Prosecution Accuses Lay of Trying to Tamper With Witnesses

By Frank Ahrens
Washington Post Staff Writer
Wednesday, April 26, 2006 6:33 PM

HOUSTON, April 26 -- Government prosecutor John Hueston opened his cross-examination of Enron founder Kenneth L. Lay Wednesday afternoon with rapid-fire questions and accusations, charging Lay with trying to tamper with some government witnesses before their testimony, engaging in "character assassination" of others and eliciting an admission from Lay that he violated Enron's code of ethics.

Lay is facing six counts of fraud for what the government contends is his role in the 2001 collapse of the energy giant. He was chief executive of the company from August 2001 -- when Jeffrey K. Skilling, who faces 28 counts of fraud, left the company -- until Enron filed for bankruptcy in December 2001.

Lay, who has grumbled at his own lawyer, George "Mac" Secrest, during the past three days, appeared caught off-guard by the fusillade and struggled to answer Hueston, angrily lashing back at times.

"Sir, you have engaged in character assassination of witnesses in this trial," Hueston said.

"Are you considering yourself" among them, Lay asked, drawing gasps from trial observers.

"I'm an attorney and I'm doing my job," Hueston said. "You can call me anything you want."

"I just want to make sure who's on the list and who's not," Lay said, eliciting more gasps and some laughter.

Hueston accused Lay of phoning at least two prosecution witnesses just before their testimony to "get their stories straight." Further, Hueston revealed, lawyers for one of the witnesses repeatedly called Lay's lawyers to try to prevent him from contacting witnesses again.

Lay acknowledged he had called the witnesses, but he said it was only to refresh his memory of events. And he did not know they were possible witnesses, he said.

One witness "was on the government witness list, sir," Hueston said.

Hueston reminded Lay that his lead attorney, Michael Ramsey, referred to former Enron treasurer Benjamin Glisan as a "monkey." Later, Lay himself called Glisan a "liar." Glisan has pleaded guilty to fraud and cooperated with government lawyers.

"While you were saying these things, in fact did you approach Mr. Glisan in the bathroom [of the] witness area of this courthouse and tell him you had kind feelings for him and his family?" Hueston asked.

Lay acknowledged he had.

"So, you had one message for the outside world and one message for Mr. Glisan when he was testifying inside," Hueston said, making the point that he believes there are two Ken Lays -- one seemingly benevolent, the other outwardly malevolent.

"He had been under enormous pressure," Lay tried to explain.

"So you made him feel better by calling him a liar and having your attorney call him a monkey," Hueston said. "To help him out."

Also in the first 30 minutes of testimony, Hueston proved that Lay had invested $60,000 in Photofete, a small photo company started by a former girlfriend of Skilling's that did business with Enron. Lay did not recall disclosing this conflict-of-interest to the board, which he admitted was a violation of the company's code of ethics, which he authored.

Hueston finished the day by attempting to prove that Lay was well-connected to the company, aware of its daily operations and ultimately responsible for its conduct. Lay has maintained that he delegated a great deal of responsibility.

But Hueston used Enron documents known as DPRs, or "daily position reports" in an attempt to show that Lay knew more about the company than he said.

"The DPRs, what were they?" Hueston said.

Lay said it was "his understanding" that the DPRs tracked the performance of Enron divisions on a daily basis and monitored how risky was the company's positions in various markets.

"You were an important part of the DPRs, right?" Hueston asked.

"I did not receive them on a daily basis," Lay said.

But then Hueston produced a document that showed Lay and other top executive received daily summaries of the DPRs. "This would indicate that I received it," Lay said, but added: "I do not believe I looked at these on a daily basis."

Hueston began his cross-examination shortly after 3 p.m. It followed nearly three days of testimony by Lay under friendly questioning from his attorney.

In the direction of Secrest, Lay addressed one of the government's key charges against him and told the jury that he was not required to immediately disclose his decision to cash in $70 million in Enron stock in 2001. He said such a disclosure would have further harmed the company during an already-tenuous time.

"It would not have been a positive event in the marketplace," Lay said.

Prosecutors say that Lay dumped millions of dollars in Enron stock because he knew the company was doomed, while he lied to investors by painting a strong picture of Enron. Lay and Skilling say the company was killed by the criminal activities of a few employees that, once revealed in the press, spooked investors and led to a classic "run on the bank."

