May 23, 2006
The "Bunch of Stickies" Defense
Posted by Christine Hurt

Last week I posted on Ken Lay's separate bench trial in front of Judge Sim Lake for bank fraud.  Lay had several lines of credit from various banks during periods in which he bought margin stock.  The loan documents for those lines of credit contained representations that he would not use the proceeds from those lines of credit to purchase margin stock.  These representations were important to the banks to ensure that the banks would not loan funds to purchase margin stock in violation of Regulations U and X.

Judge Lake is now deliberating, but Lay's defense seems none too strong after questioning.  Lay admits that he purchased the stock in violation of the loan agreements but that he did not have the intent to violate the agreements that would be necessary to prove fraud.  Lay's attorney explained that he signed those loan documents and their amendments with a pile of documents in front of him with stickies showing where to sign.  If anyone has ever closed a loan transaction, then you recognize that stack of papers, but I'm not sure how that defense will play with Judge Lake. 

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