Lay: I was confident, but I sold shares
In final day of questioning by his lawyer, Enron co-founder denies he purposely misrepresented company's financial picture to analysts.
HOUSTON (CNNMoney.com) - On the third and last day of direct questioning by his lawyer, Enron co-founder Kenneth Lay testified Wednesday that he was confident in the company's strength, but was forced to sell large amounts of stock in order to meet margin calls and repay a line of credit that he borrowed from Enron.
The government maintains that his stock sales, particularly those that occurred after Skilling's abrupt departure in August 2001, were evidence of insider trading because he was aware that the company was headed for trouble. The prosecution has highlighted the fact that he sold stock even as he told investors and employees publicly that Enron was in sound financial condition in an effort to pump up Enron's waning stock price.
Lay said he didn't disclose his own stock sales at the time because he was told by Enron's internal securities attorney, Rex Rogers, that his sales didn't constitute insider trading and the sales would be reported at the end of the year.
He added that the market environment was also so volatile in the wake of Skilling's sudden departure, the Sept. 11 terrorist attacks and the presence of short-sellers eager to make a buck at Enron's expense that he believed that the disclosure wouldn't have been a positive event in the market.
"From my standpoint, I viewed this as forced sales," he said. "The fact I had forced sales was not an indication of my confidence or (lack of) optimism about Enron."
Lay sought to maintain a calm demeanor throughout questioning by his attorney, George "Mac" Secrest - a demeanor that changed dramatically later in the day when Lay was cross-examined by government prosecutor John Hueston. (Click here for details)
In the earlier direct questioning, Lay denied government allegations that he misrepresented the large-scale loss and $1.2 billion equity reduction the company incurred in the third quarter 2001 in order to pump up Enron's stock price, adding that any comments he made were based on the information provided to him by internal and external accountants.
Lay said he was given a script approved by investor relations and accounting chief Richard Causey before the third quarter conference call with analysts and that Arthur Andersen accountants also listened in on the conference call. But no one ever told him that the information was incorrect.
At the heart of the defense for Lay and former chief executive Jeffrey Skilling is that they relied "in good faith" on the advice and expertise of accountants and lawyers when it came to complex transactions at Enron.
Lay insisted that he very rarely deviated from the script and "never presume that I know more about everything than a lot of very smart people heading up a lot of different groups."
Lay also denied that he misled analysts about his views on the company's retail energy business during the company's road show following that earnings release, adding once again that his upbeat outlook was based on information provided by the heads of that business.
He said he stood by his comments that the retail business was a primary business for Enron and said "it was growing rapidly and we had very high hopes for it."
"Do you believe based on the information that you had available, what you were saying at the road show was accurate and fair?" Secrest asked. "I did then, I do today, based on what I knew," Lay replied.
During Tuesday's testimony, Lay, who is generally known for his affable, gentlemanly comportment, seemed uncomfortable on the stand. As he led the jury through the last few months of 2001 while Enron struggled to survive, he seemed to lack the warmth he's known for. And the jurors, who appeared visibly fatigued after thirteen weeks of testimony, didn't appear to connect with the defendant.
He also struggled with a lack of rapport with his own attorney. Secrest took over as lead attorney when his former lead attorney Michael Ramsey was forced to step back after being hospitalized for vascular surgery midway through the trial.
Lay frequently attempted to shape the direction of the questions and appeared irritated by the manner in which Secrest conducted his direct examination. At one point, Lay responded to Secrest's line of questioning with, "I'm not sure where you're going with this, Mr. Secrest."
The defense also faced some hurdles from Judge Sim Lake, who appeared increasingly frustrated at the pace of Lay's direct examination. Lake repeatedly admonished Secrest about continuing a line of questioning after he sustained an objection from the prosecution. And at one point, Lake lost his patience and questioned the relevancy of evidence presented to the jury.
While the relationship between Lay and Secrest and the pace of the direct examination improved Wednesday, his inability to control his temper with prosecutor Hueston could pose problems for Lay during the cross.
In the absence of any solid documentary evidence proving Lay and Skilling are guilty, the jury will have to weigh the testimonies of the 22 witnesses presented by the prosecution with the defendants' stories on the stand. And in the end, it all comes down to whom they believe.
That makes likability a critical factor for both Lay and Skilling.
The defense contends that not only are Lay and Skilling innocent of any criminal conduct, but that there was no fraud at Enron other than the activities of former chief financial officer Andrew Fastow and a handful of cohorts.
Combined, Lay and Skilling face almost three dozen charges of fraud and conspiracy and 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 in losses for investors and costing thousands of employees their jobs.
Mr. Skilling's brave new world. For more, click here.
For complete coverage of the trial, click here.