As lawyers for Enron Corp.'s former leaders prepare to start their defense next week, another potentially more dangerous trial looms for founder Kenneth L. Lay.
Lay is scheduled to be tried on four separate criminal charges related to personal bank loans, with the case opening as soon as the jury begins deliberations in the current trial, in which both Lay and former Enron chief executive Jeffrey K. Skilling are charged with fraud in Enron's collapse.
The unusual double jeopardy is the result of a bet Lay's legal team placed -- and lost -- two years ago. Lay sought to face trial alone rather than with his protege Skilling, who ran the company's daily operations.
Government lawyers pounced on the strategic opportunity. The judge's ruling, in what may be the worst possible outcome for Lay, gave prosecutors not one but two chances to convict the former titan. The judge kept Lay in the major fraud case, which includes Skilling. But he split off into a separate trial four narrow fraud charges against Lay that relate to personal bank loans.
The second proceeding, to be decided by the same judge, will begin a mere two hours after jurors retire to consider the broader charges. It means that Lay, who built a fortune once valued at more than $100 million after growing up the son of a poor Baptist preacher who hopped from job to job, will face the anxiety of awaiting a jury verdict in the first trial while he defends himself against additional charges that carry a maximum penalty of a decade behind bars.
The prospect leaves open the possibility that jurors could acquit Lay, 63, of taking part in a massive conspiracy that led to Enron's filing for bankruptcy protection but that a judge could send him to prison for wrongdoing in his personal finances. In April 2005, Lay waived his right to a jury trial on the bank fraud charges, depriving him of the best defense he had: the chance to argue to a dozen average citizens that the law did not matter.
Legal experts say the bank charges amount to a significant challenge for Lay, in part because the government cites more than a dozen clear-cut documents he signed, promising to abide by Federal Reserve Board rules prohibiting him from using his multimillion-dollar lines of credit to buy stock. It is the sort of paper trail that has been missing from the fraud trial, in which prosecutors have produced no papers or e-mails directly tying Lay to fraud. Most of the evidence in the joint trial has been stacked against Skilling, not Lay.
Michael W. Ramsey, the lead defense lawyer for Lay, has alternately mocked the bank rules Lay is charged with violating -- known in shorthand as "Reg U" -- as a kind of pasta sauce and derided them as vague and baseless. He has said that Lay repaid the loans to Bank of America, Chase and Compass Bank and that the institutions suffered no losses, making the alleged crime a victimless one. The rules date to the stock market crash of 1929, when lawmakers decided, as a matter of public policy, to limit the amount of stock purchased on credit.
But federal prosecutors at the Justice Department's Enron Task Force have replied in court papers that Lay engaged in "classic bank fraud and false statements to a bank."
"In response to the question, 'Will any part of this credit be used to purchase or carry margin stock?' defendant Lay is charged with knowingly, falsely answering No," prosecutors wrote in court papers last year. "Moreover, defendant Lay expands upon his false answer in the same form" by adding typed and handwritten phrases that contain information about how he intended to use the credit line for other purposes.
"In an ordinary case, this would be a laugher," Lay's attorney said. "These counts would never have been brought." Ramsey said the charges reflect a "political decision that is unconscionable."
In the past, prosecutors on the Enron Task Force, who come from the ranks of the Justice Department's career employees, have repeatedly denied that politics influenced their work.
The second trial could last less than a week. Government lawyers are prepared to call at least one witness who may have questioned Lay before he signed some of the papers. Lay's defense team will probably turn to his longtime financial advisers to cast doubt about whether he understood the forms but affixed his signature anyway -- a key issue in the upcoming trial.
In a provocative 2003 scholarly article, University of Miami Law Professor William H. Widen urged prosecutors to pursue the bank charges, reasoning that such a move follows in the tradition of the government's pursuit of mafia don Al Capone. After earlier, unsuccessful prosecutions, Capone ultimately went to prison on tax fraud charges.
Six years ago, it would have been unthinkable to equate Lay with such a notorious figure. He posed for photos with dignitaries including former president George H.W. Bush, Henry Kissinger and Mikhail Gorbachev. He acquired the nickname "Kenny Boy" from President George W. Bush and caucused with Vice President Cheney about energy policy. He and his wife, Linda, a former Enron secretary, donated more than $25 million to charities. They bailed out the local NAACP chapter and persuaded the local baseball team to stay put. But that was before the collapse of Enron and his indictment forced him to focus his time and energy on defending himself against fraud charges.
To date, the massive Enron fraud trial has focused mostly on the conduct of Skilling, who led daily operations until his abrupt departure in August 2001. As a result, Lay's defense in the first case will not directly overlap with that of his second, on the bank charges.
Indeed, legal experts who are following both cases say Lay's defenses reflect some inconsistency.
Lay, who is preparing to testify in the broader case within the next couple of weeks, will maintain that Enron scrupulously complied with the letter of the law and that he should not be held criminally responsible for the failure of his business. In essence, he is using the law as a shield, experts say.
But in his second, bank fraud trial, Lay is preparing to argue the exact opposite -- that banking law is outdated and unclear and therefore should not apply to him.