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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Comments (2)

1. Posted by Robert Schwartz on May 23, 2006 @ 22:27 | Permalink

This has to be the most ridiculous prosecution ever. Reg U is on the books to protect the banking system against over leveraging. The prosecutors are bending the law to make this into a borrower's violation.

And it is a pile of meaningless documents. Reg U is promulgated by the Federal Reserve under Section 7 of the 34 Act. It has its own interpretive handbook, and guess what? Words used in Reg U do not have the same meanings as the same words in the SEC regulations, the IRS regulations, the UCC, or common commercial parlance.

Expecting anybody other than an experienced commercial lending lawyer to be able to understand or operationalize that mumbo-jumbo is really too much.

2. Posted by TheOnlineLawyer on May 24, 2006 @ 13:35 | Permalink

If this were a breach of contract case Lay would be dead in the water. But in a case where his intent is a key issue Lay just might be able to side step this one. No one can really expect that Lay knew everything he was signing. At least no one who has ever purchased anything that required a closing.

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