Federal prosecutor John Hueston finished his cross-examination of Enron Corp. founder Kenneth Lay on Monday, focusing on Lay’s apparent ignorance in late 2001 of the company’s financial problems. And in a “gotcha” moment before passing the witness, Hueston told the jury that Lay’s wife sold 500,000 shares of Enron stock just hours before the official news was released that a merger between Dynegy Inc. and Enron had failed.

The 14-week-long trial opened with Lay on the witness stand for the fifth day. He is charged with six fraud counts; former CEO Jeffrey Skilling is charged with 28 counts. Like last week, Lay again made no effort to hide his dislike of Hueston, and the two men sparred frequently. But Hueston, who has pursued the charges against Lay and Skilling for years, skillfully led the witness through his activities in 2001. The government has not charged Lay with insider trading, but Hueston 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. However, problems ensued throughout the merger negotiations as more financial problems were revealed at Enron. On Nov. 28, 2001, hours before Dynegy and Enron announced the merger had failed, the Linda and Ken Lay Foundation 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. 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.

“At the end of the year [2001] you were worth $50 million, right? Hueston asked.

“Yes, but those were mostly illiquid assets, like real estate and private equity,” Lay responded.

“Of which at least $5.5 million was still totally liquid,” Hueston said. “You still took $1 million from Enron while its bankruptcy was being drafted?”


“You said Enron’s bankruptcy was a bankruptcy of liquidity?”

“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 of his cross-examination, Hueston 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, touting the stock 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 14 weeks ago, 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 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 Monday he had made an “honest mistake.” But 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.”

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