When the wild ride was over, Pai emerged with hardly a scratch, awash in cash and real estate. The company crashed.
The youngest son of an internationally renowned aeronautics professor, Pai worked as an economist for the federal government for several years in the 1970s -- including a stint at the Securities and Exchange Commission -- before moving to Texas to seek his fortune in the energy field. In 1987 he joined Enron, where he soon distinguished himself managing a trading division that bought and sold natural gas.
In many ways, Pai was a perfect fit with Enron's emerging shoot-the-moon corporate culture. He was an enthusiastic proponent of deregulation and free markets. He was an idea man rather than a detail grunt, a high priest of high concept rather than a number cruncher, a rarefied manager who wasn't known for closely scrutinizing contracts or their underlying financial assumptions. He was the sort of visionary Skilling needed to help transform Enron from a stodgy old-style energy company, saddled with sluggish assets such as power plants and pipelines, into a frenzied cash machine that would own little but trade in just about everything, from water to electricity to bandwidth.
In 1997, Pai and Skilling created Enron Energy Services, a subsidiary designed to compete with local utilities selling electricity and natural gas. With Pai at the helm (where he was soon joined by vice-chairman Thomas White, now President George W. Bush's Secretary of the Army), the division got off to a rocky start, dropping $15 million in a failed effort to woo consumers in California's deregulated market. By concentrating on winning major industrial and commercial clients, though, the division was able to report an operating profit of $165 million on sales of $4.6 billion in 2000.
Yet Enron's critics and whistleblowers say the profits were a sham, the result of accounting legerdemain that allowed the company to report projected earnings from its contracts as current revenues. Since the division's assumptions about future energy prices tended to be overly optimistic, many of the "lucrative" contracts EES landed with companies such as JC Penney might actually end up costing Enron a great deal of money. Last year, as the conglomerate was lurching toward bankruptcy, one executive fired off a memo to chairman Kenneth Lay warning that EES might have overstated its financial position by hundreds of millions of dollars.
By that time, though, Pai was no longer running EES. Late in 1999, he launched NewPower Holdings, a company spun off from EES in which Enron retained a 44 percent stake. NewPower aimed to forge a new path to the marketplace: online energy sales to consumers. Despite an impressive array of institutional investors and costly alliances with America Online and IBM, the venture stalled out trying to negotiate the hurdles of volatile energy prices and a complex regulatory climate. Within two years, Enron had racked up close to $200 million in writeoffs from NewPower. On paper, one of the biggest individual losers was Pai himself, who'd been granted more than two million shares of stock in the new company, valued at $8 million, only to see them drop precipitously in value in the months that followed.
But Pai's tanking NewPower stock was a minor jolt compared to the enormous windfall he reaped from sales of his Enron shares. In addition to the generous stock options he received, Pai reportedly converted an equity stake in EES into Enron stock. Between early 1999 and the summer of 2001, when he retired from the company, he unloaded his portfolio for $353 million. Most of his shares were sold while the stock was soaring to new highs, between $65 and $80 a share; the price had dropped to $50 by the time he finished. Five months later, the stock had sunk to under a dollar, and Enron collapsed.
Pai has said that his stock sales were prompted by his 2000 divorce from his first wife, Lanna Pai, and did not violate insider trading rules. (Pai has since remarried; according to press reports, his current wife, Melanie Miller, is a former stripper who has been in a relationship with Pai for the past ten years.) His lawyers have maintained that Pai was unaware of the fraudulent accounting practices that allowed Enron to hide debt and inflate profitability.
Yet Pai's chief contributions to the company, EES and NewPower, were among the loss leaders that helped to bring Enron down. And Pai's critics are skeptical of his claims of ignorance in light of NewPower's relationship to one of the offshore partnerships managed by Enron CFO Andrew Fastow. The complex partnerships were one of the principal ways Enron concealed debt from shareholders; in essence, Enron sold unprofitable operations to partnerships that were capitalized with Enron stock, allowing the parent company to report the sale as income, the loan of stock as an asset -- and avoid reporting the debt on its own balance sheet. One of Fastow's partnerships, LJM2, invested $50 million in NewPower in 2000 in exchange for NewPower stock, some of which was then used to help fund another partnership.
Yet even if Pai knows more about the partnerships than he has admitted, angry shareholders may not be able to recover damages from him. He is one of numerous Enron executives named in dozens of shareholder lawsuits, but his position as head of various subsidiary companies could make him an elusive target.
"I'm not sure I know of any cases where there has been actual recovery of insider profits in a case brought by shareholders," says Philadelphia attorney Carole Broderick, who is representing one group of shareholders. In Pai's case, she adds, the plaintiffs will have to show not only knowledge of fraudulent activities, but also a direct link to misrepresentations about the stock.
"You're not liable, under the securities laws, simply for knowing what was going on," Broderick explains. "You have to have been a participant in the making of the false statements. [Pai] is some steps away from the corporate financial statements. Knowing is not a standard of liability, or there would be lots of Enron employees in trouble."
