U.S.: Lay looked out for No. 1
Enron founder defends accounting practices, stock sales, but gets irritable over prosecution's treatment of company 'corpse.'
By Shaheen Pasha, CNNMoney.com staff writer

HOUSTON (CNNMoney.com) - Government prosecutors concluded their cross examination of Enron founder Kenneth Lay Monday, but not before painting a portrait of a man who put himself and his financial interests ahead of his own employees.

Prosecutor John Hueston focused on lavish spending by Lay in 2001, even as the Enron founder was selling company stock because he was under financial pressure.

Enron founder Kenneth Lay and his wife Linda arrive at the courthouse for his third day of cross examination in his fraud and conspiracy trial Monday, May 1, 2006 in Houston.
Enron founder Kenneth Lay and his wife Linda arrive at the courthouse for his third day of cross examination in his fraud and conspiracy trial Monday, May 1, 2006 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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Lay, whose anger with the prosecution and even his own defense lawyer raised eyebrows last week, stayed mostly calm on the stand Monday. But as Hueston outlined the growing complaints that Lay was receiving from employees about Enron's accounting, Lay became increasingly irritated.

"The corpse is on the gurney now and you're carving it up any way that you want," Lay remarked irritably, adding that Enron executives were focused on fixing the company’s stock price - which he called the biggest concern of Enron's employees in late 2001, shortly before the company filed for bankruptcy.

Lay said he himself was forced to sell $70 million in Enron stock earlier that year to repay funds he'd borrowed to buy other securities, which is known as meeting a margin call.

Under questioning from Hueston, Lay said Enron stock was his most liquid asset and therefore he relied upon it to help him pay his debts. But Hueston aimed to show that Lay sold Enron stock not because he needed the money but because he knew the company was in trouble.

Hueston presented evidence that while Lay was selling Enron stock starting in early 2001, he was making buying things like a $200,000 chartered boat trip for his wife's birthday (ironically, the vessel was named Amnesia), and a $12,000 resort trip for Lay's birthday in April.

"As you can see my birthday was a lot cheaper than my wife's," Lay said, trying to lighten the mood, but with no response from the jury box.

Hueston also showed that Lay took trips to the French Riviera and made large antique purchases while Enron had cancelled the company's holiday party and was laying off employees.

Lay said while he didn't feel it was fair to question his personal expenditures, he conceded he "was living the American dream," and that it was "hard to turn it on and off like a spigot," once Enron's troubles started escalating.

Hueston also noted that Lay had other ways to repay his margin calls. Lay said his options were limited but admitted, "Yes, I did have other choices."

Hueston also detailed the last few days before Enron filed for bankruptcy. He showed evidence that Lay had a net worth of $50 million, with $5.5 million of liquid assets, but still chose to borrow $1 million from Enron at a time it was facing a liquidity crunch.

"You had a liquidity problem and Enron had a liquidity problem, isn't that correct?" Hueston asked. "Yes, that's correct," Lay responded.

"But you saw to it that you were taken care of before the Enron employees," Hueston concluded before ending his cross-examination.

Earlier in the day, Lay tried to brush off evidence of employee criticisms that emerged in late 2001 - which ranged from comments presented in an employee survey to e-mails sent directly to Lay - warning him that Enron's accounting for its retail energy unit and its controversial LJM partnerships was fraudulent and deceptive.

Lay said while he took the comments to heart, he believed employees couldn't fully understand the company’s complex transactions or were influenced by negative articles in the Wall Street Journal. And based on the information he had available at the time, "I didn't believe it," he said.

Aggressive doesn't mean illegal

He added that internal accounting experts and its outside accounting firm, Arthur Andersen, were defending Enron's accounting, and said that some of the creative financing was so new it may have been misunderstood.

"Aggressive accounting does not mean illegal accounting," Lay insisted testily. "People misunderstood things that were new and different as being wrong."

Both Lay and ex-CEO Jeffrey Skilling say they are innocent of misconduct and that the only crimes at Enron were committed by former financial chief Andrew Fastow, who pleaded guilty and testified for the government. Lay and Skilling face charges of fraud and conspiracy and could get 20 to 30 years behind bars if convicted.

Lay even kept his cool when Hueston raised Lay's friendship with and admiration for Michael Milken – the 1980s junk bond king who helped bring down Drexel Burnham Lambert – in an attempt to pin down Lay's definition of aggressive accounting.

Another run on the bank

Lay said he felt Drexel made many positive contributions to the world of finance and that the company wasn't brought down by its use of innovative accounting but rather by a "run on the bank in the mid-eighties."

"Another unfortunate run on the bank?" Hueston asked dryly, referring to the defense's assertions that Enron's demise was the result of shareholder fear following Fastow's misconduct that caused them to dump Enron stock.

"Failure does not need to be equated with criminal activities," Lay replied.

But it's up to the jury to decide whether Enron's failure came from a widespread criminal conspiracy led by Lay and Skilling, and much depends on how jurors perceive how the two men appeared on the stand.

On the surface, it appears that Skilling scored points with jurors through his affable, almost professorial demeanor while Lay, usually known as the folksy one, has been more prickly on the stand.

But after over two days of contentious cross-examination, Lay enthusiastically greeted his defense attorney, George "Mac" Secrest upon re-direct.

Lay sought to refute issues the prosecution raised, including the allegation that his own son, Mark Lay, was a short seller of Enron stock during 2001. Lay and Skilling contend that short sellers - in combination with a barrage of bad press, poor market conditions and the revelation that Fastow had stolen millions of dollars from Enron - were to blame for Enron's collapse, prompting Lay's former lead attorney, Michael Ramsey, to call short-sellers "vultures."

Lay testified on re-direct that he examined his son's documents and found that he had been attempting to sell 5,000 shares but that his broker "became nervous" and "shorted the stock to lock in" the stock price at $60.

"I'm certain he wasn't a vulture and wasn't a short seller," Lay said.

He also reiterated his belief that his own "forced sales" were properly disclosed as regulated by the Securities and Exchange Commission. The government, during cross, said Lay misled investors by only disclosing his stock purchases on a monthly basis but not the millions of dollars he sold to meet margin calls

"I felt then and I feel now that I was being fully compliant and Enron was being fully compliant with all the regulations" he added vehemently.

Secrest will resume his re-direct Tuesday morning and after a brief re-cross from Hueston Lay will be excused from the stand. Lay is the last critical witness for the defense and will be followed by a line of character witnesses and so-called "expert" witnesses.

Enron, once the seventh-largest U.S. company, filed bankruptcy in December 2001, causing billions in losses for investors and costing thousands of employees their jobs.

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Lay: No more Mr. Nice Guy. More here.

Mr. Skilling's brave new world. 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.