THESE ITEMS ARE NOT TO BE DUPLICATED OR PRINTED. FOR A HARD COPY, CONTACT JOHNNY SANCHEZ, OFFICIAL COURT REPORTER, AT 713-250-5581. THIS IS NOT AN OFFICIAL COPY OF THE TRANSCRIPT.

051806 us v lay bench v10001 1 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS 2 HOUSTON DIVISION 3 UNITED STATES OF AMERICA . . H-04-CR-025SS 4 vs. . HOUSTON, TEXAS . May 18, 2006 5 KENNETH L. LAY . 8:28 a.m. . . . . . . . . . . . . . . . . 6 TRANSCRIPT OF PROCEEDINGS 7 BEFORE THE HONORABLE SIM LAKE BENCH TRIAL 8 APPEARANCES: 9 FOR THE GOVERNMENT:10 Mr. John Hueston Mr. Robb Adkins11 Mr. John Drennan Mr. Andrew Stolper12 US Department of Justice Enron Task Force13 1400 New York Avenue, NW 10th Floor14 Washington, DC 20530 202.353.722515 FOR THE DEFENDANT KENNETH L. LAY:16 Mr. George McCall Secrest, Jr. Ms. Liz Vittor17 BENNETT & SECREST 808 Travis, 24th Floor18 Houston, Texas 77002 713.757.067919 Mr. Ken Carroll20 Ms. Wendy Gerwick Couture Ms. Sharon Shumway21 Carrington, Coleman, Sloman & Blumenthal, LLP 200 Crescent Court, Suite 150022 Dallas, Texas 75201 214.855.300023 VOLUME 124 PROCEEDINGS RECORDED BY STENOGRAPHIC MEANS,25 TRANSCRIPT PRODUCED FROM COMPUTER-AIDED TRANSCRIPTION0002 1 COURT REPORTERS: 2 GAYLE L. DYE, CSR, RDR, CRR 515 Rusk, Room 8016 3 Houston, Texas 77002 (713) 250-5582 4 CHERYLL K. BARRON, CSR, CM, FCRR 5 U.S. Courthouse 515 Rusk, Room 8016 6 Houston, Texas 77002 713.250.5585 7 8

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051806 us v lay bench v1 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX 2 Page 3 UNITED STATES OPENING STATEMENT BY MR. ADKINS 7 4 5 INDEX OF WITNESSES 6 7 FOR THE UNITED STATES OF AMERICA 8 9 JAMES SHELTON10 DIRECT EXAMINATION BY MR. HUESTON 14 VOIR DIRE EXAMINATION BY MR. CARROLL 3611 DIRECT EXAMINATION (continued) BY MR. HUESTON 39 CROSS EXAMINATION BY MR. CARROLL 8812 REDIRECT EXAMINATION BY MR. HUESTON 16613 RECROSS-EXAMINATION BY MR. CARROLL 17514 FURTHER REDIRECT EXAMINATION BY MR. HUESTON 17715 ROBERT HANISEE16 DIRECT EXAMINATION BY MR. ADKINS 17817 CROSS-EXAMINATION BY MR. SECREST 18918 REDIRECT EXAMINATION BY MR. ADKINS 19319 SALLY BALLARD20 DIRECT EXAMINATION BY MR. HUESTON 19421 CROSS-EXAMINATION BY MR. SECREST 23522 REDIRECT EXAMINATION BY MR. HUESTON 28123 - - - - -24 25 0004 1 INDEX OF EXHIBITS 2 3 Government's Exhibit Number 262 was admitted 23 4 Government's Exhibit Number 261 was admitted 30 5 Government's Exhibit Number 124 was admitted 35 6 Government's Exhibit Number 318 was admitted 43 7 Government's Exhibit Number 1005 was admitted 48 8 Government's Exhibit Number 120 was admitted 53 Government's Exhibit Number 200 was admitted 55 9 Government's Exhibit Number 161 was admitted 6010 Government's Exhibit Number 125 was admitted 69 Government's Exhibit Number 133 was admitted 6911 Government's Exhibit Number 161 was admitted 6912 Government's Exhibit Number 163 was admitted 6913 Government's Exhibit Number 164 was admitted 6914 Government's Exhibit Number 165 was admitted 69

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051806 us v lay bench v115 Government's Exhibit Number 166 was admitted 7016 Government's Exhibit Number 167 was admitted 7017 Government's Exhibit Number 168 was admitted 7018 Government's Exhibit Number 173 was admitted 7019 Government's Exhibit Number 174 was admitted 7020 Government's Exhibit Number 175 was admitted 7021 Government's Exhibit Number 176 was admitted 7022 Government's Exhibit Number 177 was admitted 7023 Government's Exhibit Number 178 was admitted 7024 Government's Exhibit Number 180 was admitted 7025 Government's Exhibit Number 181 was admitted 700005 1 INDEX OF EXHIBITS 2 (Continued) 3 4 5 Government's Exhibit Number 182 was admitted 70 6 Government's Exhibit Number 183 was admitted 70 7 Government's Exhibit Number 185 was admitted 70 8 Government's Exhibit Number 299 was admitted 70 9 Government's Exhibit Number 300 was admitted 70 10 Government's Exhibit Number 67 was admitted 8111 Government's Exhibit Number 277 was admitted 8212 Government's Exhibit Number 75 was admitted 8713 Defendant's Exhibit Number 738 was admitted 9514 Government's Exhibit Number 271 was admitted 10015 Government's Exhibit Number 122 was admitted 10516 Defendant's Exhibit Number 28 was admitted 10917 Government's Exhibit Number 198 was admitted 10918 Defendant's Exhibit Number 54 was admitted 11119 Government's Exhibit Number 260 was admitted 11820 Defendant's Exhibit Number 54 was admitted 12521 Defendant's Exhibit Number 55 was admitted 12522 Defendant's Exhibit Number 56 was admitted 12523 Defendant's Exhibit Number 57 was admitted 12524 Defendant's Exhibit Number 58 was admitted 12525 Defendant's Exhibit Number 1123 was admitted 1250006 1 INDEX OF EXHIBITS 2 (Continued) 3 4 5 Defendant's Exhibit Number 1125 was admitted 125 6 Defendant's Exhibit Number 355 was admitted 135 7 Defendant's Exhibit Number 1597 was admitted 136 8 Defendant's Exhibit Number 98 was admitted 137 9 Defendant's Exhibit Number 1601 was admitted 13810 Government's Exhibit Number 116 was admitted 13911 Defendant's Exhibit Number 1596 was admitted 14012 Government's Exhibit Number 179 was admitted 14813 Government's Exhibit Number 191 was admitted 14814 Government's Exhibit Number 195 was admitted 15415 Government's Exhibit Number 204 was admitted 15516 Government's Exhibit Number 192 was admitted 15617 Government's Exhibit Number 317 was admitted 15618 Defendant's Exhibit Number 33 admitted 15719 Defendant's Exhibit Number 1301 admitted 15720 Government's Exhibit Number 197 admitted 16421 Government's Exhibit Number 248 admitted 18322 Government's Exhibit Number 279 admitted 18323 Government's Exhibit Number 280 admitted 18524 Government's Exhibit Number 255 admitted 20325 Government's Exhibit Number 256 admitted 206

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051806 us v lay bench v10007 1 INDEX OF EXHIBITS 2 (Continued) 3 4 5 Government's Exhibit Number 257 admitted 209 6 Government's Exhibit Number 4 admitted 211 7 Government's Exhibit Number 78 admitted 212 8 Government's Exhibit Number 79 admitted 212 9 Government's Exhibit Number 41 admitted 21210 Government's Exhibit Number 316 admitted 21811 Government's Exhibit Number 117 admitted 22012 Government's Exhibit Number 152 admitted 22213 Government's Exhibit Number 128 admitted 22714 Government's Exhibit Number 3 was admitted 23115 Government's Exhibit Number 9 was admitted 23116 Government's Exhibit Number 10 was admitted 23117 Government's Exhibit Number 20 was admitted 23218 Government's Exhibit Number 26 was admitted 23219 Government's Exhibit Number 27 admitted 23220 Government's Exhibit Number 33 admitted 23221 Government's Exhibit Number 69 admitted 23222 Government's Exhibit Number 70 admitted 23223 Government's Exhibit Number 82 admitted 23224 Government's Exhibit Number 85 admitted 23325 Defense Exhibit Number 1055 was admitted 2660008 1 INDEX OF EXHIBITS 2 (Continued) 3 4 5 Defendant's Exhibit Number 186 admitted 271 6 Defendant's Exhibit Number 187 admitted 271 7 Defendant's Exhibit Number 189 admitted 272 8 Defense Exhibit Number 781 was admitted 273 9 Defendant's Exhibit Number 805 admitted 27610 Defendant's Exhibit Number 827 admitted 27711 - - - - -12 13 14 15 16 17 18 19 20 21 22 23 24 25 0009 1 PROCEEDINGS 2 May 18, 2006 3 THE COURT: Good morning. Please be seated. 4 We're here for the bench trial on the remaining 5 four counts against Mr. Lay, Counts 38 through 41. I have read 6 all the papers the parties have submitted. If each side would 7 like to make an opening argument, that's fine. 8 MR. ADKINS: Just a brief road map, Your Honor. Your 9 Honor, this is a straightforward trial about lying to the banks.10 The evidence in this case will show that Mr. Lay repeatedly and

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051806 us v lay bench v111 falsely executed forms, forms relied on by banks, forms required12 by banks.13 As you'll hear in a moment in this trial, banks14 require forms to be filled out whenever a loan is collateralized15 with stock. They're required each time. They take this16 requirement very seriously. As you'll hear in this trial, they17 can be exposed to civil liability. They can be exposed to18 additional losses. And so they take it seriously.19 They take it so seriously that they had a special20 form, a single form whose purpose is to find out what that loan21 is going to be used for, whether that loan will be used to22 purchase stock.23 If we could put up Exhibit 152, please.24 There we go.25 Your Honor, this is Form U-1. This is a form0010 1 that is central to this case, and you'll be seeing quite a bit 2 of it. This is a form that on this single page is filled out by 3 the applicant when the applicant wants to obtain a loan from a 4 bank. It's filled out each and every time. And on this form, 5 it has a question, a single question: "Will any part of this 6 credit be used to purchase or carry margin stock?" "Yes" or 7 "No." 8 What is margin stock? As the form itself 9 explains on the one page, it's principally stocks that are10 registered on a national security exchange, essentially,11 publicly traded stock. You'll hear about other forms in this12 case, as you've read in the papers, promissory notes, pledge13 agreements, collateral maintenance agreements, and so on, each14 of these forms which Mr. Lay executed asserting that he would15 not purchase stock with loans that he obtained. What is the16 consequence of what Mr. Lay put on these forms that needed to be17 filled out?18 As you'll hear, Your Honor, if the applicant19 states yes to that "Yes" or "No" question, "Yes, I will buy20 stock with this loan," then the banks require that the loan be21 limited. The loan is limited to 50 percent of the value of the22 collateral pledge, half the value of the collateral pledge for23 the loan. Smaller loan for the collateral pledged.24 Why do they do that? As you'll hear in this25 trial, Your Honor, one of the reasons that that is done is to0011 1 prevent market failure. Market failure can occur when loans 2 secured by stock are used to obtain more stock that would then 3 secure another loan to obtain yet more stock and so on and so on 4 in a daisy chain. 5 And when the stock price goes down, that daisy 6 chain can collapse. It can create market failure. This is one 7 of the reasons the banks take these forms very seriously is to 8 protect against that kind of market failure. But the process 9 only works if these forms are filled out truthfully.10 As you'll hear in this case, Your Honor, Mr. Lay11 was not satisfied with the 50 percent loan. Mr. Lay wanted a12 more leveraged loan. He wanted a higher percentage from his13 pledged collateral. He wanted a larger loan to buy his stock.14 And the first witness in this trial, Your Honor,15 will be James Shelton; and as you've read in the papers,16 Mr. Shelton was the relationship manager for NationsBank, what17 later became Bank of America. He had a meeting with Mr. Lay18 back in 1993. During this meeting, Mr. Lay said he wanted to19 obtain a loan from Bank of America and, essentially, to purchase20 stock.21 Mr. Shelton told Mr. Lay at that time about the

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051806 us v lay bench v122 Form U-1 that needed to be filled out, about the 50 percent23 limitation. Mr. Lay was not pleased with this. Mr. Lay wanted24 a larger loan. But confronted by Mr. Shelton, he agreed. He25 actually signed two separate loans, one which would have the 500012 1 percent limitation in which he said he was going to purchase 2 stock and another one in which he promised not to purchase 3 stock. 4 And in the years that followed, Mr. Shelton would 5 meet with Mr. Lay. They would sign additional forms. But he 6 didn't just have the loans at Bank of America. He had them also 7 at other banks: Compass Bank, Chase Bank. Each of them had 8 these same Form U-1s and other types of forms promising not to 9 purchase margin stock, not just once or twice but dozens and10 dozens of such forms for loans that totaled in the tens of11 millions of dollars.12 And what did Mr. Lay do after purchasing -- I'm13 sorry, after filling out these forms?14 If we could have the demonstrative, please.15 As you'll hear from a summary witness in this16 trial, Your Honor, Mr. Lay then proceeded to draw down on his17 loans for a total of over $24 million and to purchase over $1918 million from those loans in margin stock, publicly traded stock.19 Not just a few times but repeatedly time and again. He did it20 for years. He did it to the tune of millions of dollars of21 stock. This is the stock that he promised the banks he would22 not purchase from these lines of credit.23 And as you'll hear in this trial, Your Honor,24 Mr. Lay was aware of and gave instructions regarding the use of25 these lines of credit. You'll hear about daily summaries0013 1 tracking the uses of this line of credit. You'll hear about how 2 his staff checked with him before moving money for these 3 purposes. You'll hear about monthly brokerage statements in 4 which he was shown that he was using these loans to purchase 5 millions of dollars in stock. 6 Your Honor, that's among the evidence the 7 Government will put forward in this straightforward case. And 8 at the close of the evidence, we will ask for a verdict of 9 guilty on Counts 39 -- 38, 39, 40, and 41. Thank you.10 THE COURT: Thank you.11 Mr. Secrest.12 MR. SECREST: Your Honor, thank you and good morning.13 We're going to reserve our right to make an opening just before14 we begin our case. But I would like to introduce to you some15 new faces from the Carrington, Coleman law firm16 We have Sharon Shumway, Your Honor.17 And Ken Carroll.18 MR. CARROLL: Good morning, Your Honor.19 MR. SECREST: Wendy Couture.20 MS. COUTURE: Good morning, Your Honor.21 MR. SECREST: And we have Teena Calotis.22 THE COURT: One new lawyer per count?23 MR. SECREST: The 12th man is tuckered out so we have24 some reinforcements.25 THE COURT: All right. The rule is invoked. The0014 1 Government may call its first witness. 2 MR. HUESTON: Thank you, Your Honor. The United 3 States calls James Shelton. 4 THE LAW CLERK: Please raise your right hand to be 5 sworn. 6 (The witness, JAMES SHELTON called on behalf of the

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051806 us v lay bench v1 7 Government, was sworn.) 8 THE LAW CLERK: Please have a seat. 9 THE COURT: You may proceed, Mr. Hueston.10 MR. HUESTON: Thank you, Your Honor.11 DIRECT EXAMINATION12 BY MR. HUESTON:13 Q Good morning, Mr. Shelton.14 A Good morning.15 Q In front of you is a binder of exhibits that I'll make16 reference to from time to time. Let me start with just a very17 general question: Did you serve as the NationsBank, currently18 known as Bank of America, relationship manager for Kenneth Lay19 in the period of 1993 through 1998?20 A Yes.21 Q All right. Let's spin back and go through some background22 questions. First of all, where did you go to college?23 A Baylor University.24 Q Okay. And what was your major and when did you graduate?25 A Finance; graduated in May of 1989.0015 1 Q Okay. And did you get any advanced degrees after that? 2 A I got an MBA from the University of Houston in 1994. 3 Q All right. And are you a chartered financial analyst, sir? 4 A I am. 5 Q Let's turn to your -- very briefly, could you outline your 6 employment history prior to going to NationsBank? 7 A I had none. I joined NationsBank straight out of college 8 at Baylor. 9 Q What year was that?10 A June of 1989.11 Q And what did you -- what were the series of positions you12 had up until the time you became a relationship manager?13 A I started in the credit training program at NationsBank,14 actually NCNB at the time, and I spent about a year as a credit15 analyst; joined the corporate banking group in 1990, servicing16 the bank's clients, Fortune 100 clients at the time; and I17 stayed in that position until early 1993 when I moved over to18 the private client group at NationsBank.19 Q All right. And what was the private client group?20 A The private client group was the unit of the bank that21 provided loans and investment services to generally high net22 worth individuals, those that had a net worth of $1 million and23 above.24 Q Okay. And was your position relationship manager?25 A Yes.0016 1 Q And what were you duties and responsibilities in that 2 position? 3 A I was responsible for maintaining the bank's relationships 4 with our individual clients, providing credit and investment 5 services. If there was a loan request, I was the one who was 6 primarily responsible for the due diligence surrounding that 7 request and preparing any documentation to seek credit approval. 8 Q And as part of your duties and responsibilities, would you 9 make contact with the clients for which you had responsibility?10 A Yes.11 Q Were you introduced to Mr. Lay shortly after you started as12 a relationship manager?13 A Yes.14 Q By whom?15 A By Mr. Joe Musolino who was, at the time, the vice16 president of NCNB, or NationsBank. He was the senior executive17 in charge of the Houston office.

