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Enron Trial Moves into Final Stretch

The 15-week-long fraud and conspiracy trial of former Enron Corp. founder Kenneth Lay and ex-CEO Jeffrey Skilling is moving into its final days, and the presiding judge said the trial could be in the jury's hands by May 17. The defense expects to rest its case by Tuesday, and the government is expected to call no more than 10 rebuttal witnesses, who are all expected to briefly testify.

Last week, federal prosecutor John Hueston finished a contentious cross-examination of Lay, who is charged with six counts of wire and securities fraud concerning statements he made to financial analysts between August 2001 and the company's bankruptcy in December 2001. The government has not charged Lay with insider trading, but Hueston last week tried to make a case for the jury that Lay may have done just that.

In mid November 2001, as Enron's stock continued to plummet, the company agreed to a merger with crosstown rival Dynegy Corp. However, problems ensued throughout the merger negotiations as more of Enron's financial problems were revealed. On Nov. 28, 2001, hours before Dynegy and Enron announced the merger had failed, the Linda and Ken Lay Foundation, run by Lay's wife, sold half a million shares of Enron stock. The sales were sold at 9:30 a.m. CST; the failed merger announcement was made at 12:30 p.m. Kenneth Lay was listed on the sale as the beneficial holder of the shares.

"That was a decision that was made by my wife," Lay said angrily. He said he was on the board of the foundation, but Lay said he played no part in making decisions to sell stock. Being accused of insider trading was "totally unfair," said Lay, and it had nothing to do with the indictments against him.

Before passing the witness, Hueston also left the jury with this information: using his Enron credit line, which allowed Lay to trade in Enron stock for cash, Lay borrowed $1 million on Nov. 27, 2001 -- one day before the Dynegy merger fell through and just a week before the company declared bankruptcy. The prosecutor noted that while Lay managed to trade in his stock for $1 million in cash, the former chief sent an e-mail to employees saying that if the company filed for bankruptcy, each employee could expect to receive about $4,600 in severance.

"You said Enron's bankruptcy was a bankruptcy of liquidity?" Hueston asked.

"That's right," Lay answered.

"You had a liquidity problem, and Enron had a liquidity problem?"


"And you saw to it that you were taken care of before the employees were in those competing interests."

For several hours, Hueston also focused on Lay's lavish lifestyle in 2001, going through Lay's financial stock holdings and his Enron stock sales. During 2001, Lay sold about $70 million in Enron stock, and he has testified the sales were made because he was "forced" by margin calls on several investments. Lay said he did everything to avoid selling the Enron stock because he believed in the company, and he touted the stock during an Enron employee meeting as an "incredible bargain" in September 2001.

However, the prosecutor showed jurors all of Lay's holdings at that time: $30 million in real estate investments, a $588,000 stake in a private equity investment that he made in 2001 and about $3 million in stock holdings in several companies, including Applied Materials, AOL Time Warner and Berkshire Hathaway. He also had a $6 million credit line at Bank of America. The nonEnron holdings could have been used to meet margin calls, Hueston claimed. Quoting an opening statement by Lay's lawyer Mike Ramsey's to the jury, Hueston repeated to Lay, "You only sold off Enron stock after you sold off all your other stocks."

But Lay contradicted his lawyer's statement. "That is not correct," he told Hueston. "I don't know what my attorney said, but that is not correct."

Although Lay said he had to sell Enron stock to make margin calls throughout 2001, Hueston showed the jury that among other things, in February 2001, Lay paid $200,000 to charter a boat called the Amnesia for his wife's birthday. "I thought it was a meaningful way to celebrate it," Lay said. In April 2001, Lay spent more than $12,000 to stay at a resort to celebrate his birthday. "So you can see that my birthdays are cheaper than my wife's birthdays."

