By William D. Cohan
It’s August. It’s hot. The airwaves have been dominated by stories about the buffoons in Washington trying desperately to avoid defaulting on the nation’s $14 trillion in debt and S&P deciding to downgrade the country’s AAA credit rating for the first time ever.
What better time for Westar Energy, a Kansas-based utility, to announce the unsatisfying news that former CEO David Wittig had just settled a long-standing financial arbitration against the company for $36 million in cash, plus $2.7 million in stock and another $3.1 million to cover his legal expenses.
The settlement represents a total victory for Wittig, who had previously been convicted in federal court – along with Douglas Lake, his number two executive -- by a Kansas jury on charges of essentially “looting” Westar for their own personal benefit, although the Tenth Circuit Court of Appeals later overturned the convictions of both men. The case against Wittig and Lake became known as the Enron of Kansas.
Wittig, a former Salomon Brothers and Kidder Peabody M&A banker, was facing up to 18 years in prison on the federal conviction, a prison sentence that he would have served along with the up to four years he was serving as a result of his – entirely separate – conviction for bank fraud. (Wittig ended up spending some 21 months in prison in Sandstone, Minnesota.)
Word of Wittig’s settlement with Westar followed the May news that Westar had settled for $26.3 million a similar dispute with Lake, who used to work with Wittig at Salomon Brothers and who then worked at Bear Stearns. Lake was facing 15 years in prison before his conviction was overturned. (The good news in all this, Westar claimed, was that it had accrued $90 million as a potential payment to Wittig and Lake and so has about $22 million it can reverse.)
Only in America can a hot shot investment banker like Wittig learn the tricks of the trade in New York (Fifth Avenue apartment, Hamptons beach house, Cuban cigars and French cuff shirts), return home to Kansas to become a senior M&A executive at what was a sleepy utility, Western Resources, and then do everything in his power to turn it into Enron-lite. Wittig launched the first hostile takeover in the utility industry’s history (unsuccessful), launched a hostile takeover of security company ADT in a bid to diversity Westar (unsuccessful but a big payday for Wittig’s company when Tyco bought ADT), made the acquisition of other alarm companies (disastrous) and then attempted the ultimate M&A chicanery of all by trying to split the company in two and merge the utility with one in New Mexico, leaving himself in charge of the unregulated part of the business.
The whole thing blew up after Wittig’s aggressive behavior and his high lifestyle in Topeka – he bought and renovated for millions of dollars the former governor Alf Landon’s mansion – rubbed people the wrong way. He also ran into trouble when he was indicted for bank fraud, after he agreed to make a $1.5 million loan to a local bank president without disclosing the loan to regulators. The bank president in turn increased Wittig’s line of credit from the bank by $1.5 million.
Soon thereafter, the Westar board hired a New York law firm – and paid it $9 million – to go through chapter and verse of Wittig’s behavior at the company, uncovering instance after instance where he allegedly used company resources for his own benefit. Among the incidents were trips on the corporate jet to the Hamptons and to the Final Four to watch his beloved Kansas Jayhawks play, as well as paying himself unauthorized bonuses.
The report led to the indictment of Wittig and Lake on federal charges of, essentially, looting the company. Their first trial ended in a mistrial. They were convicted in the second trial only to have the conviction overturned on appeal. The U.S. Attorney was all set to try Wittig and Lake a third time when the government decided to drop the case against the two men once and for all in August 2010, following a Supreme Court decision that would have made the case more difficult to win.
That’s when Wittig and Lake resumed their longstanding arbitration case – it had been stayed pending the outcome of the federal trials -- in which they both claimed Westar owed them millions of dollars in contractual payments plus legal expenses.
The moral of their story seems to be: Bad behavior does pay, and pay well.
(William D. Cohan is a Bloomberg View columnist.)