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051806 us v lay bench v118 Q Okay. And do you recall when Mr. Lay became a client of19 NationsBank?20 A It would have been around about the summer of 1993.21 Q Shortly thereafter, did you have a meeting with Mr. Lay?22 A I did.23 Q And what was the purpose of that meeting?24 A The purpose of that meeting was to go over a line of credit25 that he had requested to be secured by Enron stock.0017 1 Q And so did you meet with him? 2 A I did. 3 Q Can you describe what was discussed at that meeting. 4 A We just discussed the purpose of the loan, the collateral 5 that we would be taking, and also what his future plans were in 6 terms of a relationship with the bank. 7 Q All right. And did you inquire about the -- Mr. Lay's 8 intentions for the use of the loan? 9 A Yes.10 Q And why did you do that?11 A Because when we -- when we extend a loan to a borrower12 secured by stock, there is a question as to how much we can13 actually advance against the value of the stock based on the14 purpose of the loan.15 Q And why is that?16 A If a -- there's a Federal Reserve regulation, called17 Regulation U, that, if the purpose of a loan secured by stock is18 to purchase or carry what's called margin stock, essentially,19 publicly traded equity securities, then you can only lend 5020 percent against the value of that stock. If it's for any other21 purpose, then the bank can lend however much, you know, the bank22 is comfortable in lending against that stock.23 Q Okay. And were you explaining these things to Mr. Lay at24 the meeting?25 A Yes.0018 1 Q And when the meeting began, what was his expectation as to 2 the LTV ratio, the loan-to-value ratio, that he thought he was 3 going to get on this line of credit that was collateralized by 4 stock? 5 A Yes. The original expectation was that we would lend up to 6 70 or 75 percent of the value of Enron stock. That's what had 7 been originally communicated to me by Mr. Musolino. And so that 8 was his expectation, that we would lend up to 75 percent against 9 Enron.10 Q And was he -- did he talk to you about that during the11 meeting?12 A Yes. That was his expectation. That's what he -- that's13 what his original conversation was with Mr. Musolino.14 Q All right. And once you described the different types of15 loans that would be available, depending on the purpose, how did16 he reply? How did the meeting proceed and resolve itself?17 A Well, he -- he let me know that his plan for this loan18 request was to purchase Enron stock, effectively exercise some19 Enron stock options and then hold the Enron stock. So under the20 Reg U definition, he could only borrow 50 percent of the amount21 of that stock.22 Q And did you tell him that?23 A Yes.24 Q What was his response?25 A His response was -- I think he was a bit surprised and --0019 1 because he had understood that we would lend 75 percent. So I 2 explained that I didn't really have a choice. I couldn't

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051806 us v lay bench v1 3 negotiate this. If the use of the loan would be to purchase or 4 carry margin stock, I could only lend 50 percent. And so at 5 that point, we didn't have -- we didn't have a deal. 6 Q All right. Now, you said earlier 70 or 75 percent. Was it 7 sort of standard practice to have 70 percent as the LTV for 8 loans that were going to be used for purposes other than buying 9 stock?10 A Yes. The bank's credit policy guideline in lending against11 liquid publicly traded stock was 70 percent advance ratio12 against the value of that stock.13 Q So who was asking for 75 percent?14 A Mr. Lay did. He asked if we could lend up to 75 percent,15 and that was my original understanding in talking with16 Mr. Musolino.17 Q So he had an interest in getting as much of an LTV -- the18 highest LTV ratio that he could?19 A Yes, yes.20 Q How did the meeting resolve itself?21 A The end result of the meeting was that we weren't going to22 be making this loan to Mr. Lay at this point in time, that he23 would get back to me. Perhaps, we would have another24 opportunity in the future. But at that point in time, we25 weren't going to have a relationship.0020 1 Q All right. Why not? Why not just allow him to go ahead 2 and borrow beyond 50 percent anyway even if he was going to be 3 buying stock with it? 4 A It's a Federal Reserve regulation. There are penalties to 5 the bank. Actually, there's penalties to me personally as an 6 officer of the bank. So there was -- there was no way that we 7 were going to actually make that loan for the purpose of buying 8 margin stock with it. We weren't going to do that. 9 Q And in fact, in your time at NationsBank, did you receive10 training with respect to complying with Regulation U in the11 relationships that you would develop with your clients?12 A Yes.13 Q And as part of that training, did they train you to ask14 questions and to determine the intent of the borrower's planned15 usages of these lines of credit?16 A Yes.17 Q Why is that?18 A Again, it's -- it's a Federal Reserve regulation that we19 are expected to abide by, penalties to the bank, penalties to20 the loan officer. Our requirements under the regulation are to21 make a good faith effort in determining what the proceeds of the22 loan are going to be.23 Q All right. And so what if you just didn't bother asking24 questions of your -- of your customer? What did you understand25 would be the consequence to you of that?0021 1 A That the bank could be held liable under Regulation U, and 2 I would be as well. I would very well might lose my job. 3 Q All right. And did you have an understanding about whether 4 Regulation U had a role in protecting the health of the 5 marketplace? 6 A Yes. 7 Q And what was that? 8 A Well, the regulation was -- was adopted back in the 9 depression era times, and the reason for the law was that, you10 know, during the big bull market leading up to the stock market11 crash in 1929, it was felt that the crash was exacerbated by the12 fact that investors had too much leverage, had borrowed money to13 purchase stocks. And so when the market started to turn, there

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051806 us v lay bench v114 were margin calls and people were so leveraged that it actually15 made the stock market decline potentially worse than what it16 was.17 Q And was that explained to you as well in the training you18 received at NationsBank?19 A Yes.20 Q Did your -- we're going to get back to the documents in21 just a moment with respect to the relationship with Mr. Lay.22 Did you in your internal bank documentation make sure and have23 issues addressing Reg U to make sure it was all addressed in24 that internal loan documentation for your clients?25 A Yes.0022 1 Q Let's take a look at an example. If I can have you turn to 2 your exhibit book. Turn to Exhibit 262, please. And I'll ask 3 if you can identify that. 4 A Okay. 5 Q Do you recognize that, sir? 6 MR. CARROLL: Your Honor, could I ask that counsel 7 provide us with a copy of what we're using here. 8 MR. HUESTON: You should have all of them. 9 MR. SECREST: Okay.10 THE COURT: You should have notebooks with all of them11 in it.12 MR. CARROLL: I think we do. I think -- not having13 been here last week, I thought I was under -- with the14 understanding they would provide us with individual exhibits.15 But that's fine.16 MR. HUESTON: We're making it easier. We're giving17 them all to you in advance.18 MR. CARROLL: I don't think we have -- we don't have19 the notebook, for example, that the witness does, if that's what20 you're saying.21 MR. HUESTON: Well, you have all the exhibits.22 MR. CARROLL: We do have all the exhibits.23 MR. HUESTON: All right.24 BY MR. HUESTON:25 Q What is that document, sir?0023 1 A These are my comments attached to a credit approval report. 2 Q Okay. And who prepared the credit approval report? 3 A I did. 4 MR. HUESTON: I move this in at this time, Your Honor. 5 THE COURT: All right. Government Exhibit 262 is 6 admitted. 7 (Government's Exhibit Number 262 was admitted.) 8 MR. HUESTON: Let's post that, please. 9 BY MR. HUESTON:10 Q First of all, what is the purpose of this document,11 Mr. Shelton?12 A The purpose of this document is to discuss the terms and13 conditions and the circumstances behind the loan request,14 identify the risks in those mitigating factors of those risks,15 and discuss the use of proceeds and the like, all the pertinent16 facts concerning the loan request.17 Q Okay. And this one is dated August 10, 1993. Is this18 roughly the time period where you recall having this meeting and19 visiting with Mr. Lay about the line of credit?20 A This one would have been after we had had that initial21 meeting, yes.22 Q All right. It says in the first line: "This CAR requests23 a $6 million confirmed line of credit to Ken Lay, chairman and24 CEO of Enron Corporation. The majority of the proceeds of the

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051806 us v lay bench v125 loan will be used to refinance a loan made by Enron to enable0024 1 Lay to purchase $5 million in Enron stock. Since this will be a 2 purpose loan under Regulation U, Lay will pledge 185 million 3 shares of unrestricted Enron Corporation common stock." And 4 there's a value attached. And it says, "Mr. Lay will be 5 required to pledge additional shares or reduce the outstanding 6 balance should the LTV exceed 75 percent." And there's a 7 parenthetical: "Regulation U does not require additional 8 monitoring," et cetera. 9 What's generally be addressed here in this first10 section?11 A This just lays out what the purpose of the loan will be,12 the amount, how much the banks going to lend against that stock,13 and then also setting up what's called a margin maintenance type14 of provision that, if the value of Enron stock declines such15 that the loan to value is now 75 percent or greater of the value16 of that collateral, that then there would be a margin call at17 that point in time.18 Q All right. And then under transaction analysis, there's a19 section called "Use of Proceeds." In that section,20 particularly, in the latter part, it says, "As a result of this21 loan, this facility is a purpose loan under Regulation U" --22 purpose loan because it's being used to buy stock; is that23 right, sir?24 A That's correct.25 Q -- "and is subject to a maximum initial loan-to-value ratio0025 1 of 50 percent"? 2 A Yes. 3 Q And why is this put in here? Why is there a use of 4 proceeds section and why is this noted? 5 A We typically would have a use of proceeds section in all of 6 these credit approval reports. And of course, it's particularly 7 important in this case in that the bank is limited by the 8 Federal Reserve Regulation U to only a 50 percent advance 9 against the stock.10 Q All right.11 MR. HUESTON: And let's go to page 911, please.12 BY MR. HUESTON:13 Q Here's a regulation here --14 MR. HUESTON: If we can blow it out.15 BY MR. HUESTON:16 Q It says, "Regulation U compliance." Would this typically17 be included in the internal bank documentation for18 collateralized loans?19 A Yes.20 Q And again, is this laying out the items of compliance that21 you had outlined earlier, namely, although initial LTV will not22 exceed 50 percent, there are issues about margin call, that23 there are efforts here to make sure that the loan is, in fact,24 going to be in compliance with Regulation U?25 A Yes.0026 1 THE COURT: Is this something you prepared before you 2 met with Mr. Lay? 3 THE WITNESS: No, sir. This would be prepared after I 4 had had a meeting with him. I would only do this when there is 5 actually a loan request and I'm submitting it for approval. But 6 this would have been something that we would have talked about 7 in our meeting to help me prepare this. 8 THE COURT: I thought you said that the loan would not 9 go forward. Why was this document prepared?

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051806 us v lay bench v110 THE WITNESS: That's correct, sir. The original loan11 request was not what you're seeing up here on the screen. That12 was for a loan that we would lend up to 75 percent against. And13 when I had the initial meeting with Mr. Lay, that's when I14 determined that I wasn't going to be able to make that loan15 because of the use of proceeds would be to purchase Enron stock.16 THE COURT: So this instrument was prepared as a17 result of the meeting when you learned the purpose of the loan?18 THE WITNESS: As a result of the meeting and then also19 Mr. Lay going back and considering what he wanted to do and then20 making the request of me.21 MR. HUESTON: And I will bring this out.22 BY MR. HUESTON:23 Q I just wanted to get through a couple of the internal24 documentations of Reg U before getting back to the story.25 Just very briefly, was there a resolution later0027 1 where there was effectively a split line of credit, some to be 2 designated as purpose credit and some to be designated as 3 non-purpose credit? 4 A Yes. 5 Q And there were documents prepared for that, which we will 6 get to shortly, that you remember seeing, correct? 7 A Yes. 8 Q All right. Let's just turn to another issue here with 9 respect to compliance. Did the bank consider risk of loss10 issues with respect to these lines of credit?11 A Yes.12 Q And why is that?13 A When you --14 Q Purpose and non-purpose.15 A Yes. When you take collateral that can be volatile, that16 will change in value, the risk to the bank is that the17 collateral value declines and there could potentially be a18 deficiency.19 Q And did you, as the relationship manager, and others20 working on the accounts with Mr. Lay consider risk of loss with21 respect to the specific types of credit lines that were provided22 to Mr. Lay, both purpose and non-purpose?23 A Yes.24 Q All right. Take a look at Exhibit 262. I'll ask if you25 can identify that.0028 1 A That's the same one we're looking at, right? 2 Q Oh, I'm sorry. It is. Sorry about that. Let's go to page 3 910 which is -- 4 MR. HUESTON: Post that back up. Go to page 910. 5 BY MR. HUESTON: 6 Q And there's a section in this called "Key Critical Issues." 7 And part of that -- 8 A Yes. 9 Q -- which is highlighted there under "Single Repayment10 Source," I'll read aloud: "While the stock has been less11 volatile than the market, the recent price appreciation makes12 the stock vulnerable to a potential correction." That's13 referring to the collateral?14 A Yes.15 Q "This risk is mitigated by the conservative 50 percent16 advance ratio for this credit facility and the fundamental17 strengths of Enron that are driving the price appreciation."18 What is the reference to "This risk is mitigated by the19 conservative 50 percent advance ratio"? What is that in20 reference to?

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051806 us v lay bench v121 A The lower the percentage that the bank advances against22 collateral, typically, the less risk that there is because, in23 this case, with the 50 percent advance ratio, we have two-to-one24 collateral to loan coverage.25 Q And the 50 percent advance ratio would come with these0029 1 non-purpose loans, right? 2 A I'm sorry. No. 3 Q I'm sorry. Go ahead. 4 A The 50 percent advance ratio would go with purpose loans. 5 Q That's right, thank you. Because the 50 percent cap would 6 be for purpose loans, namely, to buy -- to allow buying of 7 stock, right? 8 A Yes. 9 Q So this allows more protection for the bank with more10 conservative advance ratio?11 A Yes.12 Q And typically, in your bank documentation, would you13 address that issue with this sort of line of credit?14 A Yes.15 Q Let's go back to, as the judge was asking you, what16 happened next with respect to the negotiations. There was that17 initial meeting. It was kind of a nonstarter. But eventually,18 loans were had with the bank. So what happened next then in19 that series of discussions?20 A Well, Mr. Lay made the request to me to set up this line of21 credit here that we've just been talking about. I had -- I22 wrote this up. We were -- it was approved by the credit23 authorities at the bank. We drew up loan documentation. And24 then I went to Mr. Lay, and we signed the documents and booked25 the loan.0030 1 Q Okay. Were there -- let's go to Exhibit 261 which is 2 another credit approval report dated December of '93. Do you 3 recognize that? 4 A Yes. 5 Q Is that likewise prepared by you? 6 A Yes. 7 MR. HUESTON: We move this in at this time, Your 8 Honor? 9 THE COURT: It's admitted.10 (Government's Exhibit Number 261 was admitted.)11 MR. HUESTON: Let's post that, please.12 BY MR. HUESTON:13 Q And going to the first paragraph, this says: "This CAR14 requests two credit facilities totaling 12.5 million and an 18.515 million PAL for Ken Lay." And then Facility A says, "Purpose16 credit, 10.5 million." Facility B: "Non-purpose credit, 217 million." Can you explain that?18 A Yes. The -- this is what we used to denote the two19 different types of loans. The purpose credit would be that line20 of credit whose use of proceeds would be to purchase or carry21 margin stock. Facility B, the non-purpose credit, would be used22 for any other purpose other than to purchase or carry margin23 stock. We would have a higher advance ratio against the stock24 held as collateral for the non-purpose credit. Only a 5025 percent advance ratio against the purpose credit.0031 1 Q All right. And did you have discussions with Mr. Lay to 2 explain what could and couldn't be done with each of these 3 facilities, the purpose and the non-purpose? 4 A Yes. 5 Q And why did you do that?

