Kenneth Lay, the founder and former chairman of Enron Corp., takes the spotlight in a Houston courtroom on Monday to answer charges that he conspired to commit securities and wire fraud in the three months before Enron declared bankruptcy in December 2001. Lay's testimony comes just a few days after former CEO Jeffrey Skilling took his turn in the witness chair, maintaining his innocence on 28 criminal counts.
Lay, who will be tried separately for personal banking fraud, allegedly made misleading statements to employees, financial analysts and investors between Sept. 26, 2001 and Oct. 23, 2001. As the 13-week trial has progressed, Lay has taken notes and occasionally whispered to his lawyers as a parade of his former executives have taken the stand to testify about the alleged wrongdoing at Enron.
Asked what he thought of Skilling's testimony, Lay said Thursday, "He did great." Is Lay now ready to take the stand? "Oh, yeah. Ready."
Lay pleaded the Fifth Amendment when he testified in 2002 before Congress about Enron's collapse, but he has maintained a higher profile than Skilling over the past six years. Lay has made occasional speeches, including one before the Houston Forum last December (see NGI, Dec. 19, 2005), and he held a press conference to declare his innocence when he was indicted in 2004 (see NGI, July 12, 2004). Lay even maintains a website, www.kenlayinfo.com, which offers courtroom news, Enron presentations, trial transcripts and personal information.
"Dear Visitor," Lay's letter to website visitors begins, "As you are probably aware, I have been indicted on 11 charges and my trial began on January 30. I am innocent of all charges against me. I eagerly await the day that all facts come out in court and prove my innocence."
When Lay takes the stand, here's a look at the charges and what the government intends to prove:
In an online forum with Enron employees on Sept. 26, 2001, Lay stated "the third quarter is looking great [and] we will hit our numbers," reads the indictment. "We are continuing to have strong growth in our businesses, and at this time, I think we're positioned for very strong growth." He also said, "we have record operating and financial results" and that "the balance sheet is strong."
"In fact, as Lay knew," reads the indictment, "Enron was preparing to announce a significant overall quarterly loss for the first time since 1997, and had committed a $1.2 billion accounting error, among other problems facing the company. In addition, Lay knew that the balance sheet reflected approximately $7 million in embedded losses in business units and overvalued investments and that Enron had been exploring such drastic solutions to Enron's financial problems as a merger with another company and the sale of Enron's pipelines."
Also during the September 2001 employee meeting, Lay announced to employees, "I have strongly encouraged our 16b [management] officers to buy additional Enron stock. Some, including myself, have done so over the last couple of months and others will probably do so in the future...My personal belief is that Enron stock is an incredible bargain at current prices."
The indictment charges that Lay "deliberately created the impression with Enron employees that his confidence in Enron's stock was such that he had increased his personal ownership in Enron stock over the past two months. In fact, as Lay knew, during the prior 'couple of months,' Lay had purchased approximately $4 million in Enron stock but sold $24 million in Enron stock in sales to Enron that were concealed from Enron employees and the rest of the investing public."
In a credit ratings agency call on Oct. 12, 2001, Lay stated that Enron and its auditors had "scrubbed" the company's books and that no additional writedowns would be forthcoming. "In fact, as Lay knew, Enron's international assets were being carried on Enron's books for billions of dollars in excess of their fair value," the government contends.
Specifics about allegedly fraudulent statements made by Lay during Enron's 3Q2001 analyst call also are included in the indictment (see NGI, Oct. 22, 2001), as well as statements made during investor and analyst "road shows" and additional analyst telephone calls. The indictment refers to statements by Lay during those calls that included "we're not trying to conceal anything." "We're not hiding anything." "We're really trying to make sure that the analysts and the shareholders and the debt holders really know what's going on here. So, we're not trying to hold anything back." "I'm disclosing everything we've found."
However, the government contends, "while professing candor, Lay failed to disclose numerous dire facts about the state of Enron's business that he knew and that are outlined in this indictment."
In an Enron employees meeting on Oct. 23, 2001, Lay stated "our liquidity is fine. As a matter of fact, it's better than fine, it's strong..." The government contends that "In fact, Lay knew that in order to maintain liquidity, Enron had been forced to take the unusual step of offering its pipelines as collateral to obtain a needed $1 billion bank loan. Lay knew that Enron had failed to complete a $1 billion bond deal planned for execution since July 2001."