While Lay and his wife were vacationing in France in April 2001, he called the United States to sell $4 million in Enron stock. Also in May 2001, Lay invested $588,000 in the private equity transaction, and he spent $20,000 on antiques. "We were living a very expensive lifestyle," Lay explained. "It's the kind of lifestyle that's very difficult to turn off or on like a spigot."

On Aug. 20, 2001 -- about two weeks after Skilling resigned -- Lay bought 68,000 shares of Enron stock. However, that same day, he sold 110,000 shares back to the company. Hueston also displayed a $4 million stock-for-cash draw in August 2001, and he asked Lay whether the draw was used for a margin call.

"I don't think I've said each and every one of these [margin calls] was forced," Lay said.

"You would concede then you actually sold Enron stock during 2001 when you had options to sell nonEnron stock?" Hueston asked. He showed the jury an e-mail from Lay's stepson in 2001. The stepson, who was also Lay's personal accountant, asked Lay if he wanted to sell Enron stock or draw down the other credit lines to meet the margin calls. "The choice was clear," said Hueston. "Sell Enron stock or use your Bank of America line of credit...You chose to sell Enron stock."

"I thought each margin call was going to be the last margin call because I thought Enron stock was undervalued," Lay said.

Asked why Lay did not consider selling some of his extensive real estate holdings, Lay said the sales could not be done quickly enough.

Hueston argued that was not the case. "Selling property in Aspen was not a long tedious process for you, was it?" Hueston asked. Lay put his $10 million home in Aspen, CO, on the market on Jan. 21, 2002. The home sold in two days to a buyer who paid cash. Lay netted a $7.6 million profit.

Before focusing on the stock sales, Hueston questioned Lay about why he chose to ignore problems he knew existed at Enron within the special purpose entities (SPEs). A series of articles was published in The Wall Street Journal in mid-October 2001 questioning the accounting of the LJM SPEs and ex-CFO Andrew Fastow's management fees. After the stories were published, Lay said he asked two of Enron's board members to determine how much money Fastow was making from the SPEs.

Why didn't Lay ask Fastow himself? Hueston asked. Lay and Fastow had offices on the same floor at Enron.

"It's awfully easy to look back today and ask, 'Why didn't you do this and why didn't you do that' with 20/20 hindsight," Lay replied. "We were making the best decisions with the best information at the time on an ongoing basis."

And why did Lay hide information about the LJM hedging vehicles known as the Raptors? asked Hueston. In Enron's 3Q2001 earnings report, the Raptors were not named as a reason for about half of Enron's $1.2 billion write-downs in the quarter. Hueston showed the jury two October 2001 quotes by Lay -- one in an interview with the Journal and one in a conference call with analysts the following day. Both times, Lay was asked about the $55 million write-down, and both times, Lay said, "I don't even know if it had a name."

Lay said last Monday he had made an "honest mistake." Hueston replied, "You lied...let's move on."

After a barrage of other questions about why Lay had not done more to find out why employees were concerned with Enron after Skilling had resigned and after the Journal had run stories questioning Fastow's SPEs, Lay chastised the prosecutor.

"The corpse is on the gurney, Mr. Hueston, and you're carving it up any way you want to carve it up," he said. "I didn't have that luxury right in the heat of battle.''

On Tuesday, Hueston told Lay, "You have a long list of people to blame for Enron's collapse, sir, and it gets longer and longer as you testify... And your list of people to blame and events to blame did not include yourself, did it, sir?"

"I did everything I could humanly do during this time," Lay answered. "Did I make mistakes? I'm sure I did, Mr. Hueston. I had to make real-time decisions based on the information I had at the time."

Lay told his lawyer George Secrest in his redirect that he had used more than $7 million of his nonEnron assets in spring 2001 to pay off obligations and said he used more than $6 million of his other assets through the rest of 2001. Lay did not specify how much of the $13 million was used to meet margin calls on bank loans nor how much went to other personal obligations. And Lay noted he and his wife still held five million Enron shares and options when the company declared bankruptcy.