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051806 us v lay bench v1 6 A Because, again, Federal Reserve Regulation U requires that 7 for a purpose credit, if it's used to purchase margin stock, you 8 can only have a 50 percent advance ratio. We would be 9 prohibited from advancing credit under the non-purpose credit10 whose use of proceeds would be to purchase or carry margin11 stock.12 Q All right. And then the last line of that highlighted13 section says, "The purpose of Facility B," which is the14 non-purpose credit line, "will be to finance personal expenses15 and will be non-purpose credit under Regulation U." That16 statement of intention, where did you get that information from?17 A From Mr. Lay.18 Q Okay. And that was important to make sure it wasn't going19 to be used to buy any kind of stock or margin stock?20 A Yes. That is why we set up two separate lines of credit.21 Q Now, we've been -- the term "margin stock" has come up.22 Was that -- did you define what margin stock was to Mr. Lay?23 A Yes.24 Q And what is that? What does that mean? It sounds like a25 fancy term.0032 1 A It's -- it's effectively any publicly traded equity 2 securities or securities that are convertible into equity 3 securities. 4 Q All right. 5 A Publicly traded on a national exchange, like the New York 6 Stock Exchange, or on the over-the-counter market. 7 Q Let's quickly move to page 819. 8 MR. HUESTON: And blowing out the top portion 9 there.10 BY MR. HUESTON:11 Q It says, "Use of proceeds. Lay intends to use proceeds of12 these facilities to fund investments in marketable securities13 and to finance personal expenses." And there's more discussion14 about Mr. Lay.15 Again, does this reflect discussions that you had16 with Mr. Lay about what he was going to do with one line and17 then the other line?18 A Yes.19 Q All right. And again, there are the LTV, loan-to-value,20 ratios listed for, say, non-purpose credit. You get the higher21 LTV for the non-purpose credit, right?22 A Yes.23 Q And that's, again, because there's been a statement of24 intention to use it for something other than buying stock?25 A That's correct.0033 1 MR. HUESTON: Let's go to page 820, please. 2 BY MR. HUESTON: 3 Q Once again, key critical issues. Again, there's the risk 4 mitigation section addressed, as is typical for the loan 5 documentation? 6 A Yes. 7 Q And that's the 50 percent ratio. That applied to which of 8 these two facilities? 9 A It applied to the purpose credit.10 Q All right. Now, at this time, Facility A and Facility B,11 the bigger line was which one?12 A The bigger line was the non -- was the purpose credit. The13 non-purpose credit was the smaller of the two.14 Q Over the course of the years of your relationship with15 Mr. Lay, did that balance change?16 A Yes.

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051806 us v lay bench v117 Q And how so?18 A The purpose credit began to diminish and the non-purpose19 credit grew to be much larger.20 Q Okay. By the way, as a relationship manager, did you have21 a philosophy about getting to know your clients in the private22 banking group?23 A Yes.24 Q What was that philosophy?25 A Well, I felt that, to adequately serve my client's needs0034 1 and also protect the needs of the bank, I need to fully 2 understand my client's financial situation and also make sure 3 that they understood the documents they were signing and the 4 various terms and conditions that were placed on them. 5 Q And so as part of that, would you make a practice to meet 6 your clients and get to know them? 7 A If at all possible, I did meet with my clients, got to know 8 them, did the best that I could in terms of sitting down with 9 them when it came time to close loan documents, and go through10 those documents and make sure that my clients understood them.11 Q And did you do that with Mr. Lay?12 A On many occasions, I did.13 Q And on those occasions, did -- the discussions of purpose14 and non-purpose credit, was that addressed --15 A Yes.16 Q -- on those occasions?17 A Yes.18 Q Each time?19 A Each time.20 Q And why is that?21 A Well, it was -- it was very important, as I said earlier,22 that we keep the two lines of credit separate and that23 borrowings under the non-purpose line of credit did not go to24 purchase or carry margin stock.25 Q Okay. As part of your client contact, would you also send0035 1 term sheets to your clients that would confirm the salient 2 points of the loan documents and agreements? 3 A On occasion we would. 4 Q All right. Let me have you turn to Exhibit 124 and ask you 5 if that is an example of such a term sheet, in this case, one 6 sent to Mr. Lay. 7 A 124? 8 Q Yes, Exhibit 124. 9 A Okay.10 Q Do you recognize it?11 A Yes.12 Q And is that a letter to Mr. Lay with respect to the credit13 facilities?14 A Yes.15 MR. HUESTON: We would move this in at this time, Your16 Honor.17 MR. CARROLL: Your Honor, I object on foundation with18 respect to the signature of Mr. Lay on that document.19 THE COURT: Well, I'll admit it other than for the20 signature now, and we'll see where we go from there.21 MR. HUESTON: Okay.22 (Government's Exhibit Number 124 was admitted.)23 BY MR. HUESTON:24 Q And by the way, with respect to the signatures of Mr. Lay,25 when you were meeting with Mr. Lay, did you, in fact, bring loan0036 1 documents to sign when you met with him?

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051806 us v lay bench v1 2 A Yes. 3 Q And did he sign these documents in your presence? 4 A Yes. 5 Q And did you come to recognize his signature over time? 6 A Yes. 7 Q And looking at this letter, does it appear to be the 8 signature of Mr. Lay? 9 A Yes, it does.10 MR. CARROLL: Objection, Your Honor. Could I take the11 witness on voir dire on this point?12 THE COURT: Sure.13 VOIR DIRE EXAMINATION14 BY MR. CARROLL:15 Q Mr. Shelton, you did say that you had seen Mr. Lay sign16 certain of these loan documents or, perhaps, even letters like17 what's before you now, correct?18 A Yes.19 Q You're not saying, however, that you did see Mr. Lay sign20 Exhibit Number 124, are you?21 A No, I'm not.22 Q Do you recall whether you did or not?23 A On this particular letter?24 Q Yes.25 A No, sir, I don't.0037 1 Q Mr. Shelton, are you familiar with a device called Autopen, 2 or signature machine? 3 A Yes. 4 Q You're aware of the fact that at Enron there was an Autopen 5 or signature machine for Mr. Lay's use, correct? 6 A I don't know that. 7 Q Well, you know that the purpose of an Autopen is to 8 replicate the signature of the person whose name is programmed 9 or put into that machine, correct?10 A Yes.11 Q You've seen it before, right, Autopens?12 A Actually, I don't recall ever seeing one.13 Q But you do understand --14 A I understand the concept.15 Q -- the exact purpose is --16 A Yes.17 Q -- in fact, to put the signature of the person's name --18 the person on the document that looks like what that original19 signature would be, correct?20 A Yes.21 Q You're not able to sit here today and say that you can tell22 the difference between a genuine signature of Mr. Lay and a23 signature that would have been placed on a document by an24 Autopen, are you?25 A No, I'm not.0038 1 Q Particularly, with respect to, as we're sitting here today, 2 looking at photocopies, you couldn't tell the difference, could 3 you? 4 A No, I couldn't. 5 MR. CARROLL: Your Honor, we maintain our objection 6 with respect to the signature. 7 THE COURT: How did this document come into your 8 possession? 9 THE WITNESS: I would have had it drafted at the bank,10 sent to Mr. Lay's office, and then it would have been -- a11 signed original would have been returned to the bank.12 THE COURT: And is this a copy of the signed original

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051806 us v lay bench v113 from the bank's files?14 THE WITNESS: It appears to be.15 THE COURT: Who would have returned it to the bank?16 THE WITNESS: Most likely, Ms. Sally Keepers would17 have had it returned to the bank.18 THE COURT: Who is that person?19 THE WITNESS: Ms. Keepers was a personal assistant to20 Mr. Lay that handled much of his financial affairs.21 THE COURT: What's the significance -- let's say,22 Mr. Lay had a machine affix his signature. Does that have any23 legal significance as opposed to whether he took out a Waterman24 pen and signed it?25 MR. CARROLL: Absolutely. If Mr. Lay wasn't the0039 1 person who turned on the signature machine and had it signed, 2 then, it wouldn't, in fact, be his statement. It may or may not 3 have been authorized. Certainly, Mr. Shelton doesn't know 4 whether it was authorized. 5 THE COURT: Well, it's a part of the bank's records, 6 and the bank relied upon it. I'm going to admit the document. 7 DIRECT EXAMINATION 8 (continued) 9 BY MR. HUESTON:10 Q By the way, Mr. Shelton, did Mr. Lay in any of his meetings11 with you say, "Just forward the documents to some -- one of my12 helpers. I'll have my signature put on by Autopen"?13 A No.14 Q Did you ever hear of Autopen anytime you spoke with him?15 A No.16 Q And in fact, in those meetings with him -- and we'll get to17 them -- did you present personally those Regulation U forms for18 his signature?19 A Yes.20 Q After explaining how important the Reg U was to his banking21 relationship with NationsBank and Bank of America?22 A Yes.23 MR. CARROLL: Objection, Your Honor. Leading.24 THE COURT: Overruled.25 BY MR. HUESTON:0040 1 Q And did you obtain those signatures? 2 A Yes. 3 Q Having observed physically, watching him sign those after 4 discussing those regulations and how they governed his lines of 5 credit? 6 A Yes. 7 MR. HUESTON: Let's post this term letter, please, 8 Exhibit 124. 9 BY MR. HUESTON:10 Q This is dated December 8, 1993? Same period of time,11 sir --12 A Yes.13 Q -- as you were having these meetings?14 All right. And so here, this part -- first part15 of the letter is addressing the purpose part of the facility,16 Facility A, the $10.5 million line of credit; is that right?17 A Yes.18 Q All right. And what's bullet point 4 there?19 A It says that "The purpose of this Facility A is to purchase20 or carry margin stock."21 Q All right. And then, there's a section that starts there22 about Facility B, right?23 A Yes.

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051806 us v lay bench v124 Q And what is that addressing?25 A It says that "The proceeds of Facility B are to be used to0041 1 finance personal expenses. Facility B will not be used to 2 purchase or carry margin stock." 3 Q All right. And then, the language that's in there under 4 Facility B, did that reflect the discussions that you had and 5 the confirmation of understandings that you sought from Mr. Lay? 6 A Yes. 7 MR. HUESTON: Let's go to page 2, please. 8 Let's blow out that section. 9 BY MR. HUESTON:10 Q It's a section that say, "Interest Rate. LIBOR plus 17511 basis points based on 30-day" -- and initials. Do you recognize12 those initials?13 A Yes.14 Q Whose initials are they?15 A I recognize them as Mr. Lay's.16 Q And do you recognize the circling? Would he often return17 documents with circled things with things initialed?18 A Certainly did in this case.19 Q Okay. And what's being addressed here, by the way?20 A This is -- the bank is offering several different interest21 rate periods which would have different interest rates attached22 to them. And typically, the shorter the time period of the23 interest period, the lower the interest rate would be. I think24 what Mr. Lay is doing here is he's just communicating to me25 that, typically, he's going to borrow at 30-day LIBOR, which0042 1 would be the lowest rate. 2 Q And you stated earlier you would have meetings with your 3 client, including with Mr. Lay, to get to know them and to 4 understand them, right? 5 A Yes. 6 Q And did you as part of your meetings with Mr. Lay assess 7 whether he had attention to detail with respect to his lines of 8 credit? 9 A Yes.10 Q What was your -- what did you gather from that, from your11 meetings?12 A I gathered that he was a hands-on, detail-oriented person13 who was very much interested in what the various details and14 terms and conditions of the loan would be.15 Q All right. Let's go on -- now, this relationship that you16 had with Mr. Lay -- we're starting here in '93; we're going to17 quickly move forward in time -- extended to what period of time?18 From '93 'til when?19 A Approximately, late '97 or early '98.20 Q All right. And let's just go through a few more examples21 of these CARs and other documents to show and track the22 progression of the loans over time.23 MR. HUESTON: Let's go to Exhibit 318, please.24 BY MR. HUESTON:25 Q Is this another credit approval report that you prepared,0043 1 this time in July of '94? 2 A Yes, it is. 3 Q All right. 4 MR. HUESTON: We move this in at this time, Your 5 Honor. 6 THE COURT: 318? 7 MR. HUESTON: Yes. 8 THE COURT: It's admitted.

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051806 us v lay bench v1 9 (Government's Exhibit Number 318 was admitted.)10 MR. HUESTON: Let's post that up and let's blow this11 out.12 BY MR. HUESTON:13 Q This is effective date July, '94. It says, "New credit14 request." There's one and two. Each says 8 million. Do you15 see that, sir?16 A Yes.17 Q And what are those numbers? What does that refer to?18 A Those are two separate lines of credit that I am submitting19 for approval.20 Q All right. For Mr. Lay?21 A Yes.22 Q And down below, it says, "Purpose of the credit, 1 and 2."23 What is that?24 A The "Purpose of the credit, 1 and 2," Facility Number 1,25 eight for $8 million, is to purchase or carry margin securities.0044 1 The second line of credit is for business investments and 2 personal expenses and will not be used to purchase or carry 3 margin stock. 4 Q All right. And so the non-purpose line of credit is now 5 larger; is that right? 6 A It looks to me like -- 7 Q From '93. 8 A Yes, it is larger than it was. It's the same as the 9 purpose credit, yes.10 Q Right. And in fact, as we look forward over time, that11 non-purpose line is going to get larger and larger and the12 purpose will be getting smaller and smaller?13 A That's correct.14 MR. HUESTON: Let's go down to the bottom of the page,15 please.16 BY MR. HUESTON:17 Q There are handwritten notations there. Who are these18 others -- your name is there and there are initials there with19 the date; is that right?20 A Yes.21 Q And there are others here whose names are there with22 initials. Just briefly, who are these other folks and why are23 they signing off on this?24 A On the left-hand side of the signature blocks there, those25 individuals are my direct reports that would be required to0045 1 approve. So K. Wilson would have been my manager here in the 2 Houston office. W. Helms is -- ran the State of Texas. And 3 then the folks over on the right-hand side there, Mr. Pryde and 4 Mr. Reilly, were what we call the credit policy officers of the 5 bank. 6 Q All right. And in general, the higher the line of credit, 7 the more -- the more banking officers and personnel needed to 8 look at and sign off on the line of credit; is that -- 9 A Yes.10 Q Is that fair?11 A Yes.12 Q And there are handwritten notations that are put in on --13 on the bottom right. Are those your handwritten notations?14 A No, they are not.15 Q Okay. In these credit approval reports, would, in the16 course of Bank of America's business, different officers put in17 handwritten notations for the review of the other people's and18 signatory's review and consideration?19 A Yes.

