Enron's Ken Lay goes on trial on another front: Bank ...

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Author: Greg Farrell

Section: Money, Pg. 08b

HOUSTON -- A second trial began here Thursday for former Enron CEO Ken Lay, who stands accused of violating an obscure banking law that forbids using proceeds from certain types of loans to buy publicly traded stock.

The four bank fraud charges, which carry penalties of up to 30 years, were severed from the larger trial in which Lay and another former Enron CEO, Jeff Skilling, are charged with conspiring to hide Enron's financial condition from investors in 2000 and 2001. Jury deliberations in that trial began this week and will continue Monday.

The second trial is being held without a jury before the same judge who managed the Enron fraud case, U.S. District Judge Sim Lake. Unlike the jury trial -- a sprawling drama which began in January and featured testimony from 56 witnesses including Lay and Skilling -- the bank fraud case is narrow and should end early next week.

Lake has said he won't announce his verdict in the bench trial until jury deliberations have concluded in the larger Enron case.

In his opening statement Thursday, prosecutor Robb Adkins told the judge that Lay repeatedly violated "Regulation U," a rule put in place following the 1929 stock market crash to protect banks from borrowers who speculate in the stock market. According to the rule, when a borrower uses stock as collateral for a loan, banks are only allowed to lend an amount equal to 50% of the stock's value. Every borrower has to sign a form indicating he or she understands the rule.

The idea, Adkins explained, was to prevent a "daisy chain" effect that crippled many U.S. banks following the '29 crash, when speculators used stock as collateral for loans and then invested the loans in more stock. "The process only works if these forms are filled out truthfully," Adkins said.

James Shelton, a former Bank of America loan executive, told the court that he explained the limitations of Regulation U to Lay when he approved loans to the former Enron CEO in the 1990s. Asked whether he thought Lay understood the rule when he took out loans, Shelton said he did. "He was a very hands-on, detail-oriented person," Shelton said.

Lay's attorney, Ken Carroll, suggested that the former Enron CEO was so busy he didn't necessarily micromanage every investment he made.

"If anybody told him he wasn't doing the right thing with these lines (of credit), he would have fixed it," Carroll said. Carroll also pointed out that Lay traveled a lot, and didn't necessarily sign every document that needed his signature. An "auto-pen" was sometimes used at Enron for documents that needed Lay's signature when he wasn't around, Carroll said.

Sally Ballard, who works for Ken Lay and his wife, Linda, in a secretarial capacity, also testified. Ballard admitted that in grand jury testimony several years ago, she confirmed that Lay used proceeds of his bank loans to buy stock. But on the stand Thursday, she said she may have been mistaken during the grand jury proceedings. Thinking it over afterward, she said, she realized a document purporting to confirm Lay's use of bank loans to buy stocks could simply have been an old form that she never revised. She acknowledged that Lay was paying for her legal fees.

(c) USA TODAY, 2006