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Former Enron Chairman Lay Pleads Innocent

Posted on: Friday, 9 July 2004, 06:00 CDT

HOUSTON - Federal prosecutors have unveiled charges that placed Enron Corp. founder and former chairman Kenneth Lay at the helm of a conspiracy to make a severely shaky company appear healthy in the frenzied weeks before its scandalous collapse.

He returned the punch Thursday with an unusual and aggressive public declaration of innocence, speaking at length at a news conference and taking questions from reporters after entering an innocent plea.

"I firmly reject any notion that I engaged in any wrongful or criminal activity," Lay said, adding that his failure to prevent the company's bankruptcy did not equate to a crime. "Not only are we ready to go to trial, but we are anxious to prove my innocence."

Lay and his family continue to grieve "over the loss of the company, my failure to be able to save it," he said in the same hotel meeting room where Enron held its last shareholder meeting months before the company crashed. "But failure does not equate to a crime."

Lay appeared in federal court in Houston 2 1/2 years into a painstaking investigation that has produced charges against some of his once most highly trusted lieutenants. Prosecutors have aggressively pursued the one-time friend and contributor to President Bush, and this week's action made Lay the 30th and highest-profile individual charged.

Prosecutors contend Lay, his hand-picked protege and former Enron CEO Jeffrey Skilling, and the company's former top accountant Richard Causey, were among principal operators of a wide-ranging scheme to deceive the public, shareholders, government regulators and others.

A federal indictment unsealed Thursday alleged that Skilling spearheaded the scheme until he abruptly quit in mid-August 2001, less than four months before Enron imploded. Lay resumed as CEO upon Skilling's departure and "took over leadership of the conspiracy," the indictment said.

In 11 counts of conspiracy, securities fraud, bank fraud and other charges, prosecutors allege Lay wasn't blithely unaware of wrongdoing by his minions, as he has maintained. The indictment alleged Lay intensified his oversight of Enron's day-to-day operations and "took control" of a conspiracy to keep Enron's ever-growing financial crises hidden deep within the company.

Enron's collapse led a series of corporate scandals that prompted Congress to pass sweeping reforms of securities laws. Thousands of Enron's workers lost their jobs, and the stock fell from a high of $90 in August 2000 to just pennies, wiping out many workers' retirement savings.

"All along, I've kind of felt they would get these guys eventually," said Sherri Saunders, a 24-year Enron employee who lost her job and nearly $1 million in savings when the company crashed. "Having worked there so long, knowing how complicated these things are, I thought it would take a long time to get the big guys."

The charges allege Lay painted a rosy picture of Enron to employees, analysts and investors when he had learned in meetings that the company faced massive losses on poor assets and unprofitable business units.

"Rather than come clean and tell the unvarnished truth about Enron, Lay chose to conceal and distort and mislead at the expense of shareholders and employees, people to whom he owed a duty of complete candor," said Andrew Weissmann, head of the Justice Department's Enron Task Force.

Lay asserted in his news conference that he took responsibility for Enron's collapse as chairman, but he said "that does not mean I know everything that went on at Enron."

Lay surrendered to the FBI before dawn Thursday and was escorted into the courthouse in handcuffs.

Prosecutors allege Lay knew Enron was preparing to announce massive third-quarter losses and a $1.2 billion writedown in shareholder equity, yet in a Sept. 26, 2001, Internet chat told Enron employees he had strongly encouraged management to buy Enron stock.

"Some, including myself, have done so over the last couple of months and others will probably do so in the future," he said in the chat. "My personal belief is that Enron stock is an incredible bargain at current prices."

Then on Oct. 12, 2001, he told a credit rating agency that Enron and its auditors had "scrubbed" the company's books and that no additional writedowns would be forthcoming. Four days later, the company announced those big losses, but the shareholder equity writedown was not in Enron's press release.

The indictment alleges Lay also knew Enron was facing a $700 million writedown in its water business, Azurix, but didn't disclose detailed information. In addition, it alleges Lay knew Enron had reorganized its energy services unit to hide hundreds of millions of dollars in losses.

"We're not trying to conceal anything," Lay told analysts on Oct. 23, 2001, according to the indictment. "We are not trying to hide anything."

He also told employees that same day: "Our liquidity is fine; as a matter of fact, it is better than fine, it is strong."

Prosecutors allege Lay knew Enron had been forced to offer its pipelines as collateral to get a $1 billion bank loan to maintain liquidity.

Then on Nov. 12, 2001, in a call to analysts and in another effort to combat bad publicity, he said: "We don't have anything we are trying to hide. I am disclosing everything that we've found."

The bank fraud and false statements to banks counts accuse Lay of improperly drawing from his lines of credit, and exposing banks to a higher risk of loss, to directly or indirectly buy stock on margin.

The indictment added Lay to a case already pending against Skilling and Causey, both of whom have pleaded innocent. Lay was released on $500,000 bond - much less than Skilling's $5 million and Causey's $3 million bonds. Prosecutors had sought a $6 million bond, saying Lay was a flight risk. Lay's lawyers had requested that he be released on his own recognizance.

U.S. Magistrate Mary Milloy allowed Lay to keep his passport because he travels internationally on business, but she required him to obtain court permission to leave the country.

Lay's lawyer, Michael Ramsey, said he would seek to have Lay tried separately from Skilling and Causey and go in front of a jury as early as September. Ramsey called the charges against Lay a "tag-on" to the more expansive allegations against Skilling and Causey, since the Lay allegations target August through December 2001 while the Skilling and Causey allegations are spread over several years.

Ramsey also said he wants Lay to be tried wherever a fair jury can be chosen.

Lay and Ramsey also cast blame for Enron's collapse on former chief financial officer Andrew Fastow, who pleaded guilty to two conspiracy counts in January and is the government's most high-profile cooperating witness.

Fastow admitted to orchestrating partnerships and financial schemes to hide Enron debt and inflate profits while pocketing millions of dollars for himself. Fastow is waiting to testify for the prosecution.

"Andy is obviously a liar and a thief," Ramsey said. "He admits that."

The superseding indictment, now totaling 53 counts, also accused Lay, Skilling and Causey of enriching themselves through salaries, bonuses, grants of stock and stock options. If convicted on all counts, Lay could receive up to 175 years in prison plus fines possibly totaling more than $5.7 million.

Prosecutors also were trying to seize an undisclosed sum of money from Lay, plus his Houston penthouse valued at more than $7 million.

The indictment contains no new charges against Skilling, already named in 35 counts alleging fraud, conspiracy and insider trading. Causey was named in three additional counts for a total of 34: two conspiracy and one securities fraud.

In a separate action, the Securities and Exchange Commission filed civil charges Thursday against Lay, accusing him of fraud and insider trading and seeking recovery of more than $90 million in what the agency said were illegal proceeds from stock sales.

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Associated Press Writer Juan A. Lozano contributed to this report.

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