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051806 us v lay bench v120 Q So would you have reviewed those handwritten notations as21 part of the course of your business duties and responsibilities?22 A Yes.23 Q Let's take a look --24 MR. HUESTON: Let's blow out that handwritten25 notation, please.0046 1 BY MR. HUESTON: 2 Q And this says, "Subject to our legal counsel's satisfaction 3 that the structure partnership is guarantor and pledgor finally 4 protects us and that all proposed mechanics are within Reg U 5 boundaries." What is that item referring to, generally? 6 A In this case, Mr. Lay had set up a family limited 7 partnership that was going to be pledging the collateral, and so 8 this is the credit policy officer just making sure that our 9 legal counsel signs off on the fact that all the partnership10 documents would fully comply with Reg U.11 Q All right.12 MR. HUESTON: Let's go to page 486, please.13 BY MR. HUESTON:14 Q Is this part of the credit approval report documentation,15 sir?16 A Yes, it is.17 Q And this is entitled, "Quick Reference Guide for Analyzing18 Stock Secured Loans." Why was this prepared with the loan19 documentation?20 A This is -- was simply a form to summarize all of the21 pertinent facts associated with the stock secured loan, the type22 of collateral, what the purpose would be for an analysis of the23 underlying stock.24 Q All right.25 MR. HUESTON: Let's go page 487.0047 1 BY MR. HUESTON: 2 Q And here under Roman Numeral IV, "Margin Maintenance 3 Requirements," in fact, was it part of the standard loan 4 documentation to ascertain issues with respect to Regulation U? 5 A Yes. 6 Q And then, "Is the loan governed by Regulation U?" there was 7 a blank filled in "Yes"? 8 A Yes. 9 Q "Does the structure conform to Regulation U?" again with an10 asterisk; is that right?11 A Yes, that's correct.12 Q And that was part of standard bank procedure?13 A Yes.14 Q Mr. Shelton, we've addressed this just very generally. Did15 the lines of credit increase over time?16 A Yes.17 Q And who was driving that, by the way?18 A Mr. Lay.19 Q And what was -- in the course of the relationship, how20 would he go about doing that? I mean, what do you recall21 happening during these years?22 A Typically, he would call me or have one of his associates23 call me and ask if we would be interested in increasing the line24 of credit.25 Q And it would go through more reviews by you; is that right?0048 1 A That's correct. 2 Q Let's go quickly to Exhibit 1005 in your book. 3 Is this a letter memorializing with Mr. Lay an 4 increase of his line of credit?

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051806 us v lay bench v1 5 A Yes. 6 Q And dated November of '94? 7 A Yes. 8 Q All right. 9 MR. HUESTON: We move this in at this time, Your10 Honor.11 MR. CARROLL: Your Honor, again, object to foundation12 with respect to the signature of Ken Lay.13 MR. HUESTON: Once again, under 902, Sub (10), there's14 a presumption this comes in, that the -- any signature is15 presumptively prima facie genuine or authentic; and beyond that,16 Your Honor, I've now provided a foundation with Mr. Shelton that17 he, in fact, had gotten signatures live. He never heard of any18 sort of signing machine.19 THE COURT: Yeah, I sustain -- I mean, I overrule the20 objection. It's admitted.21 (Government's Exhibit Number 1005 was admitted.)22 MR. HUESTON: Okay.23 Let's post this, please.24 BY MR. HUESTON:25 Q This is dated November 23, 1994. And you're addressing0049 1 this to "Dear Ken." Were you on a first name basis? 2 A Yes. 3 Q "Per your request, NationsBank of Texas is pleased to 4 provide a $7.5 million increase to your existing $8 million 5 credit facility which is guaranteed by KLL and LPL Investments, 6 Limited. This new $15.5 million credit facility may be used for 7 any purpose other than to purchase margin stock." 8 This is a one page letter. Why did you put that 9 language in there?10 A Because this would have been a non-purpose line of credit11 or would we have advanced in excess of the 50 percent limitation12 for a purpose credit. So it was important to communicate that13 this line of credit could not be used to purchase margin stock.14 Q Okay. And you signed the letter?15 A Yes, I did.16 Q And you sent it for his signature as well?17 A Yes.18 Q Would this have reflected discussions that you would have19 had prior to this letter with Mr. Lay?20 A Yes, it would.21 Q And what would be the nature of those discussions with22 Mr. Lay?23 A The nature would just be that Mr. Lay --24 MR. CARROLL: Your Honor, I object to this as calling25 for speculation unless the witness actually remembers what the0050 1 discussions were rather than what they would have been. 2 BY MR. HUESTON: 3 Q Let's try that first. Do you remember having discussions 4 with Mr. Lay with respect to this? 5 A I don't remember the exact discussions. 6 Q Okay. Before every increase of these lines of credit, 7 Mr. Shelton, was it your practice to, in fact, have personal 8 contact with Mr. Lay to both ascertain what he was going to use 9 the loans for and what his desire was for the loans and the10 amounts?11 A Yes.12 Q Do you remember trying to negotiate with someone other than13 Mr. Lay in this time?14 A No.15 Q Did you continue to meet with Mr. Lay periodically to

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051806 us v lay bench v116 discuss additional line of credit products at NationsBank and17 Bank of America?18 A Yes.19 Q All right. Let's talk about one thing that was mentioned20 briefly earlier. You knew that Mr. Lay had a line of credit at21 Enron; is that right?22 A Yes.23 Q And how did you learn that, by the way?24 A I originally learned it from reading the proxy materials25 attached to Enron's annual filings.0051 1 Q Okay. Did you discuss that directly with Mr. Lay as well? 2 A Yes. 3 Q And in what context? 4 A Just the bank's desire or interest in potentially providing 5 additional credit to Mr. Lay. Perhaps, we could have refinanced 6 that line of credit as well. 7 Q All right. And was that an issue that came up in the 8 relationship with you and Mr. Lay that you directly addressed 9 with him?10 A Yes.11 Q Can you explain that, the nature of those discussions that12 you had with Mr. Lay on that?13 A Well, just that -- that, if we were to refinance that line14 of credit, we needed to know what the original purpose of that15 credit was, what the proceeds were actually used for.16 Q And why is that?17 A The reason is is that under Regulation U, while Enron may18 not have been subject to that regulation in terms of the 5019 percent advance, the bank would. The regulation states that if20 you refinance any line of credit that was originally used to21 purchase or carry margin stock, then -- then we would have to --22 we could only advance the 50 percent loan-to-value.23 Q All right. Is that something called carrying margin stock?24 A Yes.25 Q And I just want to make a brief illustration here. Let's0052 1 just say this is stock that is to be purchased. Let's just put 2 -- I'll put a block here which will represent the Enron line of 3 credit, okay? And then, let's just say this is Bank of America 4 line of credit. Let's assume this is one of the non-purpose 5 Bank of America lines of credit. The non-purpose line of credit 6 would have a limitation, right? 7 A That's correct. 8 Q What was the limitation? 9 A The non-purpose line of credit would have a -- typically, a10 70 percent advance ratio and it could not be used to purchase or11 carry margin stock.12 Q All right. So it -- this couldn't be done, right? You13 couldn't take the non-purpose line and buy stock?14 A No.15 Q Now, the idea of this carry margin stock, that's a16 refinancing idea, right?17 A Yes.18 Q So if the Enron line of credit were used to buy stock,19 right --20 A Yes.21 Q -- you can't get around Reg U by just paying down that22 Enron line of credit later, right?23 A No.24 Q So that's the idea --25 A Yes.0053

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051806 us v lay bench v1 1 Q -- to make sure there is no end run around Reg U -- 2 A Yes. 3 Q -- essentially? 4 All right. And so did this concept come up and 5 did you have discussions about that with Mr. Lay? 6 A Yes. 7 Q And in fact, did you memorialize some of the discussions 8 that you had with Mr. Lay about that issue, carrying margin 9 stock?10 A Do you mean put it in writing?11 Q Yes.12 A Yes.13 Q Thank you.14 Let's take a look at Exhibit 120. And I'll ask15 if that's an example of that, an August 15, 1995, letter.16 A Yes.17 Q All right.18 MR. HUESTON: Move this in at this time, Your Honor.19 THE COURT: It's admitted.20 (Government's Exhibit Number 120 was admitted.)21 MR. HUESTON: Let's put that up, please.22 BY MR. HUESTON:23 Q It's dated August 15, 1995, regarding Federal Reserve24 Regulation U, and it's addressed to Kenneth Lay; is that right?25 A Yes.0054 1 Q And it says, "Dear Ken, I completed further research on Reg 2 U in your various financing alternatives. Below is a summary of 3 my findings." And just going to point 4, it says, "Since the 4 Enron Corporation credit would be considered purpose credit, the 5 Reg U margin requirements two-to-one collateral coverage" -- 6 that's that 50 percent, right? 7 A Yes. 8 Q -- "would apply if you refinanced the Enron Corporation 9 purpose credit with a financial institution."10 A Yes.11 Q Is that addressing what we just outlined there on the12 board?13 A Yes, it is.14 Q All right. And you signed that.15 And did this come after discussions you had on16 that issue with Mr. Lay?17 A Yes.18 Q And do you remember what his desire was at the time, why19 that issue arose?20 A I don't recall an exact conversation, but I believe it was21 because he was asking if we were interested in refinancing the22 Enron line of credit.23 Q Okay. Let's move on now to Exhibit 200, please.24 Do you recognize that document?25 A Yes.0055 1 Q What is that? 2 A This is what we call at the bank a modification to a credit 3 approval report, typically, used for changes to original terms 4 and conditions but not an increase in the amount of the line of 5 credit. 6 Q Okay. And did you prepare this, sir? 7 A Yes. 8 MR. HUESTON: Move this in at this time, Your Honor. 9 THE WITNESS: Well, hang on. I'm sorry. This says10 1998, so I would not have prepared this, actually.11 BY MR. HUESTON:

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051806 us v lay bench v112 Q All right.13 MR. HUESTON: We have a business certification for14 this, so we would move this in as a business record.15 MR. CARROLL: No objection, Your Honor. The pages16 behind it do bear Mr. Shelton's signature -- or initials.17 THE COURT: All right. Exhibit 200 is admitted.18 (Government's Exhibit Number 200 was admitted.)19 MR. HUESTON: All right. Let's move this then.20 BY MR. HUESTON:21 Q So, in fact, taking a look at that, do you find your22 initials there, sir?23 A I see my initials on the next page.24 Q Okay.25 A 338 or --0056 1 Q I think it's -- 2 MR. HUESTON: Let's put this up. 3 THE WITNESS: There's a lot of numbers. 4 I believe this says H. Williams where my 5 signature block would be. And again, this one looks like it's 6 dated January of 1998. So it would not have had my -- when I 7 flip to the next page, I see my initials from a different date. 8 BY MR. HUESTON: 9 Q Okay. And in fact, I think that's what we're going to be10 on anyway, on that page with your initials.11 MR. HUESTON: Seeing it highlighted there, let's blow12 that up.13 THE WITNESS: Okay. Yes.14 MR. HUESTON: Okay, there we go.15 BY MR. HUESTON:16 Q And that's signed in September of '97; is that right?17 A Yes.18 Q And just briefly, this is really to outline the course of19 changes that you had discussed in the relationship over time20 with Mr. Lay.21 Now, looking at purpose of credit --22 MR. HUESTON: If we can go up to the beginning,23 please, to give this proper context. To the top of the page.24 BY MR. HUESTON:25 Q Can you just briefly describe the status of the lines of0057 1 credit at this point? 2 A Yes. We were asking for approval of a $30 million 3 non-purpose line of credit where we would have the higher 4 advance ratio of 70 percent against the collateral. And then 5 there's also a $750,000 unsecured line of credit. 6 Q All right. And just briefly, we had started with some 7 documentation in '93. Again, over the course of time, was the 8 trend towards more of this non-purpose credit from the bank? 9 A Yes.10 Q And that was at the request of Mr. Lay?11 A Yes.12 Q All right. Sir, in fact, do you recall -- do you have a13 recollection of a time where he was trying to move more business14 from one bank to -- from another bank to Bank of America and15 this happening during a summer vacation of yours?16 A We did have an opportunity to refinance or take a larger17 line of credit from a relationship that Mr. Lay had at Charter18 Bank.19 Q And what do you remember from that opportunity? Did you20 have a discussion with Mr. Lay, if you can describe that?21 A I did. I just remember having a conversation initially22 with Ms. Sally Keepers as I was leaving on vacation, and I was

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051806 us v lay bench v123 told that Charter Bank was being a little slow in their response24 for the credit request. We had already approved our portion of25 the request. And then I was asked if we -- if the bank would be0058 1 interested in increasing our line of credit to take out some of 2 that exposure that Charter Bank had. 3 Q Okay. And do you recall having a discussion with Mr. Lay 4 at this time as well? 5 A I did. After the initial discussion with Ms. Keepers, I 6 was patched through to Mr. Lay to just discuss it briefly, what 7 the request was. 8 Q All right. And do you remember roughly what that 9 discussion pertained to? Did you talk about the intentions of10 use of the lines of credit?11 A Yes.12 Q And why was that?13 A Well, we were just simply talking about increasing our14 lines of credit with him, and it was an additional multi-million15 dollar request. So we were just talking about the general terms16 and conditions. Effectively, we just -- it was the same terms17 and conditions as what you see here on this credit approval18 report.19 Q Okay. And you have walked us through a number of loan20 documents which show both non-purpose and purpose lines of21 credit?22 A Yes.23 Q And as a relationship manager over the course of those24 years, was it unusual for your client to have both non-purpose25 and purpose lines of credit?0059 1 A Mr. Lay was the only client that I recall that actually had 2 both purpose and non-purpose lines of credit. 3 Q All right. And how did that factor into your work with him 4 as a relationship manager? 5 A Well, I think it required an increased level of diligence 6 in making sure that all the parties understood the various 7 requirements of Regulation U and making sure that we kept the 8 two of those lines of credit separate so that there wouldn't be 9 the risk of violating Regulation U.10 Q And how did that -- how did you bring that into practice in11 this relationship with Mr. Lay?12 A Well, it was -- it effectively dominated a lot of what we13 did in that we all had to -- we spoke the same language, if you14 will. If there was going to be a request that was going to be15 used to purchase margin stock, then we would make sure that the16 request came in as an advance on the purpose credit.17 Also, just in terms of going through the loan18 documentation, just making sure that -- that we knew which loan19 was which; going through the form Reg Us and walking Mr. Lay20 through those so that he knew which was -- which was purpose21 credit and which was not and what his responsibilities would be.22 Q Okay. And so on top of these meetings where you23 ascertained how from Mr. Lay these were to be used and on top of24 explaining how each was to be used and getting confirmation of25 his understanding of that and on top of the term sheets that0060 1 would be sent from time to time, did you also require Mr. Lay to 2 sign Regulation U or U-1 forms? 3 A Yes. 4 Q And why did you do that? What was the role of these U-1 5 forms in the relationship? 6 A The U-1 forms explained what a margin stock is, and then 7 there is -- it details the amount of the line of credit, and

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051806 us v lay bench v1 8 then it also has a question that asks will the proceeds of this 9 loan be used to purchase or carry margin stock.10 Q And are these the forms that you brought to him to be11 signed in your presence?12 A Yes. They would be part of the larger package of loan13 documentation.14 Q Okay. Let's turn to Exhibit 161. We have a number of15 these, but I'll just bring up one for example right now. Turn16 to 161, if you will, and I'll ask if this is an example of one17 of the U-1 forms that you brought to him for his signature.18 A Yes.19 MR. HUESTON: We move this in at this time, Your20 Honor.21 THE COURT: It's admitted.22 (Government's Exhibit Number 161 was admitted.)23 MR. HUESTON: Let's put this up, please.24 BY MR. HUESTON:25 Q This form, Federal Reserve Form U-1, is this the0061 1 standardized form that was used for purpose and non-purpose 2 lines of credit? 3 A Yes, it is. 4 Q Okay. And the form is how many pages long? 5 A It's two. 6 Q Okay. And on the first page here, there are instructions. 7 And at point 2, what is -- what is being discussed at point 2 8 there? 9 MR. HUESTON: If we can blow that out.10 THE WITNESS: In the upper portion of the document?11 BY MR. HUESTON:12 Q Under instructions, yes.13 A Okay. It says that -- it describes what the definition of14 a margin stock is.15 Q And in the course of your relationship with Mr. Lay, did16 you orally talk about that with him?17 A Yes.18 Q And did you -- did he appear to understand what you were19 talking about?20 A Yes.21 Q And it was on these forms as well; is that right?22 A Yes.23 Q And so here it says, "The term 'margin stock' is defined in24 Regulation U and includes principally stocks that are registered25 on a national securities exchange or that are on the Federal0062 1 Reserve board's list of marginable over-the-counter stocks; two, 2 debt securities, bonds, that are convertible into margin stocks; 3 three, any over-the-counter security designated as qualified for 4 trading in the national market system; and four, shares of 5 mutual funds unless 95 percent of the assets of the fund are 6 continuously invested in US Government agency, state, or 7 municipal obligations." 8 Did you explain all that to Mr. Lay? 9 A Yes.10 Q Did you do that on more than one occasion.11 A Yes.12 MR. HUESTON: And then going down on the form, please13 If you can blow back out and go down.14 BY MR. HUESTON:15 Q There's a section there about "What is the amount of credit16 being extended?" There's an amount put in there?17 A Yes.18 Q And then, here, there's a question: "Will any part of this

