Enron's Lay to Testify

HOUSTON – Enron Corp. founder Kenneth Lay has embraced myriad roles in his life: economist, business visionary, Houston booster, philanthropist and smooth political gladhander among them.

On Monday, he'll become his most important witness.

"I'm looking forward to it," the 64-year-old ex-chairman said last week with the same confident smile he has displayed since his fraud and conspiracy trial began nearly three months ago. "I want to put more of the facts and the truth out about what happened at Enron."

For the last two weeks, the trial's focus rested on often contentious testimony from Jeffrey Skilling, Lay's co-defendant and brief successor as chief executive. The pair has presented a unified defense from the start, so Lay aims to build on what Skilling already told jurors: Enron was no bed of fraud and both are innocent of any wrongdoing.

The government contends the men lied repeatedly to investors and employees about Enron's financial health when they allegedly knew serious turmoil simmered beneath their ebullient optimism. Enron spiraled into bankruptcy protection in December 2001 six weeks after revelations of massive losses heightened scrutiny, leaving thousands jobless and wiping out billions from investors.

Lay is expected to be the more unflappable of the two, as he was when they ran the once-adored company that was the nation's seventh largest until it crashed.

His testimony also is expected to last about half as long because he faces six criminal counts to Skilling's 28 that focus on his actions from Skilling's abrupt resignation in mid-August 2001 through the company's failure. The charges against Skilling focus on actions from 1999 through his resignation.

"The great strength that Ken Lay has is that he is remarkably personable, and juries give verdicts to people they like," said David Berg, a Houston civil litigator. "This was a man who was going to be mayor of Houston, a brilliant man who is enormously likable — someone who can really sell to a jury panel."

Although the charges against both men differ in scope, they are linked by the overarching conspiracy count that alleges they participated in a sprawling effort to portray Enron as strong when they knew accounting tricks hid bad news and weak ventures. Both are charged with fraud and conspiracy, while Skilling also faces charges of insider trading and lying to auditors.

Skilling told jurors neither he nor Lay perpetuated such a ruse. And Lay has said repeatedly that he tried and failed to save a sinking ship, but did nothing illegal.

"He has to tell the jury in essence that he viewed Enron as a child that had been diagnosed with a fatal illness. He may have said and done some things in those final days that weren't accurate, but he didn't believe what he was seeing, and in retrospect, he made some mistakes. That's Mr. Lay's way out of the courthouse," Berg said.

But Berg added that the defense teams' stance that no fraud occurred at Enron could be problematic for Lay. The defendants attribute Enron's swift failure to bad publicity that siphoned market confidence rather than unsustainable fraudulent accounting maneuvers, overvalued assets that brought in paltry returns and crumbling business units.

"Lay's biggest obstacle is predicated on an almost unbelievable story — that there was nothing wrong at Enron," Berg said.

Prosecution witnesses have testified that when Lay resumed as CEO after Skilling's resignation after just six months in that role, he received forewarnings of disaster while publicly insisting the company was strong.

Former Chief Financial Officer Andrew Fastow testified that the day after Skilling quit, he gave Lay a rundown of huge looming write-offs because of overvalued international assets and a massive accounting error that would force a $1.2 billion writedown in shareholder equity in the third quarter.

A few days later, Lay met with former Enron executive Sherron Watkins, who Congress anointed a heroine in 2002 for trying to warn the company founder that accounting improprieties she had found could sink the energy giant.

Lay enlisted Vinson & Elkins LLP, Enron's outside law firm that had already reviewed the structures Watkins found, to investigate her claims. The firm conducted a cursory probe and concluded Enron's only risk was negative publicity and litigation.

Then former treasurer Ben Glisan Jr., who created the structures that caught Watkins' attention, testified he told Lay in October 2001 the company was so weak that bankruptcy was "inevitable." A day later, Lay assured Enron employees the company was sound.

Fastow and Glisan are among eight prosecution witnesses who have pleaded guilty to crimes, and both profited from secret scams unknown to Lay. The ex-chairman has repeatedly pegged Fastow as a crook who betrayed his trust and helped undermine the company.

Lay's lawyers also tried to show the Vinson & Elkins probe was evidence that Lay took Watkins' concerns seriously.

Unlike Skilling, Lay isn't charged with improper stock sales. But his heavy usage of his line of credit with Enron in the months before the company failed to repay his personal bank loans could damage his credibility.

Paula Rieker, former corporate secretary who has pleaded guilty to insider trading, testified for the prosecution that Lay infuriated Enron's board when directors learned he'd repaid more than $70 million in company loans with Enron stock in 2001, even as the company was collapsing. She quoted one director, John Duncan, saying: "He was using Enron like a damn ATM machine."

An executive's stock sales back to a company don't have to be reported to regulators until the year after they occur. Had Lay sold stock on the open market, he would have had to report it to the Securities and Exchange Commission.

Lay had used his Enron stock as collateral for personal bank loans, which he has said he had to repay because banks issued margin calls as the company's share price fell. However, he didn't tell employees of those sales as he encouraged them to buy more stock in September 2001.

"His dealings with his own Enron stock were much more complicated than Skilling's, and potentially more problematic for him," said Sam Buell, a former prosecutor with the Justice Department's Enron Task Force who is a visiting professor at the University of Texas School of Law.