, emerged from the Enron collapse in far stronger financial shape than his old boss, primarily because his stock was not encumbered by loans as Lay's was, and he cashed out a big chunk of his holdings before Enron's troubles were first exposed.

Other high-level executives who were never charged with wrongdoing - including Lou L. Pai, who once ran Enron's retail operations, and Rebecca Mark-Jusbasche, the former head of its international effort - left the company with tens and hundreds of millions of dollars, which they have retained.

Lay's failing fortune underscores a recurrent - but often overlooked - theme in recent corporate collapses.

Despite the public image of corporate chieftains at scandal-plagued companies escaping the debacles with their pockets stuffed with cash, several have been pushed far down the road toward insolvency long before a civil or criminal judgment is entered against them.

In a number of cases that is because the chief executives were as reckless with their personal finances as they were with the management of their companies.

Bernard J. Ebbers at WorldCom and John J. Rigas at Adelphia Communications, both convicted of fraud, borrowed hundreds of millions of dollars from their businesses to purchase their own companies' stock.

When the companies collapsed into bankruptcy, those shares were worthless, but the executives still owed the money.

Lay, for somewhat different reasons, finds himself in a similar situation.

As a result, analysts said, Lay's finances appear tattered beyond repair, regardless of the outcome of his criminal trial. And that is just the way it should be, lawyers for shareholders contend.

"If the message that emerges after WorldCom and Enron is that the executives who preside over corporate fraud are ruined, that is a message I support 100 percent," said Sean Coffey, a shareholder lawyer.

Michael W. Ramsey, Lay's lead criminal lawyer, said his client's financial collapse underscores that his sales of Enron stock in the company's waning days were not motivated by knowledge that it was failing.

"Ken Lay put his money where his mouth was," Ramsey said. "He held as many shares of Enron stock as he possibly could. He never sold, other than by forced sale, which led to his financial ruin.

Ken was a company man to the end. And he suffered all the financial consequences of that decision, along with all the other employees, who he has deep sympathy for because he shared their fate."

To be sure, Lay has sufficient cash to cling to a few scattered vestiges of his old lifestyle.

He and his wife, Linda, still occupy the same apartment in an expensive condominium building in the wealthy River Oaks section of Houston. The apartment, however, cannot be sold because it is subject to forfeiture in the criminal case.

On days when he is not on trial, where he is accused of conspiring to defraud investors in the company he helped build, Lay spends time at the exclusive River Oaks Country Club, takes walks past the finely manicured lawns of his neighborhood and dines at some of his favorite restaurants, including La Griglia, a bustling Italian place known for its power lunch clientele.

But today, Lay has expenses that were never part of his previous life.

He has spent $20-million of Enron insurance proceeds for his defense, including money supplied to Carrington, Coleman, Sloman & Blumenthal in Dallas, which is defending his civil case and providing legal support in the criminal case, according to one lawyer involved with the case.

In addition, Lay has spent $5-million of his own money and has $4-million in unpaid legal fees. He has paid $2.7-million of the $3-million fee his Houston defense lawyers, Michael W. Ramsey and George M. Secrest, are charging. Lay also agreed to pay Carrington, Coleman hourly for court time.

In all, Lay already has spent $25-million on his defense and expects to spend close to $30-million by the time it is all over, the lawyer said.

The asset picture is not pretty. In early 2001, the year his company collapsed, Lay owned marketable securities of $339-million. Today he possesses less than $1,500, according to the records. His current assets - excluding the note receivable for $1.9-million - are just under $220,000. His retirement benefits, once worth $68-million, have fallen to $3.5-million.

Almost half of his total assets, or $4.2-million, is in real estate - mostly his apartment.

All told, Lay has $10.6-million in assets, the documents show, weighed against current liabilities of $9-million, plus an additional $930,000 in longer-term liabilities.

In the end, legal analysts said that the collapse of Lay's personal finances seemed a natural result of the way his wealth was formed: through the growth of a company that proved to be a management debacle.

"We shouldn't feel guilty for enjoying the fact that these people are no longer wealthy," said Stephen Meagher, a former federal prosecutor who is now a lawyer in private practice in San Francisco.

"I find it hard to feel bad for Ken Lay. Many, many other people lost their wealth and were put into poverty by the Enron collapse. But whether he is guilty is a question for a jury."