Lay's 2nd trial gets under way

Case involves bank-fraud charges

May 19, 2006|By BLOOMBERG NEWS

HOUSTON -- Kenneth L. Lay was repeatedly told that it was illegal to use some loans to buy stock, a banker testified yesterday in the government's bank-fraud case against the former Enron Corp. chairman.

James Shelton, a Bank of America Corp. executive who oversaw the bank's loans to Lay starting in 1993, told U.S. District Judge Simeon T. Lake III that he explained to Lay many times that he was forbidden under federal law from using some of the credit lines to buy stock. Shelton said he also got Lay to sign forms explaining the limitation.

"We had to make sure everyone understood what their obligations were," Shelton said.

The government contends Lay ignored those limitations and used some of the $75 million he borrowed to buy Enron stock.

Testimony in the non-jury case began as jurors deliberated separate fraud and conspiracy charges against Lay and former Enron chief executive Jeffrey K. Skilling for a second day. Lake has said he won't announce his verdict in the bank-fraud case until the jury finishes weighing the other charges. He's the judge in both cases.

Lay, 64, is facing at least 30 years in prison if he's convicted of committing bank fraud and making false statements in connection with the loans. He's also facing at least 25 years in prison in his other trial if jurors find him guilty of conspiring with Skilling to defraud Enron investors while enriching himself.

Prosecutors contend that Lay violated Regulation U, part of a package of Depression-era laws meant to guard against reckless investing in shares, such as buying them on credit and using stock as collateral.

Under that law, banks can only lend 50 percent of a stock's value when it's pledged as collateral to avoid contributing to the kinds of "market failure" that occurred during the 1929 crash on Wall Street, prosecutors told Lake yesterday. If a borrower says he's going to buy stock with the loan proceeds, he's subject to that limitation, they said.

Other credit lines designated as "non-purpose" loans are barred from being used to buy stock under the law, the government contends.

Prosecutors allege that Lay arranged for about $75 million in loans between 1993 and 2001 using Enron shares as collateral. Some of those loans were designated as non-purpose loans, prosecutors say.

In Lay's 2004 indictment in the bank-fraud case, prosecutors allege that he used $25.3 million of the non-purpose loans to buy margin stock, which is defined as "any publicly traded security."

Shelton testified that loan documents Lay signed contained a section that stated the non-purpose loans couldn't be used to buy margin stock. He also made sure Lay signed forms acknowledging he understood the Regulation U limitations, Shelton added.

Shelton said he satisfied himself that Lay was informed about Regulation U's provisions "by meeting with him and going over the documents" anytime Lay sought a new loan or wanted to extend an existing credit line. That occurred many times between 1993 and 1997, he said.

Under cross-examination by Lay lawyer Ken Carroll, Shelton said he didn't see Lay sign all the loan documents that prosecutors have produced in the case.

Defense lawyers deferred making opening statements until they present their case next week, but Carroll said the defense would produce evidence that the Enron executive had "plenty of collateral" to open unrestricted credit lines to finance his stock purchases and didn't need to use his restricted credit lines.

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