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051806 us v lay bench v119 credit be used to purchase or carry margin stock?" Is that a20 question that you asked Mr. Lay when you would bring these forms21 to him or prior to bringing these forms to him?22 A Yes.23 Q Okay. And then there's "If the answer is no," as it is24 here, there is a statement of intent; is that right?25 A Yes.0063 1 Q And would you have had discussions with him each time to 2 affirm that his intent was, in fact, what's written there and 3 not to buy stock? 4 A Yes. 5 Q And then down below -- 6 MR. HUESTON: Thank you. 7 Let's just go to the signatures. 8 BY MR. HUESTON: 9 Q And in fact, Mr. Lay signed. And then I guess -- whose10 signature was that to the right?11 A It was Mrs. Lay.12 Q When that signature was required?13 A Yes.14 Q All right. Mr. Shelton, what was the significance to the15 bank of this form? In other words, if somebody just said, "You16 know, I don't want to -- I don't want to sign this form. It17 just -- it's too technical. I think we have an understanding18 here. I don't need to sign this." What was the significance of19 this form?20 A We would be unable to actually make the loan available if21 this document was not signed.22 Q What does this document, in fact, represent?23 A It represents that the borrower understands and agrees that24 a line of credit will or will not be used to purchase margin25 stock.0064 1 Q And was that your understanding from the training and 2 experience you received at Bank of America? 3 A Yes. 4 Q And the approach that you and other relationship managers 5 were trained to have with the clients? 6 A Yes. 7 Q And just very briefly, you began this relationship in '93. 8 Moved on to '98. Were there other times between 1993 and 1998 9 where these Regulation U forms were required to be signed?10 A Yes.11 Q And just, generally, when would that be?12 A Generally, when you're extending a new loan or increasing13 the amount of the loan, or, for that matter, actually decreasing14 it, changing the loan amount, new loans, this form would be15 required.16 Q Okay. And with -- the relationship with Mr. Lay,17 generally, when was that happening? How often were new18 increases being requested by Mr. Lay in his line of credit, just19 in general?20 A In general, an annual basis. Sometimes more frequent than21 that.22 Q Okay. And each time, would it be your practice then to23 meet with him and to ascertain his understanding and obtain the24 signatures?25 MR. CARROLL: Objection. Compound. Leading.0065 1 THE COURT: Can you break it up? 2 MR. HUESTON: Sure. 3 BY MR. HUESTON:

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051806 us v lay bench v1 4 Q Just -- why don't you just, Mr. Shelton, state what your 5 practice would be then as these new requests would come up with 6 respect to the Regulation U compliance and the forms that were 7 required for the documentation. 8 A Again, I would do the best that I could to sit down with 9 Mr. Lay at time of loan closing. I wasn't always able to do10 that. But particularly, early on in our relationship that I did11 -- I did that. Otherwise, we would send loan documentation over12 to his office for his signature.13 Q Okay. And in the course of the relationship, what was the14 practice generally and the balance between the two, meetings to15 obtain signatures or sending the stuff over?16 A It was more -- during my time on the relationship, to the17 best of my ability, I recall that I met with him more often than18 I did not. He was a very busy executive, and it typically was,19 you know, some of the few times that I had an ability to meet20 with him. So I attempted to make all of the loan closings if he21 could.22 Q And you said, "particularly early on." And how do you23 remember that and why was that of significance?24 A Well, it was of significance again because this Regulation25 U was very important to the bank; certainly, me personally. And0066 1 as I stated earlier, we had two separate lines of credit. We 2 had one that was non-purpose and one that was purpose which 3 complicated matters a bit. And so we had to make sure that 4 every -- all parties understood the implications, what our 5 various responsibilities were. 6 Q Did Mr. Lay understand Regulation U as -- from what you 7 could gather from your meetings and attempts to explain this to 8 him? 9 MR. CARROLL: Objection. Calls for speculation.10 THE COURT: Sustained.11 MR. HUESTON: Okay.12 BY MR. HUESTON:13 Q As part of your duties and responsibilities, sir, were you14 -- did you attempt to assess whether your clients understood15 loan requirements as they would come up with different loan16 documents?17 A Yes.18 Q And why was that part of what you were trained to do?19 A Because we were required to make a good faith effort to do20 the due diligence required to satisfy in our minds that our21 borrowers understood the requirements of Regulation U.22 Q And did you attempt to do that with Mr. Lay?23 A Yes.24 Q And how did you attempt to do that? How did you try to25 ascertain whether he was getting it, understanding this?0067 1 A By meeting with him initially the first couple of times 2 that I met with him, and we actually went over these documents. 3 I made an attempt to go through loan documents with virtually 4 all of my clients and explain what the particular document was 5 that they were signing. 6 Q And did you continue to work with him until you were 7 satisfied personally that he understood what was required under 8 non-purpose and purpose loans? 9 A Yes.10 Q And was that important to you?11 A Yes.12 Q And did you just have one meeting and sign off and say13 "Great, everything seems to be fine. He understands. I never14 need to go back again"? Was there any kind of thought like that

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051806 us v lay bench v115 in your mind?16 MR. CARROLL: Objection. Leading, cumulative.17 THE COURT: Overruled.18 THE WITNESS: No.19 BY MR. HUESTON:20 Q All right. Let me have you flip through additional Forms21 U-1 that were signed under Bank of America.22 MR. HUESTON: And we have business certifications for23 all of these, Your Honor. Most of these, Mr. Shelton, himself24 reviewed.25 BY MR. HUESTON:0068 1 Q But let me have you look, sir, at Exhibits 125 -- 2 MR. HUESTON: These are the ones we will be moving in, 3 Your Honor, at this time. 125, 133, 161, Numbers 163 through 4 68. 5 THE COURT: What was the first number in that series? 6 MR. HUESTON: 125. 7 THE COURT: No. Did you say 153? 8 MR. HUESTON: I'm sorry. It was 163. 9 THE COURT: 163 through what?10 MR. HUESTON: 168.11 And then 173 through 178.12 THE COURT: Is there any objection to those that have13 been offered thus far?14 MR. CARROLL: Your Honor, if you could give me a15 moment. I've just seen them.16 THE COURT: We started with 125.17 MR. CARROLL: Yes, Your Honor. With respect to each18 and every one of these documents, unless Mr. Shelton was19 physically present to watch Mr. Lay and Mrs. Lay sign these20 documents, he's indicated he can't tell the difference between21 an original signature and an Autopen signature. So I think22 there's no foundation for the signatures with respect to my23 client. So we'll object on that basis, no foundation.24 MR. HUESTON: Your Honor, there's been no evidence at25 all that there was ever any Autopen, and Mr. Shelton has0069 1 discussed how he obtained live signatures from Mr. Lay on these 2 forms. We can go through some of the early ones, and he's 3 recognizing his signature on -- and we will have him do this 4 through all of these, through Number 167. These also have 5 business certifications attached to them from the files of Bank 6 of America. And Mr. Shelton has furthermore explained how these 7 were necessary as part of the files for non-purpose loans, and 8 they were part of the file because of that. 9 MR. CARROLL: Your Honor, I don't have any objection10 to them being admitted as being the things that are in the11 bank's files. What we object to is simply the fact that -- the12 authentication or the genuineness of the Lays' signatures,13 that's all. No business record authentication can attest to the14 genuineness of those signatures.15 MR. HUESTON: And what I'll further show here is that16 these also have dates next to them which are not Autopen, and we17 can go through that with Mr. Shelton as well.18 THE COURT: All right. They're admitted. The19 objection is overruled.20 (Government's Exhibit Number 125 was admitted.)21 (Government's Exhibit Number 133 was admitted.)22 (Government's Exhibit Number 161 was admitted.)23 (Government's Exhibit Number 163 was admitted.)24 (Government's Exhibit Number 164 was admitted.)25 (Government's Exhibit Number 165 was admitted.)

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051806 us v lay bench v10070 1 (Government's Exhibit Number 166 was admitted.) 2 (Government's Exhibit Number 167 was admitted.) 3 (Government's Exhibit Number 168 was admitted.) 4 MR. HUESTON: Just to finish this series, 173 through 5 178. 6 THE COURT: They're admitted. 7 (Government's Exhibit Number 173 was admitted.) 8 (Government's Exhibit Number 174 was admitted.) 9 (Government's Exhibit Number 175 was admitted.)10 (Government's Exhibit Number 176 was admitted.)11 (Government's Exhibit Number 177 was admitted.)12 (Government's Exhibit Number 178 was admitted.)13 MR. HUESTON: And 180 through 183.14 THE COURT: They are also admitted over objection.15 (Government's Exhibit Number 180 was admitted.)16 (Government's Exhibit Number 181 was admitted.)17 (Government's Exhibit Number 182 was admitted.)18 (Government's Exhibit Number 183 was admitted.)19 MR. HUESTON: 185, 299.20 THE COURT: They're admitted.21 (Government's Exhibit Number 185 was admitted.)22 (Government's Exhibit Number 299 was admitted.)23 MR. HUESTON: And 300 is the last one, Your Honor.24 THE COURT: It's admitted.25 (Government's Exhibit Number 300 was admitted.)0071 1 BY MR. HUESTON: 2 Q Mr. Shelton, before testifying today, did you have an 3 opportunity to look at all these Forms U-1? 4 A Yes. 5 Q And does each one have not just Mr. Lay's signature but 6 also a date handwritten next to his signature? 7 A Yes. 8 Q And when you were meeting with him, you saw him sign 9 documents and date the documents, right?10 A Yes.11 Q So turning, for instance, to Exhibit 125 --12 MR. HUESTON: Let's post that one, please.13 Let's go, I'm sorry, to 133. Let's do that.14 Sorry about that.15 And then going to the bottom.16 BY MR. HUESTON:17 Q Appear to be signatures and dates as well, sir?18 A Yes.19 Q And is that true of the other documents, too, the other20 U-1s?21 A Yes.22 MR. CARROLL: Objection. Vague. Is what true?23 MR. HUESTON: I'm sorry.24 BY MR. HUESTON:25 Q Are there signatures and handwritten dates as well on these0072 1 documents? 2 A Yes. 3 Q Now, I'm about to show a demonstrative. In fact, we'll do 4 that at this time. 5 MR. HUESTON: Let's show Demonstrative BF-23, please. 6 BY MR. HUESTON: 7 Q And sir, you have compared the forms we just admitted to 8 this demonstrative, have you not? 9 A Yes.10 Q And does this reflect the list of Forms U-1 with signatures

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051806 us v lay bench v111 of Mr. Lay?12 A Yes.13 Q And just to be clear, your relationship directly with14 Mr. Lay extended through 1997 and possibly into 1998? Is that15 your recollection?16 A Yes.17 Q So the list through -- about two-thirds of the way through18 would be ones that you would have handled with Mr. Lay; is that19 right?20 A Yes.21 Q And the ones afterwards would post-date with Mr. Lay but22 appear to be Forms U-1 with Bank of America, right?23 A Yes.24 Q All right. And just in summary, again, for all those that25 list down through 175 and into the beginning of 1998, those0073 1 would have been the product of your relationship with Mr. Lay, 2 right? 3 A Yes. 4 Q And would reflect discussions and understandings that you 5 would ascertain with him as part of your duties and 6 responsibilities as the relationship manager? 7 A Yes. 8 MR. CARROLL: Objection. Leading. 9 THE COURT: Overruled.10 But I think I understand what the facts are.11 MR. HUESTON: All right, Your Honor.12 BY MR. HUESTON:13 Q And just a related point here, sir. We talked about this a14 little bit. Actually, I think we covered that. Let me -- a15 couple of other names came up here. You mentioned Ms. Keepers,16 Sally Keepers?17 A Yes.18 Q And who did you understand her to be?19 A He was -- she was the personal assistant to Mr. Lay that20 handled much of his personal financial affairs, administrative21 duties associated with that.22 Q Okay. And did you -- were you able to ascertain whether23 she was acting as an agent for Mr. Lay or was making independent24 decisions on behalf of Mr. Lay?25 A I don't believe that she was making independent decisions0074 1 on his behalf. 2 Q And would that come from the course of your discussions 3 from her and in your relationship with Mr. Lay himself? 4 A Yes. 5 Q What about Ms. Sherrie Gibson? Who is she? 6 A She was hired by Mr. Lay two or three years into my 7 relationship with Mr. Lay to help him with his accounting, some 8 of his -- you know, he had a family limited partnership. Just 9 the workload was increasing and so he needed some additional10 help.11 Q Okay. And same question there: Was she appearing to act12 as an agent of Mr. Lay or was she making independent decisions13 on behalf of Mr. Lay in the course of your discussions and14 involvement with her?15 MR. CARROLL: Objection. Calls for speculation.16 THE COURT: You can base it on your own dealings with17 her.18 THE WITNESS: In my own dealings with Ms. Gibson, she19 was acting on his behalf.20 BY MR. HUESTON:21 Q All right. Let's go now to -- let's shift out of your time

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051806 us v lay bench v122 at NationsBank and Bank of America. Did you leave Bank of23 America to pursue another opportunity -- business opportunity at24 some point?25 A Yes.0075 1 Q And what was that? Describe when that happened and what 2 was the opportunity. 3 A I had actually shifted my responsibilities at Bank of 4 America in 1997 to become a portfolio manager in our investments 5 group part of the private client group. And I left in early 6 1999 to form Caprock Capital Advisors which was a registered 7 investment advisory firm. 8 Q All right. And what is a registered investment advisory 9 firm? Can you just briefly explain.10 A We were registered with the Securities and Exchange11 Commission to have discretionary authority over our client's12 personal financial investments.13 Q All right. And when do you recall beginning this venture14 with Caprock Capital Advisors?15 A I started that March 1st, 1999.16 Q Okay. And did you have an opportunity to have a discussion17 with Mr. Lay about Caprock Capital Advisors?18 A Yes.19 Q And when was that and what do you recall from that20 discussion?21 A It would have been sometime during 1999, I believe in the22 summer or towards the end of the summer of 1999. We had a brief23 discussion about what I was doing. And I told him we'd love to24 do business with him.25 Q And what did he say in response?0076 1 A He said we -- he said that he would like to support my 2 business and would like to discuss it at a later date, give his 3 office a phone call. 4 Q Did you, in that discussion, describe, generally, what 5 Caprock was investing in? 6 A Yes. 7 Q And what -- what did you describe? What was the general 8 nature of what you were investing in? 9 A Our primary investment style was large capitalization10 growth stocks. So we were investing in some of the larger11 companies that are publicly traded.12 Q And did you discuss that with Mr. Lay?13 A Yes.14 Q And did he then afterwards say he was interested in15 pursuing that?16 A Yes.17 Q What happened next then in your dealings then with Mr. Lay?18 A I called Mr. Lay's office; relayed to, I believe it was19 Sally Keepers at the time, that we had had -- that Mr. Lay and I20 had had that conversation. And then she told me that I needed21 to get in touch with Beau Herrold who was handling some of the22 investments for Mr. Lay at the time.23 Q And did you, in fact, contact Mr. Herrold?24 A I did.25 Q And did you have a discussion with Mr. Herrold relaying0077 1 what you had said with Mr. Lay? 2 A Yes. We had a meeting at Mr. Herrold's office where I made 3 a presentation to him regarding our firm, what our investment 4 philosophy and process was in an attempt to get an account from 5 Mr. Lay. 6 Q Okay. And during the course of that discussion, did he,