"I continued to have faith in Enron stock most of the way through 2001, certainly into November 2001," Lay said.

After Lay's testimony was completed, Martin Siegel, a New York-based lawyer, told jurors that Lay tried to settle the $7.5 million loan from Enron but that Hueston did not approve the settlement. The proposed settlement was in reaction to a lawsuit filed in 2003 by Enron's creditor committee. Lay's proposed settlement included a promise from Enron that it would not sue Lay in the future, and it requested the return of Lay's Enron annuities, which would pay him about $80,000 a month for life.

Under cross-examination by prosecutor Sean Berkowitz, Siegel admitted he did not know whether Lay ever tried to pay off the Enron loan before the lawsuit was filed. And Siegel admitted Lay had attempted to have the creditor committee lawsuit dismissed. Siegel also did not remember if Enron's board of directors had signed off on the proposed agreement or whether the board ever saw Lay's proposed settlement.

In addition, Siegel agreed under cross that Lay has never repaid his loan to Enron, and that even though the settlement was not approved, it did not preclude him from settling with creditors if he had wanted to do so. Siegel also admitted he had prepared a motion for Lay to sue Enron for $50-60 million after the company declared bankruptcy, but the lawsuit was never filed.

Christopher B. Barry, a finance professor at Texas Christian University in Fort Worth, testified for the defense that the "run on the bank" theory espoused by Lay and Skilling was accurate. The defendants testified they believe the company went bankrupt partly because the financial markets lost faith in Enron in late 2001 because of the continuing bad news concerning quarterly earnings and CFO Andrew Fastow's involvement in its special purpose entities.

Barry said the bad news led to a drop in Enron's credit rating, which then led to a fear by Enron's energy trading partners to do business. The reluctance to do business with Enron weakened its financial position, which in turn led to other companies refusing to do business with Enron.

"Fear produces the feared outcome," Barry told the jury.

And defense witness Walter Rush, testifying as an expert accounting witness, said when Enron shifted part of Enron Energy Services (EES) into Enron North America, it did not break any rules. The government contends the move was made to hide EES losses from investors.

"It happens all the time," said Rush.

"Is there anything whatsoever, a rule, law, regulation you're aware of, to keep a company from doing it?" asked defense lawyer Randy Oppenheimer.

"As long as it stayed within the same country... As long as it was the same taxing jurisdiction, it's fine," Rush said.

Rush also told jurors the decision to move Enron Energy Services (EES) into its profitable trading arm Enron North America in early 2001 was not illegal. The prosecution alleges Skilling directed the move to mask huge losses within EES.

"That's kind of like, say, having $2 in my right pocket and $2 in my left pocket," Rush told jurors. "If I take out $1 from one pocket and put it in the other, I've still got $4."

Defense lawyer Daniel Petrocelli told Lake he expects to complete presentation of his case on Monday. Rebecca Carter, Skilling's wife and a former Enron secretary, was expected to take the stand, but the defense said she will not.

The government said its rebuttal case will take less than two days. Former EES co-CEO Kenneth Rice is expected to take the stand for the prosecution a second time in rebuttal testimony. Also, in somewhat of a surprise move, the prosecution said it will not call former Chief Accounting Officer Richard Causey as a rebuttal witness. Causey was indicted with Lay and Skilling, but he pleaded guilty to one count of securities fraud in December.

If Skilling, 52, is convicted on all of the 28 counts of fraud and insider trading against him, he theoretically could face up to 275 years in prison and millions of dollars in fines. His actual prison sentence likely would be around 20 years, according to lawyers. Lay, 64, faces a prison sentence of up to 45 years in prison if convicted of the six fraud charges against him.

Lay also faces a separate trial on personal bank fraud charges, which will be heard by Lake without a jury while the jury deliberates this case. Prosecutors allege Lay obtained $75 million in loans from three banks and then reneged on an agreement with the lenders that he wouldn't use the money to carry or buy margin stock.

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