Kenneth Lay, once the toast of Houston’s social community and referred to by President Bush as “Kenny Boy,” on Thursday pleaded innocent to 11 criminal charges in connection with his actions at the failed company that he founded, Enron Corp. Lay, 62, who faces charges that in total carry 175 years in prison if he is convicted, also was charged by the Securities and Exchange Commission (SEC).

Lay, who is the 30th and highest ranking Enron official charged by the Enron Task Force, was indicted on one count of conspiracy to commit securities fraud and wire fraud; two counts of wire fraud for making false and misleading statements in employee meetings; four counts of securities fraud; one count of bank fraud; and three counts of making false statements to banks. His bond was set at $500,000, and is unsecured, which means he did not have to pledge any of his assets. Lay did not have to give up his passport, and will be allowed to travel, but the court required him to turn over three shotguns.

Dressed in a blue jacket and tie and accompanied by his pastor, Lay smiled and chatted amiably with about 50 reporters and photographers when he turned himself in early Thursday. He then was taken in handcuffs in an unmarked sedan to Houston’s downtown federal courthouse to enter his plea before U.S. Magistrate Judge Mary Milloy.

The 65-page indictment caps a two-plus year investigation by the Enron Task Force. The new indictment supersedes earlier charges against Lay’s hand-picked protege, former CEO Jeffrey Skilling, and former Chief Accounting Officer Richard Causey, who were charged in February (see Daily GPI, Feb. 23). Both Skilling and Causey have pleaded innocent and are awaiting trial. The new indictment includes all three as a part of an on-going conspiracy.

However, while the charges against Skilling and Causey focus on actions over several years that led up to Enron’s bankruptcy, the charges against Lay center on the actions he took after he resumed the role of CEO when Skilling resigned in August 2001, using “secret side deals, back-dated documents, disguised debt, material omissions and outright false statements to further the scheme.”

Specifically, the indictment refers to several incidents in the months preceding Enron’s collapse in December 2001. Enron’s share price had been falling steadily since the beginning of 2001, and following Skilling’s resignation, the indictment charges that Lay made false and misleading statements and committed fraud.

For instance, on Sept. 26, 2001, Lay held an online forum with Enron employees. “Lay stated that ‘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 added that ‘we have record operating and financial results’ and that ‘the balance sheet is strong.’

“In fact, as Lay knew, 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,” reads the indictment. “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.”

During a September 2001 meeting with employees, “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.”

The charges against Lay also focus on an Oct. 12, 2001 telephone call with a representative of a “prominent” credit rating agency. “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.”

Specifics about allegedly fraudulent statements made by Lay during Enron’s third quarter 2001 analyst call also are included in the indictment (see Daily GPI, Oct. 17, 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.”

In fact, read the charges, “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 “all 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….’ 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.”

In “another effort to dampen public concerns about the decline in Enron’s stock and the nature of Enron’s finances,” Enron executives held a special conference call with securities analysts on Nov. 12, 2001. In that meeting, “Lay falsely stated that ‘we don’t have anything we’re trying to hide….I’m disclosing everything that we’ve found.'”

The SEC complaint initiated civil charges for Lay’s “role in a wide-ranging scheme to defraud by falsifying Enron’s publicly reported financial results and making false and misleading public representations about Enron’s business performance and financial condition.” The SEC is seeking disgorgement of all ill-gotten gains, civil money penalties, a permanent bar from acting as a director or officer of a publicly held company, and an injunction against future violations of the federal securities laws.

“From the very beginning, our mandate has been to hold accountable those who contributed to the false portrayal of Enron as a viable, thriving entity,” said Stephen M. Cutler, SEC Enforcement Division director. “As Enron’s Chairman and Chief Executive Officer, Mr. Lay was an engaged participant in the on-going fraud, and must therefore be called to account for his actions.”

Following Lay’s arrest, his attorney Mike Ramsey said he wants Lay’s trial to go ahead of other executives charged in the investigation and to be separated from Skilling’s and Causey’s. Before entering the courthouse, Ramsey maintained Lay’s innocence and put the blame for the company’s failure on former CFO Andrew Fastow, who has pleaded guilty and who faces 10 years in prison.

“Andy is obviously a liar and a thief,” Ramsey said as he entered the courthouse Thursday. “He admits that.” Fastow is expected to testify for the prosecution.

In a press conference at a downtown Houston hotel following his arraignment, Lay called Thursday a “tragic day for me and my family.” Now “anxious to prove my innocence,” Lay said he was “ready for trial,” and hoped to begin it in early September.

Relaxed, with his wife Linda sitting nearby, Lay blamed Fastow for not telling him what was going on. But he noted that regardless of what eventually occurred, Enron’s “wholesale, retail and pipeline businesses were fundamentally strong,” even as the company imploded.

“Linda and I will continue to grieve” about what happened to the employees, retirees and the stockholders, Lay told reporters. “We grieve about that even more than we grieve about what we lost.”

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