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051806 us v lay bench v1 7 Mr. Herrold, indicate that he needed to talk to Mr. Lay to get 8 an answer as to whether he wanted to finally invest? 9 A Yes.10 Q Did Mr. Herrold contact you with an answer subsequently?11 A Yes.12 Q And what was the answer?13 A The answer was that Mr. Lay would like to open an account14 with us; that it would be $1 million; and that we would have15 discretionary authority over that account to manage as I had16 presented in my meeting with him.17 Q All right. Now, in order to invest with Caprock Capital18 Advisors, was Mr. Lay required to review and sign account19 opening documentations?20 A Yes.21 Q Why is that?22 A Schwab Institutional was our custodian, and Schwab had23 account opening documentation that they required. Also, we had24 an investment management agreement with all of our clients that25 effectively gave us discretionary trading authority over their0078 1 account. 2 Q And so both sets of documents then you sent to Mr. Lay for 3 his review and signature? 4 A Yes. 5 Q Let's have you look at Exhibits, first, 67, which is the -- 6 should be the account opening documents, and then 277, which 7 should be the investment advisory agreement. 8 A Could you give me that first number again. 9 Q Sure. Let's work with that first. 67.10 A 67, okay.11 Q Is that the account opening documentation?12 A This -- this letter here is just from Schwab to Mr. Lay13 communicating that an account has been opened on his behalf and14 Caprock Capital Advisors was the financial advisor.15 Q And can you just explain the relationship between the two,16 Caprock Capital and this Schwab account? How did that work?17 A Yes. As a registered investment advisor, we did not take18 custody of the assets that we were managing for our clients.19 Schwab Institutional did. That's where the account actually20 resided. And then I just had trading authority over that21 account, and Mr. Lay could revoke that authority at any time.22 Q All right. And did you cause these documents then to be23 sent to Mr. Lay for his signature?24 A Yes.25 MR. HUESTON: We'd move that in at this time, Your0079 1 Honor, Exhibit 67. 2 MR. CARROLL: Your Honor, again, we renew our 3 objection. This -- with respect to Mr. Lay's signature. 4 There's been no indication -- as a matter of fact, the witness 5 has testified he was not present, that he sent them for 6 signature. And there's been no indication that he could 7 distinguish Mr. or Mrs. Lay's signature genuinely from that 8 which might have been placed on the document by an Autopen. 9 BY MR. HUESTON:10 Q And turning to that document, sir, if you look at the11 signature, does it appear to be the same signature that you saw12 Mr. Lay sign in your presence over and over again?13 A It appears to be.14 MR. HUESTON: We move this in at this time, Your15 Honor.16 THE COURT: Just a minute.17 MR. CARROLL: Your Honor, I reiterate that there has

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051806 us v lay bench v118 been no testimony that he could take -- he could tell the19 difference between the Autopen and that which he actually saw20 Mr. Lay sign. So I object on the basis of foundation.21 MR. HUESTON: And the rule that would apply here, I22 would submit, Your Honor, is Rule 902, Sub (10), presumption23 that the signature that appears is presumptively genuine or24 authentic --25 THE COURT: Just a minute.0080 1 MR. HUESTON: -- and as business record. 2 MR. CARROLL: Again, with respect to the business 3 record, the affiant does not purport to say that they saw -- or 4 could testify that Mr. Lay or Mrs. Lay signed the document, only 5 with respect to things that were done within that institution. 6 MR. HUESTON: And alternatively, I'll move it in as a 7 business record. We have a business records certification for 8 this document as well. 9 THE COURT: How does it come in under 902(10)?10 MR. HUESTON: Well, first of all, it's a business11 record in the course of Mr. Shelton's dealings with Mr. Lay.12 It's relevant. We have the business record certification for13 that. 902, Sub (10), Your Honor -- that's actually the public14 records. Under self-authentication -- I'm sorry, I had it15 wrong. It's 902. Under self-authentication, Your Honor, I16 believe the presumption is that -- as set forth in Sub (10),17 that any signature appearing on a document is presumptively --18 presumptively comes in as prima facie genuine or authentic,19 which is what we're doing here in our case, Your Honor.20 They are certainly capable of, and I'm sure will21 pursue, some sort of defense that, in fact, these signatures are22 somehow not his own; and they have the right to do that; but23 they do come in under this rule as presumptively his signature;24 and we've gone beyond Rule 902, Sub (10) because I've actually25 had Mr. Shelton testify as to witnessing Mr. Lay sign many0081 1 documents; and he's actually recognizing the signature of 2 Mr. Lay. 3 THE COURT: Here's what we're going to do. I'm going 4 to admit it as a business record, but it would be helpful if the 5 Government could give me a copy of pages 54 through 58 of the 6 indictment; and opposite each of the agreements referenced in 7 the boxes under those counts, put the exhibit number. And then, 8 if any of these documents that we've had objections to this 9 morning are included within that sub-universe of exhibits that10 pertain to specific allegations of the indictment, you can,11 perhaps, ask Mr. Shelton and future witnesses whether they were12 personally present when Mr. Lay signed that particular document.13 MR. HUESTON: Okay.14 (Government's Exhibit Number 67 was admitted.)15 THE COURT: I realize you can't do that over the next16 break, or if you can, you're pretty quick.17 But in any event, we're going to take a break18 until 10:15.19 MR. CARROLL: Yes, Your Honor.20 (Court recessed at 9:56 a.m.)21 (Court resumed at 10:12 a.m.)22 THE COURT: Be seated, please.23 MR. CARROLL: We may have missed this, but we didn't24 see a business record affidavit for 67 or 277. I may be wrong25 about that.0082 1 MR. HUESTON: We do have those. 2 And in any event, Mr. Shelton can authenticate it

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051806 us v lay bench v1 3 as being a business record that he kept in the course of his 4 duties at Caprock. 5 THE COURT: What was the other one, 67 and 277? 6 MR. CARROLL: Yes, Your Honor. 7 THE COURT: All right. 277 is also admitted over 8 objection. 9 (Government's Exhibit Number 277 was admitted.)10 THE COURT: When you get that chart together of the11 indictment, let the other side have a copy, too.12 MR. HUESTON: Yes, Your Honor.13 THE COURT: All right, let's finish up with14 Mr. Shelton.15 MR. HUESTON: All right.16 BY MR. HUESTON:17 Q Let's just turn to 277. That's the investment advisory18 agreement; is that right, sir?19 A Yes, it is.20 Q All right.21 MR. HUESTON: Let's put that up just briefly.22 BY MR. HUESTON:23 Q This is Caprock Capital Advisors, Investment Advisory24 Agreement, November 16, 1999. "Services provision. Caprock25 will provide advice regarding the purchase and sale of mutual0083 1 funds, stocks, and other items." 2 MR. HUESTON: But let's go to the last page, "Asset 3 Allocation." Investment policy statement. 4 BY MR. HUESTON: 5 Q And sir, directing your attention to asset allocation: 6 "Portfolio should be fully invested in a diversified portfolio 7 of equity securities according to the Caprock Capital Advisors 8 model portfolio." What does that describe? 9 A I ran a model portfolio of diversified portfolio securities10 that I would manage all of my client accounts back to that11 model, if at all possible, if there weren't any restrictions on12 the accounts, so forth.13 Q Was this, in essence, a confirmation of what you had14 discussed live with Mr. Lay, in any event, namely, that you're15 going to be investing in large cap securities, traded stock?16 A Yes. This is something that we prepared that just17 documented the investment objectives. Any -- any constraints18 that were on the client account, you know, was this a suitable19 investment for the client. Yes, that's exactly what it did.20 Q And this was sent on to Mr. Lay for his signature; is that21 right?22 A Actually, this -- this form was not.23 Q But the first part that said "Investment advisory"?24 A Yes.25 Q And again, that was really documentation sent after you had0084 1 live discussion with him about the intent for the use of his 2 invested monies, correct? 3 A Yes. 4 Q And just to address this other point about a signature 5 machine, you were relationship manager at the Bank of America 6 for eight years or so? 7 A Yes. 8 Q Did you hear of anybody telling you -- any of your clients 9 telling you they were going to be not reviewing documents and10 just sending them to a signature machine? Did you ever hear11 anything like that?12 A No.13 Q Would that have caused you concern if you heard something

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051806 us v lay bench v114 like that?15 A Yes.16 Q Why is that?17 A I would like to see an original signature on all of my18 documents sent out for execution.19 Q And did you meet with clients, especially early on, to make20 sure they understood the salient terms and that they would, in21 fact, review documents that you were going to be sending them22 for their review?23 A Yes.24 Q And signature?25 MR. CARROLL: Objection. Leading.0085 1 THE COURT: Overruled. 2 BY MR. HUESTON: 3 Q You can answer. 4 A Yes. 5 Q Same with the investment advisory agreements. I mean, did 6 you have any conversations with clients there about, "Well, I'm 7 not going to review the documents, I'm just going to send them 8 off to somebody for a signature machine"? Do you remember 9 anything along those lines?10 A No.11 Q Would that have concerned you if you heard something like12 that?13 A Yes.14 Q Why is that?15 A It's important that the client understands the agreement16 between my firm and the client. And an original signature would17 -- I think would document that understanding.18 Q Okay. And you mentioned you, over the course of time, had19 discussions with Ms. Keepers, right?20 A Yes.21 Q And Ms. Gibson who worked under Mr. Lay; is that right?22 A Yes.23 Q And Mr. Beau Herrold, correct?24 A Yes.25 Q At any time when you had discussions with them, did they0086 1 indicate to you in any way, shape, or form, "Just send it to me 2 and I'll, you know, make sure there's a machine that signs it. 3 You know, no need to get it to Mr. Lay"? Anything like that? 4 A No. 5 Q Anything even close? 6 A No. 7 Q And in the discussions you had with them, in general, what 8 was the understanding that you gathered with respect to how they 9 would be handling the documents you were sending for Mr. Lay's10 review and signature?11 A Yes.12 Q What was the understanding you got?13 A That Mr. Lay was signing those documents.14 Q All right. And finally, sir, did you in this investment15 relationship send monthly accounts to Mr. Lay to show how much16 you had invested on his -- on his behalf and in what stocks?17 A Yes. We sent monthly account statements.18 Q To his attention?19 A Yes.20 Q Let's turn to Exhibit 75. I'll ask if you recognize that21 as a series of monthly account statements sent to his attention.22 A Yes.23 MR. HUESTON: Your Honor, we move these in at this24 time, Exhibit 75.

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051806 us v lay bench v125 MR. CARROLL: No objection.0087 1 THE COURT: It's admitted. 2 (Government's Exhibit Number 75 was admitted.) 3 BY MR. HUESTON: 4 Q And sir, just to summarize, did you, in fact, receive the 5 million dollars as was promised by Mr. Lay? 6 A Yes. 7 Q And did you invest that in the large cap equity stocks as 8 you had discussed? 9 A Yes.10 Q And within what period of time did you invest that money or11 get it fully invested?12 A Over approximately a three-month period.13 Q And that's reflected in those documents, correct?14 A Yes, it is.15 Q Now, Mr. Shelton, were you aware of the source of the $116 million that was sent to fund this investment?17 A No.18 Q And if these funds had been wired from a non-purpose line19 of credit, would that have been a violation of Reg U?20 A Yes.21 MR. HUESTON: Pass the witness.22 MR. CARROLL: If the Court would give me just a minute23 to get situated.24 Your Honor, I have a binder of exhibits we may25 use. Can we offer that to the Court?0088 1 THE COURT: Sure. Just hand it to my law clerk. 2 MR. CARROLL: I will. 3 THE COURT: Do you have an exhibit list, by the way? 4 MR. CARROLL: We have a full exhibit list, Your Honor. 5 I don't have one for each individual witness. I believe -- 6 We did not put it in the front of the binder, did 7 we? 8 THE COURT: If you want me to admit exhibits, I need 9 an exhibit list. That's kind of the way it works.10 MR. CARROLL: Yes.11 THE WITNESS: Your Honor, may I put that there?12 THE COURT: That's fine. That's -- the drill is the13 white books are from the Government and the non-white books are14 from the defense. You'll have two books when it's over.15 MR. CARROLL: Thank you for that choice of16 terminology.17 We have a full list, if that will help.18 THE COURT: Thank you.19 All right, let's move along.20 MR. CARROLL: Yes, Your Honor.21 CROSS EXAMINATION22 BY MR. CARROLL:23 Q Howdy, Mr. Shelton.24 A Hi.25 Q We've -- we've never met or spoken before right now, have0089 1 we? 2 A No, we have not. 3 Q You're aware, though, that several times since the 4 indictment was returned in this case, July of 2004, that we 5 tried our best to talk to you, were you not? 6 A Yes. 7 Q On a number of occasions, we approached your lawyer and 8 your lawyer has always said no, right? 9 A That's correct.

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051806 us v lay bench v110 Q The terminology that we've heard several times was that you11 just wanted to get on with your life. Is that your terminology12 or where did that come from?13 A It didn't come necessarily from me. I'm sure it just came14 from my attorneys, that that's the way they explained it.15 Q You did, however, meet with the Government before you got16 up here on the stand today, correct?17 A I did.18 Q You met with the Government, at least, twice back before19 the indictment was returned, right?20 A Yes. I was interviewed by the FBI.21 Q And you also met with Mr. Hueston and Mr. Berkowitz and22 some others as well, correct?23 A Yes.24 Q Now, before you got up here to testify today, how many25 times did you meet with the Government between the time that you0090 1 had those first meetings with the FBI and Mr. Hueston and those 2 folks and the time that you got up here today? 3 A If I understand the question, you're talking in recent 4 weeks, recent times? I just want to make sure I'm going to give 5 you a precise answer here. You said after I met with the FBI a 6 couple of times and after I met with Mr. Hueston? 7 THE COURT: Just tell us how many times you've talked 8 to the Government over the last few weeks and let's move along. 9 THE WITNESS: Three times.10 BY MR. CARROLL:11 Q When was that?12 A I met a week ago, Wednesday or Thursday of last week. I13 met Monday of this week. And then had a very -- a brief14 conversation right before we walked into the courtroom here.15 Q Why is it that you -- that you met with the Government but16 you wouldn't talk to us, the Defendant, Mr. Lay and his folks?17 A My view is that I'm here to just give the background18 information, give you the facts as I know them. I -- you know,19 my attorney recommended that we not visit with you.20 Q Well, there was no indication that we were asking for21 anything other than to learn what the background facts were as22 well; isn't that right?23 A I don't know that for a fact. But all I can tell you is24 that I had -- I followed my attorney's advice.25 Q Now, did the Government -- you mentioned that individual0091 1 bankers and banks themselves have potential exposure under Reg U 2 and other regulations with respect to, let's call it, 3 misconduct. Did the Government discuss any potential charges 4 against you with respect to your conduct as a banker? 5 A No. 6 Q Have they talked to you about any potential claims that 7 might have been brought either as a banker or now in the 8 securities industry? 9 A No.10 Q You do work in the securities industry now, right?11 A Yes.12 Q Did the Government have any discussions with you about the13 fact that your conduct in this case might open you up to some14 sort of exposure with respect to the continuation of your15 license, securities licenses?16 A No.17 Q Did the Government make any -- any promises or do you have18 any agreements with the Government?19 A No.20 Q Then the sole reason that you talked to the Government five

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051806 us v lay bench v121 or -- I guess at least five times but wouldn't talk to us at all22 was just because your lawyer advised you not to?23 A That's correct.24 Q Did he tell you why?25 A He told me he thought that it was not a good idea for me --0092 1 MR. HUESTON: Objection. Privilege here. 2 Attorney-client privilege. 3 THE COURT: He's answered the question. Let's move to 4 something else. 5 BY MR. CARROLL: 6 Q Mr. Shelton, you've -- you've known Ken Lay for more than 7 -- well, going on about 13 years; is that right? 8 A Yes. 9 Q You know his kids? You've done business with Beau and10 Mark?11 A Most of them, yes.12 Q Your wife and Mark's wife know each other, right?13 A Yes.14 Q And of course, you testified today that, after you left15 Bank of America, you formed the Caprock Investment firm and you16 asked Ken Lay to do business with you there, right?17 A Yes, I did.18 Q And you were proud to do that, right?19 A Yes.20 Q And he did, in fact, follow through and he invested a21 million dollars with you to invest for him, right?22 A Yes, he did.23 Q Just to be real clear, you're not here to testify today24 that when Ken Lay signed all those Form U-1s that we just got25 put into evidence that he was lying to you or the bank? You're0093 1 not saying that, are you? 2 A No, I'm not. 3 Q You don't, in fact, believe that, do you? 4 A No. 5 Q You don't believe either that he had some kind of scheme or 6 plan to cheat the bank or defraud the bank, do you? 7 A I don't have any information regarding that. 8 Q Because if you had that, when you left the bank, you 9 wouldn't have gone into business with him and taken a million10 dollars from him, would you?11 A No, I would not.12 Q Do you really have any doubt that, if anybody had told Ken13 Lay that there was some problem with the way that he was using14 his lines of credit at NationsBank, he would have fixed it?15 A I would have expected him to, yes.16 Q Do you know if anybody ever did that?17 A No, I don't.18 Q Isn't it more likely that, if, in fact, there's some19 problem with the way Mr. Lay or the folks in his office used the20 Bank of America line of credit, that it's a result of a mistake21 or misunderstanding?22 MR. HUESTON: Objection. Calls for speculation. No23 foundation.24 THE COURT: Sustained.25 BY MR. CARROLL:0094 1 Q You would have no way of knowing whether -- if there's 2 something that's wrong with the way that the lines of credit 3 were used, whether that was a result of a mistake or 4 misunderstanding versus intentional misconduct, would you? 5 MR. HUESTON: Again, foundation.