Wednesday, Lay called the government charges against him "cockamamie."

Lay said the stock cash-in was used to pay back $70 million he had borrowed from the company, using a special line of revolving credit made available to some top executives as part of their compensation package.

At one point, Lay said his personal debt reached $110 million, owing to his far-flung investments in real estate and other assets. Lay took the opportunity to lash out at government prosecutors by saying he paid back almost the entire sum, save for a small part "and that was blocked by John Hueston." The government froze many of Lay's assets.

As part of an effort to show how much of Lay's personal wealth was tied up in Enron stock -- he said he owned 1 million shares and had 3 million vested option when the company entered bankruptcy in December 2001 -- Secrest had Lay reveal some stunning numbers when describing his worth at the height of Enron's success.

From 1999 to 2001, Lay testified that his total Enron compensation -- salary plus bonuses -- totaled $223 million. He said he kept $22 million for living expenses, gave away $25 million and owned three houses in Aspen, Colo., and three in Galveston, Tex., in addition to his Houston home. He had $32 million in Enron stock put into a deferred account that he said was meant for his retirement.

Lay also testified that he got a $10 million bonus for re-taking the chief executive job after Skilling left.

Since Enron's collapse, Lay has sold all three Aspen homes (which garnered $20 million) and all three Galveston homes, primarily to pay legal bills connected to his government indictment on six counts of fraud. He drives a '93 Mercedes, he said.

"It's all gone," Lay said.

Lay's testimony was meant to show jurors that his once-substantial worth has been drained by the government investigation and indictment.

One of the issues examined earlier Wednesday is at least $200 million in "goodwill" adjustments to Enron's third-quarter 2001 earnings. Goodwill describes the value of an asset in addition to its physical attributes -- in other words, its non-tangible value. The goodwill adjustments would have been a negative -- or an "impairment" -- on Enron's balance sheets.

In its indictment, the government alleges that Enron faced an additional $700 million in goodwill charges related to a water company it owned in England that Lay did not disclose.

Lay has maintained that Enron accountant Arthur Andersen signed off on everything in the earnings release.

"Did you ever make any misrepresentation to Arthur Andersen to conceal $700 million in goodwill impairment?" Secrest asked.

"I did not," Lay answered.

In its indictment, the government charged that Lay "while expressing candor failed to disclose numerous dire facts about Enron."

Secrest zeroed in on an Oct. 23, 2001, call with securities analysts, designed to bolster the market after three damaging Wall Street Journal articles about Enron's off-balance-sheet partnerships, known as the LJMs.

The SEC had launched an informal inquiry into the accounting of the LJMs, and Lay did not address them in the call, although they would have been of primary concern to the analysts.

"That was on the advice of our various attorneys," Lay testified. "They said there were some things I should not get into. Questions were coming up in the week before, in the Wall Street Journal and elsewhere, and we didn't have all the facts on them. They didn't want me making a statement until we really knew all the facts."

Later, Lay was asked why he told investors that Enron's liquidity was "better than fine, it is strong."

"I was relying on people who I thought were experts in the company," Lay said. "Our CFO and our treasurer." In addition to Glisan, former chief financial officer Andrew Fastow has pleaded guilty to fraud charges.

Lay testified that he pushed for more openness in Enron's financial statements, sometimes against the advice of his colleagues.

Lay has testified that when he took over for Skilling, he wanted to "clean up" the company's balance sheet -- making a point to say he did not believe there was anything illegal in the company's accounting, but that its complexity was confusing Wall Street analysts, causing a lack of faith in Enron.

The third-quarter 2001 earnings release included a $1.2 billion reduction in shareholder equity, which the government contends was the result of an accounting error the company tried to hide. Lay said he was advised by Enron executives, such as accounting chief Richard A. Causey -- who has pleaded guilty to fraud and is cooperating with the government -- not to include the amount in the earnings release. Instead, Causey wanted to wait and report the number in the company's quarterly required SEC filings. Earnings releases receive much more publicity than SEC filings, where information damaging to a company can be buried.

"I decided I wanted to get everything out that we knew about," Lay testified.