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Another day, another trial for Enron founder Lay

By ASSOCIATED PRESS
Published May 19, 2006

HOUSTON - Enron Corp. founder Kenneth Lay wasn't satisfied with federal loan rules that limited his purchase of stock, so he lied on bank forms and used the borrowed money to improperly buy stocks anyway, prosecutors said as his bank fraud trial began Thursday.

"This is a straightforward trial about lying to the banks," prosecutor Robb Adkins said in a brief opening statement. "Evidence will show Mr. Lay repeatedly and falsely executed forms relied on by banks and required by banks."

Lay's federal fraud trial began as jurors were in their first full day of deliberations in the fraud and conspiracy trial of Lay and former Enron chief executive Jeffrey Skilling. Lay is charged with six counts in that case, Skilling with 28.

The eight-woman, four-man jury in that trial deliberated for about 9½ hours Thursday and will continue Monday.

In the new trial, Lay's attorney, Ken Carroll, said Lay had no motive to violate rules, had collateral to back up the loans and even paid them off.

"If somebody told him he wasn't doing the right thing with these lines (of credit), he would have fixed them," Carroll said in response to a question from U.S. District Judge Sim Lake, who is trying the case without a jury.

Carroll also suggested many of the documents may have been signed by an automatic signature machine that Lay and his wife, Linda, used, and that Lay's assistants would have used the machine "if somebody sends him a pile of bank documents and had to be signed in order to get a loan done."

When Lake asked Carroll if there's a distinction to be made if the signatures were made electronically, Carroll responded that while it could be a civil or regulatory matter, "It's not a crime."

Lay faces four charges: one of bank fraud and three of making false statements.

Prosecutors allege that starting in 1999, Lay obtained $75-million in loans from three banks - Bank of America, Chase Bank of Texas and Compass Bank - and reneged on an agreement with the lenders that he wouldn't use the money to carry or buy stock. Under federal rules adopted after the 1929 stock market crash, only 50 percent of a loan can be used to buy stock, Adkins said.

"Mr. Lay was not satisfied with the 50 percent of this loan," Adkins said.

Instead, Lay secured loans from the banks, signed documents agreeing to the rules, but "repeatedly, time and again, over a period of years," drew down on the loans to buy stock "he promised he would not purchase from these lines of credit," Adkins said.

Lay used his Enron stock as collateral for the $75-million in loans. Lenders issued margin calls as Enron's share price fell throughout 2001, which he said prompted him to tap the company for cash and repay the energy giant with Enron stock. Although Lay repaid the bank loans, legal experts have said that's no defense for fraud.

The first government witness was James Shelton, who from 1993 to 1998 was Lay's private banker at what is now Bank of America. He said he advised Lay about the 50 percent rule and that Lay was surprised he couldn't use up to 75 percent.

"There are penalties to the bank, and to me personally as an officer of the bank," Shelton said. "There was no way we were going to make that loan for purpose of buying margin stock. We just weren't going to do it."

Lay ultimately obtained two lines of credit through Shelton, one of them for stock purchases, and signed documents agreeing to the regulations, according to evidence. The documents raised objections from Carroll, who said Lay's signatures could not be authenticated as original.

Under cross-examination, Shelton said he never saw Lay or anyone associated with him misuse the lines of credit and that no regulatory or law enforcement agency ever raised questions about Lay's loans until after Lay was indicted. Shelton also said he often mailed or had documents delivered to Lay and didn't personally see Lay sign them.

Robert Hanisee, who oversaw Lay's investments at a Los Angeles management firm where Lay was on the board of directors, testified that he considered Lay a sophisticated investor who made all the decisions on his investments.

Sally Ballard, the administrative assistant who paid the bills for Lay and his wife, described Lay as an active manager of his accounts.

She acknowledged using the automatic signature machine when Lay was out of town or unavailable, but said she never used it without his permission.

Under cross-examination by Lay's attorney George Secrest, she said Lay never asked her to transfer funds from one of his accounts to another in a way that would conceal the purposes from a bank.

"Oh no, no," she said.

Prosecutors said they expected to wrap up their case early Monday. Lay's attorneys said they planned to call three witnesses, including Lay, and could end no later than Tuesday.

There is no testimony today.

[Last modified May 19, 2006, 06:27:00]