— Federal prosecutors sought Thursday to torpedo Enron Corp. founder Kenneth Lay’s image as a company champion, trying to show he used the ailing energy giant to bail himself out of personal financial woes in 2001.
Lay obtained more than $70 million in loans from Enron throughout 2001 and repaid most with company stock, even as he encouraged employees to buy more shares.
Lay didn’t disclose those stock sales publicly because regulations required that sales of shares back to a company be reported only in the year after they occur. Unlike his co-defendant in his fraud and conspiracy trial, former Enron Chief Executive Jeffrey Skilling, Lay isn’t charged with improper stock sales.
However, Lay did tell workers less than three months before Enron filed for bankruptcy protection that he had bought stock when, in fact, he had sold more shares than he bought.
In a methodical yet blistering cross-examination, prosecutor John Hueston highlighted Lay’s complicated stock activity throughout 2001 to challenge the ex-chairman’s credibility in portraying himself as a loyal company man who put Enron first.
Lay’s demeanor was markedly more subdued than when Hueston first challenged him late Wednesday. At that time, Lay’s trademark public amiability disappeared as he raised his voice, scowled and snarled repeatedly at the prosecutor who secured an indictment against him in July 2004.
On Thursday, Lay often appeared to treat Hueston like an irritant, but answered inquiries in a matter-of-fact tone.
Yet during lengthy questioning later about one of the case’s most arcane aspects, Lay chastised Hueston.
“I think it’s a real waste of the jury’s time. We’ve spent an hour on this,” the ex-chairman said about allegations he had tried to dodge accounting rules requiring writedowns on overvalued assets, specifically Wessex Water LTD, a British utility.
Lay’s cross-examination will continue Monday, and then the ex-chairman’s lawyer, George Secrest, can launch a second round of questioning.
But as U.S. District Judge Sim Lake noted to Secrest, “Mr. Lay covered a lot of what you would probably cover on redirect.”
Lawyers told Lake they expect other defense testimony and the prosecution’s rebuttal case to wrap up by May 11. If so, closing arguments would take place May 15.
On the stock sales, Hueston displayed records for jurors that showed Lay’s Enron stock ownership rose from 2.64 million shares to 2.76 million from January through October 2001. His stock purchases were reported publicly when they took place.
But the ex-chairman sold a total of 1.77 million shares back to Enron in February and from April through October that year to repay company loans.
“I didn’t know that until right now,” Lay said as Hueston pointed out the 1.77 million figure.
Lay had used his Enron stock as collateral on $100 million in personal bank loans, and those lenders issued margin calls for repayment throughout 2001 as the energy giant’s share price fell. He obtained cash from Enron to meet those margin calls.
“It was a lot more sufficient way to handle this problem than selling on the open market,” he testified. “I found it more convenient to use the line of credit. It was set up to provide me, and other senior executives, with more financial flexibility.”
Hueston pounded at the issue, asking why Lay didn’t immediately disclose the sales to investors and employees even if regulations didn’t require him to do so.
Lay’s eyes narrowed as he said the prosecutor seemed to be suggesting to jurors that he broke the law.
“I was fully complying with all the existing regulations and requirements on my stock transactions,” Lay said.
Some jurors rolled their eyes.
But even the disclosures didn’t tell the whole story, Hueston demonstrated with Enron’s annual filings with the Securities and Exchange Commission for 1999 and 2000.
In 1999, Lay sold $8 million in Enron stock back to the company. In 2000, he sold the energy giant twice that much. But annual filings for both years said only that he had repaid $4 million loans in full.
Lay’s employment agreement with Enron was amended in 1999 to allow him to sell stock back to the energy giant to repay company loans. When Hueston asked why the amendment was never disclosed to the SEC, Lay replied, “I’ll accept your representation on that. It’s not something I can confirm.”
The ex-chairman also has repeatedly explained to jurors that he learned from an internal Enron lawyer he wasn’t conducting an illegal insider trade by selling company stock back to Enron because the energy giant would ostensibly have as much information as Lay about what transpired within its walls.
The government contends Lay and Skilling repeatedly lied to investors and employees about Enron’s health, touting the company as strong when they allegedly knew accounting tricks masked flailing businesses and other problems.
The two defendants counter that no fraud occurred at Enron other than that committed by a few executives who skimmed money from secret side deals and blame bad publicity as well as a loss of market confidence for the company’s swift descent into bankruptcy proceedings in December 2001.
Lay’s company loans are unrelated to bank loans at the center of separate bank-fraud charges against him. He’ll go to trial without a jury on those counts while the Lay-Skilling jury is deliberating.
Another sticky stock issue arose Thursday that involved Lay’s son, Mark.
Hueston challenged Lay’s testimony that short-sellers helped fuel the company’s collapse by showing that Lay’s own son short-sold Enron stock.
Both Lay and Skilling contend short-sellers spread nasty rumors about Enron that year to profit from driving down the stock, adding to a lethal combination of bad publicity and lost market confidence. Short-sellers borrow stock to sell on the market and buy back at a lower price, pocketing the profit.
Hueston displayed for jurors a brokerage statement showing Lay’s son Mark shorted Enron stock four times in March 2001.
“He wasn’t trying to kill Enron in 2001, was he?” Hueston asked.
“I would think not,” Lay answered.
Hueston also sought to undercut Lay’s contention that negative articles in The Wall Street Journal in late 2001 helped fuel the company’s demise, suggesting many others questioned the company’s finances.
The prosecutor showed jurors a note published by a Prudential analyst that criticized Enron’s obfuscated disclosures and said management had an “obsession with semantics.”
When Hueston asked if “average Joe” investors could understand disclosures by Enron that had been described by prosecution witnesses as indecipherable, Lay insisted they could.
“I’d like to think that Enron didn’t have any shareholders who were average Joes,” the ex-chairman said.
Lay faces six counts of fraud and conspiracy related to the months before the company’s collapse, when he took back the role of CEO following Skilling’s resignation in mid-August 2001. Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors related to his activities from 1999 to 2001.
Lay’s cross-examination was to continue Thursday and was likely to stretch into Monday.