Bear Left!

The Lay Family Charity Began at Work
Tim Francis-Wright

Many in the media have reported on the good works that Ken Lay, the former CEO of Enron, did in Houston. He and his family were major patrons of the Houston Symphony, Ballet, and Zoo. They gave generously to their local church. Many of these donations were made through the family's charitable foundation, which held over $50,000,000 of Enron stock at the end of 2000. Unless it sold this stock in 2001, the foundation's assets are now radically diminished.

Despite the sorry return on assets in 2001, none of the actions of the foundation appear to be illegal on their face. It made sufficient donations—to legitimate charities—in each of the last three years to maintain its status as a private foundation. Several of its actions, however, show that the foundation was sometimes no more than a way to do the bidding of Enron.

The tax returns of the Linda and Ken Lay Family Foundation, like those of most American charities, are available online at www.guidestar.org. (Here are the 2000 and 1999 returns.) Like many private foundations, the Linda and Ken Lay Family Foundation is not run by outside managers. Its seven directors include both Linda and Ken Lay, as well as three of Ken Lay's children from a previous marriage.

The only contributor in recent years to the foundation has been Kenneth Lay, who has contributed large amounts of Enron stock. In 1999, he contributed $6,046,095 in stock. In 2000, he contributed $14,542,683 in stock. Although he paid less than $3,000,000 for these shares, he could (and presumably did) enjoy tax deductions for the full value of over $20,000,000 without incurring any capital gains taxes. Unlike many public charities, which routinely sell donated stock upon receipt, the foundation has not sold Enron stock until it needed to make cash donations. At the end of 2000, the foundation had $51,753,867, of which $48,186,482 —over 93% of its assets— was in shares of Enron Corporation.

The policy of holding onto its Enron stock served both the foundation and Ken Lay quite well, but failed spectacularly in 2001. Because shares in Enron were growing faster than many alternative investments, the foundation's assets grew quickly. In theory, Enron shareholders benefitted from having a large shareholder that was unlikely to sell large numbers of shares. In practice, the foundation owned less than 0.5% of the corporation's outstanding shares, so its holdings probably had little impact on the share price. But the foundation's policies certainly benefitted Ken Lay. By donating significant amounts of Enron stock to his foundation, he could take tax deductions equal to the market value of Enron stock that he had bought cheaply. And he could do this without having to report open market sales of Enron stock to the SEC.

While directors of any nonprofit organization must act in the best interests of the organization, in retrospect the Lay family—the directors of the Lay Family Foundation—got greedy. Not content to diversity almost $50 million in Enron stock, the family gambled that the stock would increase in value. Even if the directors thought that Enron stock was a good long-term investment, they knew that the foundation had committed to make almost $10,000,000 in donations between 2001 and 2005, so they were also gambling that the stock was an excellent short-term investment. A basic element in financial planning is knowing when to take risks. Making short-term stock market investments in anticipation of large cash outflows is a huge risk.

The Donations

In 1999, the Lay Family Foundation made donations of $1,265,000. Of this amount, much went to local charities in the Houston area. Lesser amounts were to charities in Aspen, or to national charities like the American Cancer Society. But some of the donations stand out for their political and commercial impact. The donations in 1999 included:

• $70,000 to America's Promise, the charity then run by Colin Powell. At the time, Powell was a potential Republican candidate for president.
• $48,000 to the Horatio Alger Society, which named Lay as its man of the year for 1998.
• $52,650 to the MD Anderson Cancer Center. As a Bloomberg article from November 2000 noted, the president of the Anderson Center is John Mendelsohn, who is a member of the Enron Board of Directors and sits on its audit committee. The bulk of the donation this year went to the "Bush Endowment for Innovative Cancer Research." The Bush family certainly noticed this donation from a longtime friend of the family.
• $15,000 to Resources for the Future, a market-oriented environmental think tank in Washington. The interesting donations to this group would start in 2001.

