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Courtroom Observers Surprised by Lay's Turn in Witness Chair

As courtroom pundits saw it, Enron Corp. founder Kenneth Lay's turn on the witness stand would be a no brainer. Well-known Houston philanthropist and Bush crony, many of Lay's close associates and friends have called him a disarming, affable and somewhat avuncular sort of fellow, likely to remember small details about his employees' personal lives and not prone to micromanaging the business. He was expected to be the calm and steady "nice" guy, unlike co-defendant and ex-Enron CEO Jeffrey Skilling, whose brash personality has often preceded him.

But the Kenneth Lay who showed up in a district courtroom in Houston last week appeared anything but genial, at times cutting off even his own lawyer and suggesting to the prosecutor during one line of questioning that "You can go where you want with this, but I think this is a real waste of the jury's time."

Courtroom observers could not help but wonder what impression Lay has left on the 12 jurors and four alternates after he spent four days on the witness stand, first in direct testimony and then a day and a half under cross examination. Lay, who is expected to continue to testify for at least one more day in the 14-week-long trial, is being tried for six counts of wire and securities fraud. Skilling, who testified for eight days in April, is being tried on 28 counts of wire and securities fraud.

Federal prosecutor John Hueston skillfully took over on Wednesday afternoon, alternating his questions to Lay between the criminal counts against him and several "gotcha" moments in a clear attempt to show jurors another side to Lay's character. The cross followed two days of mostly tedious direct questioning by Lay's defense lawyer George Secrest concerning the charges against him. But Secrest also appeared to irritate Lay, and the former Enron chief at times even corrected him from the stand.

Hueston, who headed the Enron Task Force's pursuit of Lay and Skilling, came out swinging when he took over the questioning, accusing Lay of trying to contact potential witnesses in the case, including employees of Goldman Sachs. The attempt to speak with potential witnesses, suggested Hueston, was an apparent effort by Lay to back up his version of events during a meeting in late 2001 with Enron executives. Lay denied he had done so.

"Have you contacted witnesses to get your story straight?" Hueston asked.

"I don't have a story," Lay answered sharply. He said his recollections of a meeting with Goldman Sachs executives in late 2001 differed from testimony by ex-CFO Andrew Fastow, and Lay said he wanted to talk with some of the executives to get his facts straight. "I've certainly had one conversation with a friend of mine at Goldman Sachs in Houston," Lay answered. But he said he never talked with the executives who had been in the Enron meeting.

Did Lay contact former Enron risk analyst Vincent Kaminski? Hueston asked. Kaminski testified for the prosecution earlier in the trial, telling jurors Lay and others has dismissed his criticism of Enron's accounting problems in late 2001.

Lay admitted he had tried to go through a friend to contact Kaminski nine days before Kaminski testified for the prosecution. "I did not know he was going to testify." Lay said, "I was trying to reach Vince Kaminski a long time ago before I even knew he would testify...I was trying to reconnect with Vince, to talk to him about some issues I wanted to talk to him about."

"He was listed on the government witness list," Hueston responded, noting Kaminski was named as a potential prosecution witness last November.

"Did you engage in character assassination of witnesses?" Hueston asked.

"Are you considering yourself?" Lay asked sharply. "I just want to make sure I understand who's on that list."

"Mr. Lay, I'm an Assistant United States attorney," Hueston said. "This is my job. You can call me anything you want."

Hueston referred to Ben Glisan Jr., Enron's former treasurer. Glisan, who testified for the government, is serving five years in prison after pleading guilty to committing fraud at Enron. Apparently, during the time Glisan testified, Lay's lawyer Mike Ramsey stood outside of the district courthouse and called Glisan a "monkey," and said Glisan "contradicted the whole theory of intelligent design." Lay also publicly said Glisan had been a "liar" on the witness stand.

"While you were saying these things, in fact did you approach Mr. Glisan in the bathroom witness area of this courthouse and tell him you had kind feelings for him and his family?" Hueston asked.

Lay said that he had talked with Glisan. "I feel like he had been put under enormous pressure."

"So you made him feel better by calling him a liar and having your attorney call him a monkey?" Hueston asked sarcastically. "To help him out."

Hueston also then questioned Lay about Enron's code of ethics.

"You said this on direct, 'I've always tried to live under all the rules and abide by all the laws'?" Hueston asked.

Lay said he had. Hueston then asked Lay about whether he had told the Enron board of directors about a $60,000 investment in Photofete, an Internet photo company started by a former girlfriend of Skilling's. In his testimony, Skilling admitted that he did not tell the board about his $180,000 investment in the company.

"Have you checked that?" Lay asked, in a clearly irritated voice. Then, answering his own question, he said, "I'm sure you have. The one thing you guys are is very thorough." Lay said if the investment amount was true, then he had violated Enron's ethics policy.