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051806 us v lay bench v1 6 THE COURT: Sustained. 7 MR. CARROLL: All right. 8 BY MR. CARROLL: 9 Q Mr. Shelton, while you were at NationsBank, did you10 personally see any misuse of any line of credit by Mr. Lay or11 anybody else associated with him?12 A No.13 Q You told the Government when you were talking to them back14 in June or July of 2004 that, if you had seen line of credit15 funds go to brokerage houses, that would -- I think the phrase16 was that would raise eyebrows. Do you remember that?17 A Yes.18 Q And you still stand by that, right?19 A Yes.20 Q It would also trigger what's called under the -- under the21 Regulation U terminology a good faith duty of inquiry, right?22 A Yes.23 Q On the part of the bank and you, in particular, right?24 A Yes.25 MR. CARROLL: Let's look, if we can, at Exhibit Number0095 1 738, Defendant's 738. 2 MR. SECREST: Your Honor, I think we need to switch 3 the computer when the Court has a chance. 4 THE COURT: Okay. 5 MR. SECREST: Appreciate it. 6 MR. CARROLL: Hang on. I'm sorry, Teena. I got it. 7 That's fine. 8 BY MR. CARROLL: 9 Q Look at Exhibit 738, if you would. This appears to be a10 fax cover sheet from Rosalie Fleming at Enron addressed to you.11 Has some handwriting on it. Do you recognize that as yours?12 A It looks like it's mine.13 MR. CARROLL: Your Honor, we would move admission of14 Exhibit 738.15 THE COURT: All right, it's admitted.16 (Defendant's Exhibit Number 738 was admitted.)17 BY MR. CARROLL:18 Q Now, early on in these line of credit relationships, the19 folks at Mr. Lay's office would actually send things like this,20 faxes to you directly, asking you to advance funds from lines of21 credit or to wire money to some other place, correct?22 A Yes.23 Q And it's in this kind of situation that you're saying that24 -- that if somebody on one of these papers like this had said,25 "Send the money to Goldman Sachs to open an account," that would0096 1 have, in your terminology, raised your eyebrows, right? 2 A Yes. 3 Q It would have caused you, as a banker, to go ahead and make 4 a further good faith inquiry about where that money was really 5 going, right? 6 A Yes. 7 Q And if you look at the handwriting on this document in the 8 upper right-hand corner -- 9 MR. CARROLL: If we could see that.10 BY MR. CARROLL:11 Q First of all, the document itself says that what's being12 requested is that you advance money to pay off the Enron line of13 credit, correct?14 A I don't -- I'm sorry. You'll have to repeat the question.15 Q Sure.16 MR. CARROLL: Can we blow it back out to the main

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051806 us v lay bench v117 document. I'm sorry.18 BY MR. CARROLL:19 Q "Comments" -- in the "Comments" section. "Per Enron's20 Treasury Department, the information to pay off Kenneth L. Lay's21 loan by wire transfer is as follows." They give the22 information, and then there's that $4 million number. Do you23 see that?24 A Yes.25 Q Now, what you've done is written down there in the middle0097 1 "$4 million debit, 2662530707." That's the Lays' checking 2 account, correct? 3 A It's my -- I believe you. I don't know for certain. 4 Q If you'll look up at the handwriting in the upper corner 5 there where we did it before and I got ahead of myself. 6 A Okay. 7 Q This -- the first thing says "Fund balance of $8 million, 8 non-purpose." What does that mean in this context? 9 A That -- it looks like it refers to the non-purpose line of10 credit that we had set up.11 Q Well, it looks like to me -- is it true that what you were12 directing to have happen here is that the balance of the $813 million non-purpose loan be put into the checking account to pay14 off the Enron line?15 A It appears.16 Q Now, while you were the relationship manager for Mr. Lay at17 NationsBank, were you always the person who was the recipient of18 these faxes and wire requests for draw-downs on the lines of19 credit?20 A No.21 Q Did you ever tell -- but you did receive a number of them,22 correct?23 A Yes.24 Q Did you ever tell anybody associated with Mr. Lay, either25 Ms. Keepers or Ms. Fleming or anyone else, that they ought to0098 1 start sending those to somebody else? 2 A Not that I recall. 3 Q Okay. If, in fact, you got the wire transfer request on a 4 fax like this and it had said, "Send the money to Goldman Sachs 5 or to Fayez Serafim or to Trust Company of the West," what would 6 you have done? 7 A I would have asked Ms. Keepers what the purpose of that 8 loan was. 9 Q And if Ms. Keepers had then said to you -- either said to10 you or referred you to Mr. Lay who said, "Well, I'm going to go11 diversify my portfolio, we're going to buy some stock," what12 would you have done?13 A I would have said that we need to make sure that that loan14 is advanced under the purpose credit loan.15 Q And if, in fact, there was no availability under the16 purpose credit loan, what would you have done?17 A We would not have been able to fund that request.18 Q One thing you might have been able to do, if you wanted to19 do that, was to open a new purpose line, correct, assuming there20 was collateral available?21 A That's correct.22 Q But in any event, you would have immediately contacted23 Mr. Lay and his office and told him, "Whoa, something's wrong24 here and we got to fix it," right?25 A Yes.0099 1 Q And you would have expected that they would have done that,

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051806 us v lay bench v1 2 right? 3 A Yes. 4 Q Are you familiar with, I'm sure you are, the terminology, 5 while you were a banker, "a suspicious activity report"? 6 A Yes. 7 Q That's an obligation that's imposed on banks and bankers to 8 report to something called FinCEN, which is the financial 9 information center, a bunch of law enforcement agencies, any10 suspicious activity, potential crimes, that occur with respect11 to the bank, right?12 A It's my understanding that related to money laundering and13 the like.14 Q Well, let me ask you this: Did -- did it ever happen while15 you were having -- while you were a relationship manager for16 Mr. Lay that a suspicious activity report was ever submitted17 with respect to any of Mr. Lay's conduct with respect to the18 lines of credit?19 A No, no.20 Q And you would have been the one to know that if it21 happened, right?22 A Yes.23 Q By the same token, your bank, like all of the banks, was24 subject to examination by the controller of the currency,25 correct?0100 1 A Yes. 2 Q At any time while you were at NationsBank, Bank of America, 3 did you ever get a report from the OCC that raised questions 4 about Mr. Lay's use or application of his funds from his lines 5 of credit? 6 A No. 7 Q The SEC also has the ability and the authority to regulate 8 the use of these lines of credit, does it not? 9 A Yes.10 Q Did you ever get a report of any investigation by the SEC11 into Mr. Lay's use of his lines of credit?12 A No.13 Q Did you ever hear that there was any complaint or inquiry14 about any misuse of Mr. Lay's lines of credit by the SEC?15 A No.16 Q Did you ever hear about any law enforcement or regulatory17 agency whatsoever raising any questions about the propriety of18 Mr. Lay's use of his lines of credit until the indictment came19 down?20 A No.21 Q You mentioned that you got some training at Bank of America22 with respect to Reg U and the way it was to be employed and23 utilized, correct?24 A Yes.25 Q Would you take a look right quick at Exhibit 271. That0101 1 would be Defense Exhibit 271? 2 THE COURT: Let me give you this book back. It's not 3 very helpful. 4 BY MR. CARROLL: 5 Q Do you see that? 6 A Yes. 7 Q Now, Exhibit Number 271, I'm going to grant you, is not -- 8 this is not a Bank of America document. It appears to come from 9 J. P. Morgan Chase.10 A Okay.11 Q But it's -- it's dated around August of 1996. I just want12 to refer you to -- to this document to ask if this appears to be

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051806 us v lay bench v113 the kind of training and information that you at Bank of America14 also got with respect to Reg U?15 A This doesn't look like a training document. It looks more16 like some sort of credit approval document.17 Q I'm sorry, we have the wrong document up. I'm looking at18 Government -- I'm sorry, it's Government Exhibit 271. I19 apologize. That's what I get for looking at the hard copy20 rather than the screen. I apologize, Mr. Shelton. That's my21 fault.22 A Okay. No problem. Okay.23 Q If you go to the third -- the fourth page in.24 MR. HUESTON: Your Honor, I'm going to object. I25 believe this is a Chase Bank document. There's no foundation0102 1 established here for Mr. Shelton. 2 MR. CARROLL: I'm simply asking, Your Honor, if this 3 is roughly equivalent -- 4 THE COURT: I can't rule until I hear the questions 5 and answers. So the objection is overruled. 6 THE WITNESS: I've got to tell you, I don't have this 7 document here. So you'll have to -- if you can get it on my 8 screen. I can't find it here. 9 BY MR. CARROLL:10 Q Sorry.11 A No problem. Okay.12 Q And all I'm asking because -- and I'll tell you, it's13 because we didn't get a document like this back from the Bank of14 America. I don't know why. But if you look at just the table15 of contents, which is the second page --16 A Yes.17 Q -- this looks like the kind of thing that you -- the kind18 of thing that you also saw at Bank of America?19 A The training I would have received on this would have20 occurred back in 1989 and 1990. I don't recall exactly what the21 training document looked like at the time. I will tell you we22 had a credit policy manual that was close to this thickness that23 you have before me today. And there would have been a -- there24 was a section in there that talked about Regulation U.25 Q Sure.0103 1 A I also, because of the relationship with Mr. Lay, solicited 2 advice from our NationsBank internal counsel who summarized for 3 me in memos the things that I need to be most concerned about. 4 Q Before we -- I want to talk to you about that briefly. But 5 before we do, would you just look at the fourth page of that 6 document, the Chase document. It's the one that begins 7 "Introduction" at the top of the page. 8 A Yes. 9 Q Do you see that?10 A Yes.11 Q And under "Goals," it says, follow along with me, "We would12 like you to leave this class with the following knowledge and13 understanding. Regulation U is confusing and complex." Do you14 agree with that?15 A I think that that certainly can be, but I think on its16 surface it's relatively simple.17 Q But as applied in a given circumstance, it can be pretty18 confusing?19 A It could.20 Q Yeah. And they go on to say, "It's not a safety and21 soundness rule designed to assure good underwriting." That's22 also true, correct?23 A I wouldn't agree in all instances.

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051806 us v lay bench v124 Q Its principal function though, as you said, was really not25 to protect the banks, it was to protect the markets, right?0104 1 A It is to protect the markets. It depends on the -- on the 2 type of collateral that the bank is taking. You know, when 3 you're borrowing to fund a purchase of stock, your collateral 4 value can move around a bit. So I wouldn't -- I couldn't be 5 definitive that it's not a safety and soundness rule, but it is 6 more to protect the markets, that's correct. 7 Q But, of course, if you're taking stock as collateral, that 8 safety and soundness issue applies whether it's a purpose or a 9 non-purpose loan, right?10 A That's true.11 Q Let's talk briefly about the document that you just12 mentioned. Look at Government Exhibit Number 122. You can put13 that one away. As a matter of fact, I'll take it away from you14 so it doesn't get away from you further.15 A Thank you.16 I'm sorry, what was that number.17 Q 122, Government Exhibit Number 122.18 I have another copy if you need it.19 A I mean, I just -- I don't have them.20 Q I hope you can put the white one away here. Let's assume21 it --22 A Okay.23 Q Okay. You mentioned that one thing you did with respect to24 the situation with Mr. Lay is you actually took the time to25 communicate with Bank of America's in-house legal counsel about0105 1 how Reg U operated just to get clarification, right? 2 A Yes. 3 Q And this document, Exhibit 122, is NationsBank's legal 4 counsel's response to your inquiry, right? 5 A Yes. 6 MR. CARROLL: Move Government 122? 7 MR. HUESTON: No objection. 8 THE COURT: It's admitted. 9 (Government's Exhibit Number 122 was admitted.)10 BY MR. CARROLL:11 Q And this legal counsel, Ms. Zimmerman, sent you a three and12 a half page paper giving you explanations and giving you13 examples about how Reg U would operate in given circumstances,14 right?15 A Yes.16 Q And the reason you asked for this is because, of course,17 again, you wanted to be careful and because Reg U, in fact, in18 given applications, can be pretty darn confusing, right?19 A Yes.20 Q As a matter of fact -- you can put that away now. It21 wouldn't be unusual -- in fact, it did happen that -- that22 bankers make mistakes with respect to Reg U, don't they?23 A Sure.24 Q Look at Government Exhibit 318, please.25 Got it?0106 1 A Yes. 2 Q This is a document, I think, that's been admitted. It's a 3 document -- this is a credit approval report that bears your 4 initials on the bottom down there at the very lower left-hand 5 corner, right? 6 A Yes. 7 Q This is a document that you prepared? 8 A Yes.

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051806 us v lay bench v1 9 Q If you look up here, this is the document, I believe, that10 Mr. Hueston talked to you about that discusses the approval of11 the two different lines of credit, the $8 million non-purpose12 and the $8 million purpose line?13 A Yes.14 Q Now, you've told us before that the advanced rate for a15 non-purpose line is whatever the bank will do. But the16 procedure in NationsBank was generally about 70 percent for a17 non-purpose, right?18 A Yes.19 Q And for a purpose line, it's limited to 50, right?20 A Yes.21 Q If you look up at the top of this document in the new22 credit requests section --23 A Yes.24 Q -- if you follow the line over there, you see that, for25 both of these lines, the basis of the loan value is stated as 700107 1 percent? 2 A That's correct. 3 Q Not 70 and 50? 4 A No. 5 Q That's wrong, isn't it? 6 A No, it's not. 7 Q Why isn't it wrong? 8 A Because the advance ratio on the -- on the first line of 9 credit is 50 percent. But from the bank's point of view in10 terms of just coming up with a value of the collateral in the11 loan value there, the bank's policy was to give that a 7012 percent collateral value.13 Q What purpose did it serve to do that if your advance rate14 was 50?15 A Simply just so that we can -- when we're looking at our16 risk exposures, how much risk do we actually have in this17 transaction. We're giving as much as 70 percent of a loan value18 to the -- to that collateral, even though the advance is limited19 to 50 percent.20 Q So if you look over on page 4 of this document -- same21 document --22 A Okay.23 Q -- you'll see again a chart that shows collateral24 description for the two loans. And again, we see 70 percent is25 loan percentage.0108 1 A Yes. 2 Q Under non-purpose and purpose, correct? 3 A That's right. 4 Q Now, again, the loan percentage really wasn't 70 percent 5 for the purpose loan, was it? 6 A The advance ratio was not 70 percent. 7 Q Okay. What's the difference between an advance ratio and a 8 loan percentage? 9 A The difference is is that -- let me see if I can give you10 an example. If you pledged a certificate of deposit, our loan11 value against the certificate of deposit was, typically, of 10012 percent or 95 percent if it was at another bank, okay? We --13 that's the loan value. That has nothing to do with what the14 actual advance ratio would be.15 So from the bank's point of view when we looked16 down here and we see that the value here is $18 million worth of17 loan value, we wouldn't ever want to extend credit to a borrower18 in excess of what that loan value is. So that's just from19 trying to understand what our overall risk exposure is.