Once the jury begins deliberations in the current trial, Lay also faces charges for making false statements in his personal banking to three banks: Bank of America, Chase Bank of Texas and Compass Bank.
Lay attorney George "Mac" Secrest will conduct the direct examination of Lay. Lay's lead lawyer Mike Ramsey is recovering from a medical procedure.
Last week, as he attempted to prove a pattern of deception, federal prosecutor Sean Berkowitz relentlessly cross-examined Skilling, who maintained through all of the questioning that he either didn't know, didn't remember or wasn't involved in any of the alleged misdeeds at the company. But time and again, Berkowitz tried to turn Skilling's previous testimony and public statements against him.
"You're certainly aware that the market was concerned that a portion, a large portion of [Enron's] earnings were coming from trading activity...and by trading activity, I mean speculative trading activity?" Berkowitz asked.
"Yes," Skilling answered.
But hadn't Skilling told the market that Enron had no exposure to volatile energy prices?
Skilling maintained Enron had a "much more complex discussion" with its analysts. He said the marketplace knew what trading risks Enron was exposed to through its Value at Risk (VaR) program, which calculated the risks using daily energy prices and the value of Enron's hedges. The computerized calculation provided the ceiling for Enron's acceptable risk for the day and how far it could extend itself when buying and selling gas and power.
"We communicated to the market our net VaR position, which was a very well-known factor for determining what our exposure was to commodity prices," Skilling said.
"Were you communicating to the marketplace that Enron had virtually no exposure to commodity price risks?"
"No," Skilling responded. "We published VaR." Responding to Berkowitz's suggestion that many investors might not understand VaR, Skilling said, "We had a decade of discussion with our investors, we talked about leaning into the wind, we talked about position-taking within our VaR limits. They knew exactly what our position was."
Berkowitz showed jurors some of Skilling's statements about Enron, including some from a Jan. 25, 2001 financial analysts conference. "You know, some people have said Enron is a trading business," said Skilling. "Let me hit that one head on. We are not a trading business. We are a logistics company...That is a sustainable franchise that will generate high income for our shareholders into the future..."
Berkowitz also tested Skilling's veracity in a series of questions about ex-girlfriend Jennifer Binder, a former Enron photographer who started an online photography company called Photofete. Asked about his investments in Photofete in 2000 and 2001, Skilling told the jury the investments were small, about $50,000, and he admitted he did not disclose the investment to the board of directors. Skilling said that at the time he invested in the company, he did not think Photofete had a contract with Enron.
Berkowitz then produced checks showing Skilling invested $180,000 over two years with Photofete. He also showed the jury documents that indicated Photofete's contract with Enron was worth about $450,000, which was about 70% of the company's revenue. Asked if he had disclosed the investments to the board or if he had told the board that he dated Binder in 1998 and 1999, Skilling answered, "It didn't occur to me."
Berkowitz on Thursday asked Skilling about two $10,000 checks made out to Binder. The first check to Binder from Skilling was dated Dec. 28, 1997; the second was dated March 2, 1998. However, the number on the March 1998 check preceded the number on the December 1997 check. Berkowitz accused Skilling of backdating one of the checks to avoid paying gift taxes.
"I'm suggesting you backdated a check to avoid paying taxes to the [Internal Revenue Service]," Berkowitz said.
"If you're asking me if I avoided paying every dollar that I owe Uncle Sam...the answer would be 'no,'" Skilling answered. Skilling paid about $66.2 million in taxes between 1997 and 2004.
Berkowitz asked Skilling if he continued his relationship with Binder after 1998.
"What does this have to do with fraud at Enron Corporation?" Skilling asked. "Just out of curiosity?"
Berkowitz didn't answer. Instead, he gave Skilling a copy of Enron's code of ethics.
"I didn't [sic] understand this," Skilling said. "What is this again?"
"This is the code of ethics," Berkowitz replied.
After reviewing it, Skilling admitted he had violated the company's ethics code by not informing the board as required about his relationship with Binder and his Photofete investment. "In retrospect, I probably should have been more diligent on this. I'm sorry. It didn't occur to me."
"When we started this testimony, we agreed that the most important thing that the jury had to rely on was your word," Berkowitz replied.
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