During his direct testimony on Tuesday, Lay described how he used to live and how he lives now. Once believed to be worth about $400 million, Lay said he made a total of about $220 million in his final three years at Enron. Of that amount, $36 million was in cash, while the rest came in the form of 187 million stock options. His living expenses in the three years before Enron declared bankruptcy were about $22 million, or about 10% of his salary. In those three years, he said he also donated $25 million to nonprofit organizations.

"Quite simply I had confidence in Enron stock," said Lay. "It served me extremely well." He added that "very few stocks had a higher return on investment than Enron stock."

Since the bankruptcy, his lifestyle has changed, he told jurors. About 80% of his wealth was tied into Enron stock, and "It's all gone." In the past six years, he has sold about $20 million worth of real estate, including three homes in Galveston, TX and three in Aspen, CO. A lot of the money has gone to pay for legal bills. Admitting he has "lived well" and shared his "good fortune" with his family, Lay said his former lifestyle required a lot of money.

"I like to go out to fine restaurants and less-than-fine restaurants and eat well," he said. Lay testified how he borrowed money from banks to pay for living expenses, using Enron stock as collateral. By late 2000, Lay said he was about $100 million in debt. And as Enron's stock price fell over the year, Lay said margin calls by lenders created a personal financial crisis for him.

Lay received a $10 million bonus after resuming the CEO role from Skilling in August 2001, but Lay said he used that money to pay off part of a loan at Bank of America. With just days to pay off other loans, Lay said he had no time to liquidate his real estate assets. So, he began using more of his revolving line of credit with Enron, trading in his stock to obtain about $28 million in cash the last few months of 2001.

"Virtually all of the line of credit was used to pay down the debt we're talking about," Lay said.

Hueston focused on those stock sales on Thursday. Although Lay has not been charged with illegal stock sales, the line of questioning appeared to be a way to further raise questions about Lay's character.

Lay's stock sales totaled about $77 million by the time he made his last trade in late October 2001. Complying with the law, Lay filed monthly Securities and Exchange Form 4s filings in 2001 indicating his stock holdings. But Lay actually sold more stock back to Enron in 2001 than he purchased, a fact that was not revealed to the public. Using an overhead chart to display Lay's stock holdings, Hueston noted that Enron's investors and analysts could not actually "see the reality" of Lay's stock sales in 2001.

"Correct...I was not aware of that until now," Lay said quietly. But he added, "That's a separate issue... There was no requirement for that to be reported." Hueston agreed, but he also forced Lay to admit that investors likely thought Lay was a net buyer of Enron stock in 2001 rather than a net seller.

During an Enron employee meeting in September 2001, Lay called Enron's low stock price "an incredible bargain," and he told employees that he was a net buyer of the stock. On the stand, Lay contended the statements were true because he was distinguishing between the sales he chose to make and the sales he was forced to make to meet margin calls on his loans.

"I was a net buyer on a discretionary basis," Lay testified. "The forced sales did exceed the discretionary purchases." He accused Hueston of mischaracterizing his stock sales. "Again you're trying to mislead the jury that I'm trying to do something illegal here when it's not." Lay said that even if he did not report the sales, he was following the law. "You're not arguing that I did not?" he asked, clearly irritated.

"Sir, I'm the one asking the questions," Hueston answered. "Your attorneys can ask those questions if they want."

Asked why he told employees he was a net buyer of Enron stock when he was not, Lay testified that investors would have understood why he was selling stock if they knew he had to make margin calls. Hueston noted Lay had never given anyone the option of understanding why he did it because he never gave them the information.

"I never felt a need to," Lay said.

Hueston also focused on Lay's and Skilling's assertions that short sellers had contributed to Enron's bankruptcy. The prosecutor asked Lay about an Oct. 23, 2001 conference call in which Lay cut off questions from short seller Richard Grubman (see NGI, Oct. 29, 2001), and he played an audiotape of Lay telling Enron employees in October 2001 that Enron was under attack "just like America's under attack by terrorism" referring to the terrorist attacks a month earlier. Hueston reminded Lay that his lawyer Mike Ramsey had called the short sellers "vultures."

Then came the "gotcha." Hueston used an overhead projection screen to show the jury and Lay some investment statements showing Mark Lay, his son, had shorted Enron's stock four times in March 2001.

"He was a short seller, right?" Hueston asked. "He wasn't a vulture, was he? He wasn't trying to kill Enron in 2001, was he?"

"I would think not," Lay answered.

Skilling's lawyer Daniel Petrocelli told Lake late Tuesday the defense expects to take another two weeks following Lay's testimony to complete its case. Prosecutors expect to take an additional week to redirect. Clearly upset by the length of the trial, Lake decided Wednesday to begin the trial a half hour earlier, at 8 a.m., and reduce the lunch break to one hour, with testimony four days a week until 4:30 p.m. Lake said he wants to conclude the presentation of evidence by May 11, with closing arguments beginning on May 15.

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