In 2000, the foundation dramatically increased its donations, spurred by a significant increase in the value of its Enron stock. It gave a total of $3,543,342, to a slew of worthy causes. But some of the causes had significant benefits to Enron and to Ken Lay. The donations in 2000 included:

• $996,158 to Rice University. This was to be the first of three installments of a $3,000,000 gift to fund the Ken Lay Center for the Study of Markets in Transition. Presumably, Chapter 11 of the Bankruptcy Code was not the sort of transition that Ken Lay had in mind. Rice University and Enron have enjoyed a particularly symbiotic relationship. In fact, in the spring semester of 2001, the ethics professor from the Jones School of Business took a sabbatical to work at Enron. The Rice web site is silent about the sort of ethics he found there.
• $70,000 to the Horatio Alger Foundation.
• $28,900 to the Barbara Bush Foundation for Family Literacy. Barbara Bush, of course, is the wife of former president George H. W. Bush and the mother of George W. Bush, both of whom counted on Ken Lay as a major contributor.
• $55,500 for the MD Anderson Cancer Center.
• $15,000 for Resources for the Future.
• $60,000 to the National Center for Policy Alternatives, a conservative think tank in Washington that espouses deregulation and lower taxes. In a case of logrolling from beyond the grave, the NCPA web site this week argues that the tax code contributed to Enron's collapse because it encourages companies to take on too much debt and pay too little in dividends. Perhaps without the donation, the NCPA would have echoed the safe line that Enron collapsed because its managers were crooks.

The foundation included in its 2000 tax return a schedule of donations that it had committed to making in future years. These donations included over $4 million for 2001, almost $2.5 million for 2002; over $1 million for each of 2003 and 2004; and $320,000 for 2005. (At the end of 2000, the foundation had less than $4,000,000 of assets other than Enron stock.) Two series of planned donations stick out. The first is $1,000,000 in each of 2001 and 2002 to finish the funding of the Ken Lay Center at Rice University.

The second set of striking donations is a $500,000 for each of 2001 through 2004 to Resources for the Future, an organization in Washington. The Washington Post reported last month that the foundation endowed a research chair at RFF, and that Ken Lay joined the RFF board of directors in April 2000.

The RFF board is an interesting set of characters. It includes several well-known economists (William Nordhaus of Yale, Robert Solow of MIT, and Joseph Stiglitz of Stanford). It includes two executives of natural gas firms (both Ken Lay of Enron and Catherine Abbott of NiSource). It also includes Robert Grady, the managing director of the Carlyle Group. RFF clearly enjoys being well-connected. What makes RFF different from most environmental group is its desire to be both "market-oriented" and "balanced." It was therefore in the strange position of supporting the idea of the Kyoto protocol, but advocating large changes to its emissions-trading scheme.

Enron and other natural gas traders are attracted to environmental groups in general because natural gas production can be more environmentally benign than oil and coal production. In theory, natural gas combustion creates only CO₂ as a greenhouse gas. But natural gas is primarily methane (CH₄), a more potent greenhouse gas, so any gas leaks reduce the environmental benefits of natural gas.

Many notorious polluters have often donated to groups like RFF, out of a combination of actual philanthropy, misdirection, and perhaps even guilt. Certainly the stances that RFF has taken with regards to cost-benefit analyses make it friendlier to corporations than groups like Greenpeace of the Earth Island Institute. In 1994, for example, its donors included Amoco, Atlantic Richfield, Chevron, Chrysler, DuPont, Ford, Occidental Petroleum, Texaco, Union Carbide, Unocal, and Weyerhauser, all major polluters.

Ken Lay had another reason to promote his links to RFF. Enron wanted to be a major player in the trading of emissions credits. To make emissions credits into a large and thriving business, it needed to get the federal government to stop regulating emissions at individual smokestacks and instead start allowing wholesale trading of emissions between companies. Major support of an influential organization like RFF was a good way to do this.

It would be unfair to argue that Ken and Linda Lay are anti-environment: indeed, their foundation made a total commitment of $730,000 to the Aspen Center for Environmental Studies to pay for a family field study site. But the donation to RFF does show that their environmentalism is tempered by cost-benefits analyses and controlled, ultimately, by corporate donors.

Over the past two years, Ken and Linda Lay saved taxes on up to $20,000,000 of income by contributing Enron stock that cost them under $3,000,000 to a foundation that they and their family controlled. Large chunks of the donations from that foundation went to a business school with deep and symbiotic ties to Enron; to a think tank predisposed to support Enron's business; and to pet charities of both an Enron board member and key Republicans. Who says charity has to begin at home?