Lay stock sale attacked

Doubt is cast on need to sell Enron shares


HOUSTON -- The government yesterday attacked former Enron Corp. Chairman Kenneth L. Lay's long-standing claim that his $70 million in Enron stock sales in 2001 - the year the company collapsed - had been forced by "margin calls" from his lenders.

Federal prosecutor John C. Hueston showed that on several occasions that year, Lay chose to sell large amounts of Enron stock when he could have avoided it by juggling bank borrowings or selling some of the millions of dollars in other investments he owned.

Hueston also charged that Lay ignored written warnings from a number of employees that year - not just the celebrated whistleblower Sherron S. Watkins - that something was amiss with Enron's accounting and its obsession with meeting the earnings targets of Wall Street stock analysts.

The issues arose during Lay's fifth day on the witness stand and his final day of cross-examination.

Lay and former Enron chief executive Jeffrey K. Skilling are accused of lying to the public about Enron's financial well-being and conspiring with others to falsely hide losses and inflate profits.

`Incredible bargain'

In response to an employee's question in an online forum Sept. 26, 2001, Lay said that he had recently bought some Enron stock and considered it "an incredible bargain at current prices."

In fact, on Aug. 21, he had purchased about $2 million in shares by exercising some options he held, according to exhibits in the trial.

However, between Aug. 20 and Sept. 6, 2001, Lay also had sold $20 million in stock back to the company, using the proceeds to pay down margin accounts or bank lines of credit secured by more of his Enron stock.

As Enron's stock price declined that spring and summer, Lay testified that he was barraged by margin calls, or bank demands that he put up more collateral or face having the bank itself sell the stock.

But Hueston, using bank and brokerage documents, pointed out that during that period, Lay still had more than $7 million in available credit on his bank lines, plus nearly $7 million in non-Enron securities in several brokerage accounts.

To delay disclosure

Hueston suggested that Lay traded shares to the company rather than let his banks sell the collateral directly because the latter type of sales had to be made public each month, while selling back to the company had to be reported only once a year.

That way, said Hueston, the public would have no way of knowing until the next year that Lay had unloaded more that half of his Enron holdings during 2001.

Lay insisted that he complied with all legal disclosure requirements. And he has testified that he drew a distinction between "forced" and voluntary stock sales and that he didn't consider it dishonest to overlook forced sales when discussing his personal stock activity with employees.

He said his goal was always to sell as little of his Enron stock as possible.

Hueston said that Lay had another option to avoid selling his Enron shares - he could have cut back on his spending. Hueston introduced evidence that in 2001, Lay had chartered a yacht for nearly $200,000 for his wife's birthday, had stayed at resorts in the French Riviera and Utah, and had gone antique shopping on the Mediterranean resort island of Majorca.

Lay said it was unfair of Hueston to examine lavish spending from early 2001, when nobody had an inkling of trouble at Enron. He said he had long acknowledged enjoying "the type of lifestyle that's very difficult to turn on and off like a spigot."

Lay also said the prosecutor was unfairly using hindsight to criticize him for overlooking warnings about aggressive accounting that came in an anonymous employee survey and in other communications from employees in the fall of 2001.

Positive remarks

Hueston cherry-picked the negative remarks from the survey and ignored the far more numerous positive comments, Lay said. He added that he had much more on his mind in trying to run the company as it skidded toward crisis in October and November.

"The corpse is on the gurney now, Mr. Hueston, and you're carving it up any way you want to carve it up," Lay testified, "but I didn't have that luxury when I was out there fighting the battle."

The defense is expected to rest as early as Monday, with closing arguments to follow after a two- or three-day rebuttal case by the prosecution.

Thomas S. Mulligan writes for the Los Angeles Times.

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