Enron Fraud Trial Update: Former CEO Kenneth Lay takes stand

Former Enron Chairman Ken Lay arrives at Federal court where Lay is expected to take the witness stand in his fraud and conspiracy trial in Houston April 24, 2006.

GDO Report

While the grilling was more restrained than Wednesday, when his heated exchanges with US assistant attorney John Hueston kept jurors on the edge of their seats, Lay still seemed querulous and was often evasive.

Lay explained that he gave glowing reports of Enron's health to stock analysts and company employees "based on the information I was given" and that he trusted "the advice of senior advisors".

This, prosecutors pointed out, contradicted the testimony of several of Lay's senior advisors at the time who informed him that Enron was in dire shape.

"They have all testified that they are taking responsibility for their actions at Enron," Hueston said. By contrast, he said Lay has not owned up to taking his "hands off the wheel and allowing that ship to sink into bankruptcy".

Hueston continued that Lay has not "paid one dime to shareholders" who lost their life savings after Enron collapsed amid questionable accounting practices.

Under questioning from Hueston, Lay said "there's nothing left" of the hundreds of millions of dollars he made during his career at Enron.

Lay maintained that "vicious" articles in the Wall Street Journal and a cabal of short sellers had caused Enron's demise. Hueston sarcastically said the Wall Street Journal articles were "hardly reckless, unfounded rumors".

Lay blandly responded, "Not now, but that's not what we thought at the time."

However, he said he still believed a group of short sellers, who he likened to "vultures", had "decided to work together to drive down the stock price".

Hueston then revealed that Lay's son, Mark Lay, had sold Enron stock short in 2001.

"He wasn't a vulture was he?" the prosecutor asked.

"I don't think so," Lay responded.

Short sales are a trade made in the expectation that a company's stock will decline, thereby netting the seller a profit if it does fall.

Enron collapsed in December 2001 with estimated losses of more than 40 billion dollars. It was then the biggest corporate bankruptcy in history, precipitated by revelations that the company had used questionable accounting and arcane financing vehicles to hide billions in debt.

Lay, who also served as chairman and chief executive officer of Enron, is on trial with former chief executive officer Jeffrey Skilling in what is seen as a key test for a government crackdown on corporate fraud.

In addition to six counts of fraud and conspiracy for which he is currently on trial, Lay also faces a separate trial on federal banking violations.

Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors.

Lay, 64, and Skilling, 52, face lengthy prison terms if convicted.

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Surprise of Enron Trial Is Lay's Surly Manner

Known for charm, the ex-chairman may have damaged his case with sarcasm and snippiness.
Who would have guessed that Kenny Boy could be a tougher sell to a jury than Capt. Queeg?

Enron Corp. founder Kenneth L. Lay — Kenny Boy to his friend President Bush — is renowned for his courtliness, his philanthropy, his rise from a dirt-poor boyhood in the Missouri Ozarks to a nine-digit fortune.

Codefendant Jeffrey K. Skilling, who invented Enron's most profitable business and ran the company during most of its heyday, also is known for getting in a bar fight while under indictment and for publicly calling an investment analyst by another name for a sphincter.

At the start of their federal fraud and conspiracy trial three months ago, the betting was that the volatile Skilling's performance on the witness stand might drag Lay down, not the other way around.

Former Chief Executive Skilling, 52, shares some of the obsessiveness of Queeg, the Navy skipper of "The Caine Mutiny." But unlike Queeg, Skilling didn't unravel on the stand. Where mastery of Enron's finances was at issue, he overpowered co-lead prosecutor Sean M. Berkowitz. When the nimble Berkowitz pushed certain buttons, Skilling showed flashes of anger and arrogance, but he generally kept his head.

For Lay, however, it's been a rockier ride. Although nobody knows what the 12 Texans in the jury box are thinking, during his first four days on the stand, Lay, 64, has shown some attributes that clash with his reputation as affable, openhanded and shrewd.

His worst moment came Wednesday, when prosecutor John C. Hueston jolted Lay with questions about his attempts to reach actual or potential witnesses in the case — efforts that persisted even after Lay's lawyers told him to stop.

"You've got to question the judgment of the person," said Mark C. Zauderer of New York law firm Flemming Zulack Williamson Zauderer. "No lawyer would have his client in the dock calling potential witnesses. It could be very suspect in the minds of the jury."

Lay probably didn't help matters by responding to Hueston's blitz with sarcasm. The jury of eight women and four men has hardly been immune to humor during the trial — even Skilling's mordant wit sometimes connected — but nobody cracked a smile at Lay's comebacks Wednesday.

Noting Lay's $120,000 investment in a company whose main customer was Enron, Hueston asked whether he had made conflict-of-interest filings required by Enron's code of conduct.

"I don't know," Lay shot back. "Have you checked it? I imagine you have. You guys are pretty thorough."

After describing himself in early testimony as "more of a delegator" than a micromanager, Lay quickly proved himself adept at delegating blame. If something worked out, it was his idea. If it blew up, it was somebody else's.

Asked to name his biggest mistakes at Enron, Lay unhesitatingly listed "hiring Andy Fastow" and promoting him to chief financial officer.

Andrew S. Fastow turned out to be a crook who secretly stole millions from Enron and allegedly helped cook the books. Lay didn't mention it, but he had to know the jury would recall that hiring and promoting Fastow was entirely Skilling's doing.

It wasn't the only time Lay subtly undercut his codefendant. He cited Skilling's surprise resignation in August 2001 as a source of uncertainty in the financial markets that set the stage for the investor and creditor panic that Lay said ultimately brought Enron down.

