Ken Lay: Watkins didn't call transactions illegal
On the stand, former Enron CEO says meeting with whistle blower was 'cordial'; Skilling's resignation surprised him but triggered no alarms about health of company.
By Grace Wong, staff writer

HOUSTON ( - Enron founder Ken Lay testified Monday that he met with former vice president Sherron Watkins to discuss Enron's accounting but that at no time did she suggest the transactions were illegal.

As the Enron trial entered its 13th week, Lay testified that he met with Watkins, Enron's most prominent whistle blower, in August 2001 and that the two spent nearly an hour discussing Watkins' concerns over the accounting of Enron's LJM side deals.

Enron founder Kenneth Lay as he walks to the federal courthouse in Houston. Lay took the stand today.
Enron founder Kenneth Lay as he walks to the federal courthouse in Houston. Lay took the stand today.
Find out who you might have seen at the Enron trial, how they got involved, and what they're doing now.
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Lay, who was considered a business visionary at Enron's peak, is fighting for his life. He faces six counts of conspiracy and fraud and could face 20 to 30 years in prison if found guilty, legal experts say. Lay will also face a trial for bank fraud once jurors begin deliberations in the current case

Lay described the meeting between him and Watkins as "cordial" and said he found her to be a credible and serious-minded individual. But while her concerns suggested there might be an "appearance problem" with the transactions, she didn't voice any legal concerns.

Lay said that on a couple of occasions he asked Watkins whether she believed there was anything about the accounting that did not comply with generally accepted accounting standards and principles.

"She said, 'no' each time," Lay testified.

Lay's attorney George "Mac" Secrest tried to discredit the source of Watkins' concerns, asking Lay if he knew whether Watkins had gotten her "fingers in the mud" or was basing her concerns on other sources.

Lay replied that he wasn't sure what her sources were but that he hadn't gotten the sense that she'd been investigating the accounting personally.

Watkins testified last month that she met with Lay to warn him about the company's troubles and provided him with a memo that detailed Enron's dubious dealings.

While no legal concerns were voiced, Lay said he raised Watkins' concerns with General Counsel James Derrick and that an internal review was ordered.

Lay appeared calm on the stand as Secrest methodically questioned him about matters ranging from his personal history to his knowledge of the inner workings of Enron, but testimony appeared to wear on him as the day dragged on.

At one point late in the afternoon, Secrest fumbled in his questioning, saying "Do you recall receiving the inmate" when discussing an e-mail Lay received. Lay's face hardened and he repeatedly emphasized the word "e-mail" in his following response.

Secrest is leading the direct questioning. Lay's lead attorney Michael Ramsey has been recovering from complications related to heart surgery he had in late February.

Fastow's deceit

Lay took the stand early Monday after the defense breezed through the testimony of Joe Romano, a character witness. During the morning, Lay tied Enron's collapse directly to the "deceit of Andy Fastow."

Lay testified that Enron's failure was caused by a classic run on the bank, but the main cause of that "run" was sparked by former financial chief Fastow the prosecution's star witness.

When asked by Secrest what he thought was his biggest mistake at Enron, Lay replied: "Hiring Andy Fastow."

What about his second biggest mistake? "Promoting Andy Fastow to CFO" and putting him in a position of power to orchestrate his side deals, Lay said.

In addition to Fastow, Lay blamed the company's collapse on a conspiracy of short sellers and a slew of media reports about Enron, which he said fueled uncertainty and created investor panic.

Enron in good shape

Lay accepted full responsibility for what happened at Enron but said he could not take responsibility for the individual conduct of every one of Enron's 30,000 employees.

He also insisted that Enron was in good shape when he stepped back into the top executive role at the company.

"I thought it was in good shape," he told jurors. "Going into the fourth quarter of 2001, the fundamentals of Enron were incredibly strong."

Lay was resolute when asked if he ever intentionally misled investors during an analyst meeting or conference call. "Absolutely not," he said.

He also said he was caught off guard when Skilling told him he was stepping down as CEO of Enron but had no reason to believe his decision was related to problems within the company.

"You're going to do what?" Lay testified he said in July 2001 when Skilling told him he was resigning as CEO of Enron after taking up the position in February.

Lay said he asked Skilling if any serious issues had occurred at Enron while he was away traveling to trigger his departure, but that Skilling said he was leaving because of family and personal issues and that he'd been thinking about the decision for some time.

"Jeff was very genuine about his problem," Lay said. Skilling had always been a "straight shooter" with him and he had no reason to believe there were no major questions that needed to be addressed, Lay testified.

Lay vehemently denied that he masterminded a massive conspiracy at Enron when he resumed the CEO position in August 2001 after Skilling stepped down.

It was "ludicrous" to think that he would pick up the mantle of a conspiracy upon returning to Enron and it was the "last thing" he would do, Lay testified.

As with any company though, there were some problems at the firm, but Lay insisted that the company was candid about those problems and was in the midst of tackling them before it had to file for bankruptcy in December 2001.

The reliance of others

Lay testified that he was more of a "decentralization person" who preferred to give people flexibility to do their own job. He also said in his later years at Enron that he spent on average more time traveling than managing the day-to-day affairs of the business.

Secrest systematically asked Lay questions about the complexity of running a corporation as large as Enron. In order to deal with such massive flows of information, Lay said he relied on others for tasks ranging from prioritizing his e-mail messages to vetting Enron's accounting.

"To this day do you send e-mail?" Secrest asked Lay, who somewhat bashfully replied that he receives messages but doesn't send them.

"If I would have tried to answer every e-mail that came into my office, I'm not sure if I'd have much time for anything else," Lay said.

When it came to Enron's accounting, Lay said Enron had its own accountants but that at the end of the day, the firm relied on the expertise of outside auditors Arthur Andersen.

Lay as family man

In a "he-said, she-said," case, the outcome is likely to be heavily influenced by likability, and Lay's affable personality is expected to play to his favor.

Secrest spent a fair amount of time Monday painting the picture of a family man who generously supported charities and his community. Lay pointed out the presence of his wife Linda at the trial and mentioned his "dozen grandchildren" more than once. During morning testimony, Lay emphasized his small-town background and took on a more folksy demeanor, playing up a southern drawl at times.

Lay isn't expected to spend as much time on the stand as Skilling, who wrapped up nearly two weeks of testimony Thursday, since he faces fewer criminal counts.

Legal experts say the defendants could get 20 to 30 years behind bars if convicted. Lay will also face a trial for bank fraud once jurors begin deliberations in the current case.

Enron, once the seventh largest corporation in the nation, declared bankruptcy in December 2001, resulting in billions of dollars in losses for investors and costing thousands of employees their jobs.


Mr. Skilling's brave new world. Get more here.

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