Federal prosecutor John Hueston’s cross-examination of Enron Corp. founder Kenneth Lay was more polite on Thursday, but a couple of “gotcha” moments appeared to catch Lay off guard. Speaking to a packed courtroom, Hueston sparred with Lay about the six criminal charges against him, but the prosecutor also managed to land a couple of sucker punches, including the humiliating revelation that Lay’s own son had been a short seller of Enron stock in March 2001.

Lay’s fourth day of testimony Thursday ended the 13th week of the trial against Lay and Enron’s former CEO Jeffrey Skilling. Lay is expected to remain on the witness stand when the trial resumes Monday in Houston.

Hueston, who headed the Enron Task Force’s pursuit of the two Enron chiefs, methodically questioned Lay about his Enron stock sales in 2001. Lay has not been charged with illegal stock sales, but the line of questioning clearly was used to raise questions about Lay’s character. Under a contract agreement, Lay was allowed to trade in Enron stock options for cash, and he took advantage of the clause in 2001 to begin paying down $100 million in personal debt.

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.

Proxy statements indicating Lay’s Enron stock sales between 1999 and 2000 were shown to the jury also. The filings, noted Hueston, did not divulge an amendment to Lay’s contract in 1999, which allowed him to pay off his credit line by trading in Enron stock. Hueston cited an article from the Los Angeles Times in June 2001, which indicated Lay sold $23 million worth of shares of Enron stock between November 2000 and mid-June 2001.

“The piece you’re talking about is a piece in a California paper trying to paint a picture of energy executives making a lot of money,” Lay said, referring to the period when California was attempting to place the blame for the previous winter’s soaring energy prices.

But Hueston remained on track, reminding Lay that if he had disclosed all of his stock sales, the figure cited actually would have been much higher than the newspaper had reported. Going through his stock sales in 2001, Hueston said, “so your total on [June 13, 2001, the day the article was published] would have been almost double at $43 million?”

Lay admitted the sales number was higher than the Times reported but said he didn’t know the precise figures.

Hueston then revealed that after the article was published, between June 13, 2001 and June 28, 2001, Lay sold another $28 million in Enron shares.

Three months later, in an online forum with Enron employees 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 Thursday, 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.

Early in the day, Hueston focused on an Oct. 23, 2001 conference call in which Lay cut off questions from short seller Richard Grubman (see Daily GPI, Oct. 24, 2001). Lay and Skilling both have claimed short sellers conspired at a meeting in Florida in early 2001 to target Enron.

Hueston questioned Lay about the short seller comments he has made, 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 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.

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