Moreover, by praising Skilling as an executive who "really gets into the details, the guts of how things work," Lay may have signaled that Skilling, far more than Lay, would have grasped the intricacies of Enron's accounting and financial reporting — the things at the heart of the criminal case.

Lay blamed two aides for what turned out to be one of the biggest PR gaffes of the century: rebuffing the Wall Street Journal in the fall of 2001 when the paper had questions about Fastow and his mysterious LJM partnerships — complex financial structures that the government says let Enron hide problem assets and falsely pump up profit.

With Enron offering only a brief statement written by its lawyers, the company lost any control over the debate and was powerless when the resulting stories eviscerated its stock. A livid Skilling even called from retirement to ask why Enron wasn't defending itself.

In Lay's view, his own instincts had been right all along. Stonewalling the Journal, he testified, went "against every bone in my body."

One of the witnesses whom Lay admitted trying to reach was a former Enron risk manager named Wincenty "Vince" Kaminski. Jurors would remember him as a professor type with a Polish accent and a healthy ego who testified that he tried vainly to warn higher-ups that Fastow's LJM partnerships were a stupid idea and that Enron shouldn't be involved with them.

In testimony Tuesday, Lay seemed to impugn his former colleague's courage. He acknowledged that Kaminski had been an early skeptic of the LJM deals, but added that it was only after the Journal stories hit and the partnerships blew up in scandal that "his level of dislike intensified."

To be sure, Lay is operating under the disadvantage of losing his lead defense lawyer, Michael W. Ramsey, who has undergone two heart-vessel operations during the trial.

And Lay did seem to claw back some lost ground with the jury Thursday, if only because of Hueston's insistence on spending three hours browbeating him over an accounting issue known as the "Wessex goodwill impairment."

Lay showed impatience with repeated variations on the same highly technical questions — a feeling shared by U.S. District Judge Sim Lake, who has complained about the recent slow pace of the trial. Near the end of the day, Lay burst out: "Mr. Hueston, go where you want to, but I think this is a real waste of the jury's time."

Had Lay been running for mayor at that point, he'd have had at least 12 votes.

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The joke may be on pugnacious Enron bosses

Comedians often face tough crowd in court, where best defence is rarely a strong offence
The way things have been going, the trial might as well have been held in a boxing ring.

Former Enron Corp. bosses Kenneth Lay and Jeffrey Skilling have emerged as the pugnacious duo of the courtroom in their testimony over the past three weeks, raising voices, talking back to prosecutors and even trying their hand -- very unsuccessfully -- at humour.

It has made for riveting courtroom drama, but legal experts say that as a defence strategy, it is woefully misguided.

"It's a circus," said Daniel Horowitz, a criminal defence lawyer based in Oakland, Calif., who has acted on more than 200 jury trials, many of them white-collar crime cases. "They should be in there looking scared."

The tension appeared to reach a high point Wednesday, when Mr. Lay, Enron's founder and long-time CEO, snapped at prosecutor John Hueston for accusing him of witness tampering.

"Did you have any conversations to get your story straight for trial?" Mr. Hueston asked after a preamble that would seem to have put the question in a clear context. "Can you elaborate on that Mr. Hueston?" Mr. Lay snarled. "I'm not sure what story you're talking about."

The acerbic exchange was in stark contrast to Mr. Lay's famously avuncular and affable persona when he headed the Houston energy trading juggernaut that capsized in December, 2001, in the wake of an accounting scandal.

At another point this week, Mr. Hueston asked Mr. Lay whether he had followed Enron's written code of ethics when he made an investment in a company that had received business from Enron.

"I don't know. Did you check on that?" Mr. Lay replied, winding up for an intended joke. "You guys are pretty thorough." No one laughed.

More pregnant silence ensued as the prosecutor then suggested moving on to a new topic. "Good," Mr. Lay said, looking around the room for a reaction.

"Jokes almost never work in front of a jury," Mr. Horowitz said. "Genuine humour that just comes out, that's okay. But you're not supposed to overtly make the jury do anything."

Allen Ferrell, a professor specializing in securities law at Harvard, said self-confidence, though valuable in the business world, can be a liability in a criminal trial. "The way that could obviously backfire is they don't take their cross [examination] seriously enough, they don't prepare for it seriously enough, or they assume that they're going to get their version of events across."

Prof. Farrell said the Enron duo's testy performance reminded him of Microsoft chairman Bill Gates's infamous appearance in a deposition concerning antitrust charges against the software giant several years ago. "The widely held view was that he came across as evasive and not forthcoming," Prof. Farrell said. "This is just rank speculation, but the impression I got was that he shouldn't be there at all. What came across was that he felt he was imposed upon."

Mr. Lay, 64, and former president and CEO Mr. Skilling, 52, face up to 25 years in prison each if convicted on a spate of fraud and other charges relating to the collapse of what was once the seventh-largest U.S. company.

Mr. Horowitz said the notion that the best defence is a strong offence is always misguided, and that audacity and bluster never help when you're facing criminal charges.

"You can have moral contrition and still be innocent of a crime," Mr. Horowitz said. "But arrogance combined with evidence against you equals disaster."

Mr. Skilling may have put it best during a brief moment of self-possession and humility on the stand. Daniel Petrocelli, his lead lawyer, sensing the former executive had lost his composure, suggested, "Let's go on to the next sentence."

To which the client quickly replied: "Yes, let's go on to the next sentence. I'm sorry. I have to calm down here."