Lay grilled on stock sales
On his fourth day of testimony, the Enron founder tries to persuade jurors that his selling of about $70 million in shares was properly disclosed.
by Shaheen Pasha, CNNMoney.com staff writer

HOUSTON (CNNMoney.com) - In his fourth day on the stand, Enron founder Kenneth Lay tried to convince jurors Thursday that he was fully compliant with the Securities and Exchange Commission's regulations regarding public disclosure of his approximately $70 million in stock sales in the final months before Enron collapsed.

Lay testified Wednesday that he considered those sales to be "forced sales" in order to meet margin calls and said he didn't the disclose the matter based on the advice of Enron's attorneys that said it wasn't required until the end of the year.

Enron founder Kenneth Lay faces his fourth day of testimony  in his fraud and conspiracy trial in Houston.
Enron founder Kenneth Lay faces his fourth day of testimony in his fraud and conspiracy trial in Houston.
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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But the government contends that Lay hid evidence of his own stock sales at a time when Enron was headed for trouble in order to pump up the company's waning stock price, and that he advised his own employees in an online forum that Enron's low price was "a bargain."

Government prosecutor John Hueston presented various filings with the SEC that showed Lay purchased about $2 million worth of Enron stock - information that was available to the public - but there were no public filings that showed Lay had sold about $66 million worth of stock between January and October of 2001.

Trying to discredit Lay's claims that investors were made aware of the sales in the company's annual SEC filing, Hueston pointed to language within that filing which indicated Lay had paid back in full the money he borrowed from Enron's line of credit - but didn't state that he sold millions of dollars worth of stock back to the company in order to do so.

"Those forms didn't tell reasonable investors that you were selling stock back to the company, isn't that correct?" Hueston asked Lay, who replied that "Our securities lawyers said it was appropriate and that's what we did."

Hueston also highlighted the fact that Enron neglected to attach necessary amendments to Lay's employment agreement to the company's annual SEC filing – a document that would have told the public that Lay was authorized to sell stock back to the company in order to pay back his line of credit.

"The investing public wouldn't have found out about your sales?" Hueston asked, referring to the missing document. "I guess not, not if they were not there," Lay conceded quietly, although he quickly added that the decisions were made by the company's internal securities lawyers, such as Rex Rogers.

That he fully complied with SEC rules and regulations was a mantra Lay repeated frequently throughout his testimony as he became increasingly frustrated at Hueston's line of questioning.

"Again, Mr. Hueston, you're trying to mislead the jury that I was trying to do something inappropriate or illegal here," Lay said irritably at one point.

"From my standpoint, Mr. Hueston, everything I did was totally appropriate, approved by the compensation committee (and) were totally legal," Lay declared, adding that he differentiated between forced sales and those optional purchases that he made at that time.

But he conceded that he didn't tell employees, investors or even Enron's own board members that by October, his $66 million in sales overshadowed his purchases. "Yes, my forced sales exceeded my discretionary buys," Lay said.

It's was another tough day of cross-examination for Lay as he fielded questions about his testimony that Enron was toppled by a mixture of bad press and short sellers who took advantage of investors' crisis in confidence in the wake of former financial chief Andrew Fastow's misdeeds.

Lay, who surprised the court late Wednesday with his animosity toward Hueston, kept his temper in check Thursday - even as the government presented evidence that his own son, Mark, was a short seller of Enron stock in March 2001 and had sent an e-mail to Enron's director of communications, Mark Palmer, calling for the company to disclose stock sales by top level executives on a more frequent basis.

Lay said his son had never shared either of those issues with him.

Both Lay and Enron's former chief executive Jeffrey Skilling have been adamant in their testimony that short sellers conspired in January 2001 at a secret meeting in Florida – whimsically called the "bears in hibernation meeting" – to short Enron's stock for profit.

And Lay reiterated under cross-examination that, while he considers his attorney Michael Ramsey's characterization of short-sellers as vultures a "colorful" characterization, he still believed that short sellers were spreading reckless rumors about Enron in 2001 to make a buck at the expense of the company and its shareholders.

Son at the meeting?

But Hueston presented documents that indicated that his son, Mark, also made five short sales of Enron stock on March 23.

"Was your son in Florida at that meeting?" Hueston asked. "I guess I should ask him that," Lay replied cynically.

Lay defended his assertions that the company was "under siege" by October 2001 when he tried to assure employees that the company was in solid shape and the media attacks were planted by short sellers. He conceded, however, that the articles involving Fastow's inappropriate compensation for his role as general partner of the LJM Partnerships - special-purpose entities the government contends were used to move millions of dollars of losses off Enron's balance sheet - turned out to be accurate.

Lay also testified that he believed the company's retail energy unit was poised for strong growth if Enron hadn't gone into bankruptcy and stood by the optimistic comments he made to Wall Street about its potential value.

He took issue with the government's presentation of documents from a finance committee meeting of the board of directors in which the company listed challenges the unit was facing and said it had formed a task force within Enron to handle its problems.

"The role of management is to solve problems," Lay said, adding that he disagreed with Hueston's implication that the formation of a task force implied that the unit was in trouble.

He added that his bullish comments on the unit to analysts and employees were based on information provided by the head of the division, David Delainey.

Delainey, however, who testified for the government in February, described the retail energy business as "a train wreck" to the court – a description that Lay dismissed as "very colorful."

Lay's frustration slowly mounted by the end of the day. Hueston hammered him on whether he truly planned to grow Enron's troubled water business Wessex in 2001 or if he if only said the company would continue to invest in the business in order avoid a large goodwill write-down.

Witnesses have testified that the business would incur $700 million goodwill impairment if Enron didn't say it planned to invest in the business. But over two grueling hours, Lay vehemently and repeatedly denied that there was an impairment issue and that the company ever planned any growth strategy toward Wessex in order to avoid taking a write-down.

"I don't know how many different ways I can say that," Lay said, his temper starting to show. At one point as Hueston continued to grill him on the goodwill impairment, Lay testily called that the line of questioning "a real waste of the jury's time."

It's been an uphill battle for Lay on the stand in connecting with jurors. And in a case without a "smoking gun" document, jurors have to decide whether to believe the word of the defendants or the 22 witnesses presented by the prosecution. The personalities and the credibility of the witnesses are on trial.

Not that folksy

For Lay, who has often been described as a congenial uncle figure, his personality should have been one of his greatest strengths. But, surprisingly, Lay has been anything but affable since taking the witness stand as he appeared to want to control the direction of the direct examination from his lead attorney George "Mac" Secrest, causing awkward moments between the two.

But his lack of chemistry with his own attorney paled in comparison to his blatant antagonism for the prosecution.

Lay spent much of Wednesday trying to explain away the charges against him. He was direct and generally pleasant as he went through the indictment point-by-point. It was dry testimony, to be sure, but he appeared credible as he reiterated his belief that Enron was in solid shape in the fall of 2001 and any optimistic comments he made to Wall Street at the time were supported by the information that internal and external accountants gave him.

His careful composure quickly crumbled in Wednesday's final hour when government prosecutor John Hueston began cross-examination and accused Lay of trying to manipulate potential witnesses and assassinate the character of former executives now testifying for the government.

It was the start of a contentious cross-examination and one that could tip the scales in the government's favor if Lay isn't able to regain some lost ground.

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.

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Mr. Skilling's brave new world. For more, click here.

For complete coverage of the trial,click hereTop of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.