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051806 us v lay bench v120 Q Look with me, if you will, at -- let's look at Defendant's21 Exhibit 28. This is another chart that's initialed by you22 regarding the collateral section of a credit approval report23 dated 7-15-94, correct?24 A Yes.25 MR. CARROLL: Move this admission of Number 28, Your0109 1 Honor? 2 MR. HUESTON: No objection. 3 THE COURT: It's admitted. 4 (Defendant's Exhibit Number 28 was admitted.) 5 BY MR. CARROLL: 6 Q Again, we have a loan percentage as listed at 70 percent 7 for both, correct? 8 A Yes. 9 Q Now, you're saying that this was the way you would commonly10 do it. So I could show you others, but the answer is every time11 I ought to be able to see 70 percent for both -- if it's margin12 stock, I ought to be able to see 70 -- as collateral, I ought to13 see 70 percent as the loan value for both purpose and14 non-purpose?15 A Yes.16 Q Let's look at Government Exhibit Number 198. This, again,17 is a document -- a credit approval report that you initialed18 dated October 6, 1995. Do you see that?19 A Yes.20 MR. CARROLL: We'd move Exhibit Number 198.21 THE COURT: It's admitted.22 (Government's Exhibit Number 198 was admitted.)23 BY MR. CARROLL:24 Q If you look at this one, again, we have -- under the "New25 credit request" section, we got two loans. One's a purpose loan0110 1 and one is a non-purpose loan, right? 2 A Uh-huh, that's correct. 3 Q At this point, where we have the same heading, it says, 4 "Loan" -- there's loan value and basis of loan value. And on 5 the non-purpose, you got 70 percent. On the purpose, you got 50 6 percent. Do you see that? 7 A Uh-huh. 8 Q So what explains the difference between the way you treated 9 it in that report and the way you treated it at 70 percent for a10 purpose loan in all the other reports?11 A It could be just how the people approving this report want12 to actually see it on the form. All I can tell you is that it13 says, "Maximum, 50 percent advance ratio." But the bank's14 policy on liquid publicly traded stock was to give it a loan15 value of 70 percent.16 Q You -- I assume you were -- you also paid attention, with17 respect to these loans, not simply to Reg U but with respect to18 other aspects of the loan agreements and the limitations there,19 right?20 A Yes.21 Q Okay. Look with me at a document you looked at earlier22 this morning, which is Government Exhibit Number 1005.23 Are you looking at the Government exhibits or the24 defense exhibits?25 A Oh, here it is. Last one, sorry. Okay. Okay.0111 1 Q This is the document that you addressed earlier. This is a 2 letter to you that has been admitted dated November 22, 1994, 3 regarding a $7.5 million increase to Mr. Lay's existing $8 4 million credit facility. You see the last sentence of the first

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051806 us v lay bench v1 5 paragraph there. It says, "This new credit" -- "This new $15.5 6 million credit facility may be used for any purpose other than 7 to purchase margin stock." Do you see that? 8 A Yes. 9 Q Okay. If you would look with me at Defense Exhibit 54,10 that is the restated loan agreement for this particular loan11 that you were talking about in Exhibit 1005, right?12 A Yes.13 MR. CARROLL: Move the admission of Exhibit Number 54.14 THE COURT: It's admitted.15 (Defendant's Exhibit Number 54 was admitted.)16 BY MR. CARROLL:17 Q If you flip over to page 6 -- well, excuse me, if you flip18 over to page 7 -- I can't count -- of that document. Look at19 Section 2.2, "Use of proceeds."20 A Yes.21 Q This says, "The proceeds of the loan may be used by22 borrowers exclusively for business, commercial, investment, or23 similar purposes. The proceeds may not be used for personal,24 family, household, or agricultural purposes." Do you see that?25 A Yes.0112 1 Q So when you sent the letter, Exhibit Number 1005 to the 2 Lays telling them that they could use this new $15.5 million 3 credit facility for any purpose other than to purchase margin 4 stock, that was a mistake, wasn't it? 5 MR. HUESTON: Your Honor, for the optional rule of 6 completeness, can he read the last clause in as well of Section 7 2.2. 8 THE COURT: Yes. 9 Go ahead and read it, Mr. Shelton.10 THE WITNESS: I'm sorry, read it aloud, sir?11 THE COURT: Read the last sentence in its entirety.12 THE WITNESS: "The proceeds may not be used for13 personal, family, household, or agricultural purposes, to14 purchase, refinance, or otherwise carry margin stock or other15 securities or for any other purpose whatsoever."16 BY MR. CARROLL:17 Q I ask you again, Mr. Shelton: When you told the Lays,18 Mr. Lay, in particular, in this letter, Exhibit Number 1005,19 that the new facility could be used for any purpose other than20 to purchase margin stock, that was a mistake, wasn't it?21 A It appears by reading this paragraph, yes.22 Q Contrary to the -- contrary to the terms of the loan23 agreement, right?24 A Uh-huh, yes.25 Q Look with me, if you will, at Exhibit Number -- Government0113 1 Exhibit 120. This is a document that Mr. Hueston discussed with 2 you. This is a letter that you sent to Mr. Lay when he was 3 discussing the possibility of refinancing his Enron line, right? 4 A Yes. 5 Q And you were trying to explain to him what his options were 6 or what the restrictions on his options might be with respect to 7 doing that, right? 8 A Yes. 9 Q Now, let me ask you to look now at Exhibit Number --10 Government Exhibit 317. You might want to keep your finger on11 that one that you got there.12 A Okay.13 Q Exhibit Number 317 is a -- is a note that I believe the14 testimony will show was made by Ms. Keepers, but it says that it15 records a conversation with James Shelton. Have you seen this

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051806 us v lay bench v116 document before?17 A No.18 Q Can you take a minute to read it.19 MR. HUESTON: Your Honor, there's no foundation for20 the document.21 THE COURT: Well, he hasn't offered it yet.22 MR. HUESTON: Okay.23 BY MR. CARROLL:24 Q Have you finished?25 A Yes.0114 1 Q Do you recall that, after you sent the letter, Exhibit 2 Number 120, on August 15th of 1995, that you got a call back 3 from the folks at the Lays asking for some clarification about 4 what they could do in terms of this Enron line or how they could 5 do the refinancing? 6 A I don't recall a conversation, but it wouldn't surprise me 7 if there was a phone call, yes. 8 Q The question I've got for you is do you recall giving this 9 advice to the folks at the Lays: that the way they could --10 could function here is that they could -- he could use all11 compensation and other income to repay Enron in full because12 that wouldn't violate Reg U? That's correct, right?13 A That's correct.14 Q And what you then do is you -- going down to number three,15 that you could draw on the non-purpose line for personal16 expenses during that time. Do you recall giving him that17 advice?18 A I don't recall the advice but I understand it.19 Q Okay. And that would be correct, as far as you're20 concerned, right?21 A Yes, it would.22 Q And then, there's a second item here which says, "Keep23 documentation and avoid borrowing same day as repayment is made24 to Enron." Do you recall giving that advice?25 A I don't recall the advice but it -- I understand it.0115 1 Q Okay. Well, let me see if I understand it. I'm going to 2 use Mr. Hueston's little chart here. 3 The Enron line -- your concern in the August 15th 4 letter was that the Enron line had been used to buy Enron stock 5 and, therefore, you couldn't just take money out of a line of 6 credit and repay the Enron line because you thought that would 7 violate the non-purpose restriction, right? 8 A Yes. 9 Q But according to this advice, which you've said is10 appropriate, if, at the same time Mr. Lay got -- I'm a really11 bad writer and I apologize -- got a paycheck for $100 and he12 drew $100 out of the Enron line and this hundred dollars went13 into their checking account and this hundred dollars went into14 their checking account, as long as they didn't go the same day,15 it was fine for this $100 to pay off this Enron line, right?16 A Yes.17 Q But it's not fine for this hundred dollars to pay off the18 Enron account?19 A That's correct.20 Q If the $200 go in on the same day, that's why there's --21 the suggestion that you don't put them in on the same day,22 right?23 A That's right.24 Q Without putting too fine a point on it, isn't that just a25 way of getting around the restrictions on Reg U because money is0116

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051806 us v lay bench v1 1 fungible? 2 A There's got to be a way to pay off the Enron line of 3 credit. It doesn't always have to be a purpose credit. That 4 makes sense to me what you've just diagrammed. 5 Q And the bank's at no greater risk regardless of which one 6 of those hundred dollars goes over to Enron, right? 7 A That's correct. 8 Q Okay. By the same token, at this time, August 22, assume 9 with me, if you will, that the evidence will show that you did,10 in fact, have that conversation. If you look at -- at Defense11 Exhibit 33. This is the loan agreement dated August 23, 1994,12 which is the -- about the year before this -- this thing was --13 this particular note --14 A Okay.15 Q -- was written, Exhibit 317. And this is -- as it says on16 the top, this is for the non-purpose credit loan, right?17 A Yes.18 Q And if you look over at page 6 of this document, Section19 2.2, again, reads "The proceeds of the loan may be used by20 borrowers exclusively for business, commercial, investment, or21 similar purposes. The proceeds may not be used for personal,22 family, household, or agricultural purposes, to purchase,23 refinance, or otherwise carry margin stock or other securities24 or for any other purpose whatsoever." Do you see that?25 A Yes.0117 1 Q So, again, assuming that this advice was given in the note 2 that we've just seen that you can -- you can live on the 3 proceeds of the non-purpose line while you use your compensation 4 to pay off the Enron line of credit, that would be contrary to 5 the loan agreement, right? 6 A I don't think so. 7 Q Why not? 8 A I think he has the ability to use the proceeds of the 9 non-purpose credit line for all of these reasons --10 Q But it says --11 A -- all these uses.12 Q -- it may not be used for personal, family, household, or13 agricultural purposes. So, in other words, he couldn't, in14 fact, live off the proceeds of the --15 A I guess I don't know exactly what he's using those loan16 proceeds for. But yes, if they were for those personal17 expenses, it would be in violation of this, yes.18 Q And if you told someone -- if you told Mr. Lay that he19 could do that, that would have been a misinterpretation of the20 loan agreement, right?21 A Yes.22 Q Look at Exhibit -- Government Exhibit 260, please. This is23 a memorandum dated February 1, 1994, from you, private banking,24 regarding temporarily unsecured advances; is that right?25 A Yes.0118 1 Q You recognize your signature on that document, right? 2 A Yes. 3 MR. CARROLL: We'd move its admission, Your Honor. 4 THE COURT: The number again? 5 MR. CARROLL: 260, Government Exhibit 260. 6 THE COURT: All right, it's admitted. 7 (Government's Exhibit Number 260 was admitted.) 8 BY MR. CARROLL: 9 Q Read along with me, if you will. This is a short document.10 "Advances under the $10.5 million line of credit for Kenneth L.11 Lay, Facility 639583" -- by the way, that's the purpose line at

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051806 us v lay bench v112 that point, right?13 A Yes.14 Q -- "are for the purpose of acquiring margin stock. Under15 the pledge agreement and credit agreement, Lay is required to16 pledge sufficient margin stock to provide a 50 percent LTV.17 However, the exact description of the collateral to be pledged18 will likely be unknown until after each advance occurs. As a19 result, these advances will be temporarily unsecured 30 days or20 less, until the stock transfer agents can provide the collateral21 to the bank. The relationship manager will attempt to obtain22 guarantee letters from the transfer agents prior to advances to23 ensure timely receipt of collateral."24 Did I read that right?25 A Yes.0119 1 Q The way that -- when you secure a loan or a line of credit 2 with stock is you actually have to get the certificates and give 3 them to the bank, right? 4 A That's right. 5 Q That's the only way to perfect the security interest, as we 6 say in the law? 7 A Yes. 8 Q So what was happening here was you were seeking approval to 9 actually allow Mr. Lay's purpose line to be undercollateralized10 for a period of time until you got those securities in-house?11 A No.12 Q What was happening?13 A You can have unsecured advances to purchase margin stock as14 long as you're only advancing 50 percent of the value of the15 margin stock being purchased. So what I was asking for here was16 to, effectively, to use your words, not perfect the bank's17 security interest in the collateral for a brief period of time.18 Q So, in other words, you were lending the money with respect19 to the stock to purchase the stock which was then going to be20 tendered back as collateral for the loan?21 A Yes.22 Q But when the money was actually turned over, you didn't23 have collateral covering -- giving a 2-to 1 cushion, did you?24 A No.25 Q And that's the reason you had to go to somebody and get0120 1 approval, right? 2 A That's right. 3 Q And you did that because you were confident that no harm 4 was going to come to the bank from it, right? 5 A That's correct. 6 Q Even though, at the moment you did it, there wasn't that 7 2-to-1 coverage, right? 8 A There should have been 2-to-1 coverage at the time the loan 9 was made, but the bank would not have possession of the10 collateral.11 Q Okay. Mr. Shelton, you were Mr. Lay's banker, relationship12 manager, beginning in 1993 until the very end of '97, right?13 A Yes.14 Q By the way, you were introduced to Mr. Lay by Joe Musolino,15 right?16 A Yes.17 Q Joe Musolino, I think you told us, was the head of the bank18 here in Houston at that time, right?19 A Yes.20 Q Important guy?21 A Yes.22 Q Important to you because, at that point, you were about a

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051806 us v lay bench v123 4-year banker, right?24 A Yes.25 Q As a matter of fact, you started in the private client area0121 1 in 1993, the same year you met with Mr. Lay, right? 2 A Yes. 3 Q That's a pretty big responsibility, was it not? 4 A Yes. 5 Q And you wanted, I'm sure, to please Mr. Musolino, didn't 6 you? 7 A Yes. 8 Q You understood that Mr. Musolino was the person who had 9 gone to Mr. Lay seeking to establish that credit relationship,10 right?11 A Yes.12 Q Because, in fact, Mr. Lay had been on the board at TCB and13 another bank and had a prior relationship with other banks,14 right?15 A Yes.16 Q So Mr. Musolino had gone to Mr. Lay and had gone to him to17 get the business to come over to NationsBank rather than vice18 versa, right?19 A Yes.20 Q Now, during the time that you were Mr. Lay's private banker21 -- by the way, was he your first private bank client?22 A No, he was not.23 Q How many clients did you have?24 A I don't recall how many I had. Probably had in the25 neighborhood of 40 or 50 clients.0122 1 Q Okay. Over the course of the time that you were Mr. Lay's 2 private banker, how many meetings total do you think you had 3 with him, in person? 4 A Well, I worked with him for about, let's say -- let's call 5 -- at least five times. Certainly more -- we met more often 6 than that. I would say it would have been probably about a 7 dozen times over that time period. 8 Q Well, was it five or a dozen? 9 A Closer to a dozen, sir.10 Q And you said before in your testimony that Mr. Lay was -- I11 forget exactly the terms. But he was a very busy executive,12 right?13 A Yes.14 Q And you -- I believe you previously told the Government15 when you talked to them that, when you met with him, those16 meetings were pretty brief, right?17 A They were.18 Q As a matter of fact, I think you said you usually could get19 about ten minutes, right?20 A Up to 20.21 Q But most of the time they were closer --22 A Most of the time, they were 10 to 15 minutes, yes.23 Q And when you brought documents for Mr. Lay to sign -- and24 you've said you did that on a number of occasions -- is that all25 you talked about, was signing the documents?0123 1 A Talked about what his future plans might be, where we might 2 be taking this relationship. But primarily, to go over those 3 documents. 4 Q Well, I understand you went over the documents. But again, 5 given your relationship with Mr. Lay and Mr. Musolino, really, 6 wasn't your primary purpose to safeguard that relationship and 7 to try to expand it as best you could?

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051806 us v lay bench v1 8 A Yes. 9 Q And when you went over there -- I'm just going to use one10 transaction as an example, if I can. Let's talk about the11 December 7, 1994, transaction, one that we've talked about a12 little bit before, which begins with Defendant's Exhibit 54.13 It's the restatement of the loan expanding it to 15.5 million.14 A Okay.15 MR. CARROLL: May I approach, Your Honor?16 THE COURT: Yes.17 BY MR. CARROLL:18 Q What I'm going to do is hand you a stack of documents.19 These are all documents that pertain to this particular20 transaction. Exhibit 54 is the restated loan agreement, right?21 A Yes.22 Q Exhibit 58 is the modification and renewal agreement,23 right?24 A This is 58 up here that you just asked me about?25 Q The restated loan agreement is 54. 58 is the -- we may not0124 1 have it up here. I really want you to look through the stack 2 here, if we could. 3 A Okay. 4 Q 58 is the -- it's a -- it's the modification and renewal 5 agreement for purpose credit loan, right? 6 A Yes. 7 Q Next document, 55, is the modification and renewal 8 agreement, right? 9 A Yes.10 Q 56 is the promissory note for the non-purpose credit?11 A Yes.12 Q 57, the pledge agreement for the non-purpose credit?13 A Yes.14 Q 1123 is the -- the U-1 for this $15.5 million loan, right?15 A Yes.16 Q And that's the one -- actually, that's the one that's17 signed by the investment partnership that you mentioned earlier,18 right?19 A Yes.20 Q Then 1125 is the U-1 that's signed by the borrowers, the21 Lays, individually, right?22 A Yes.23 Q So what you would do in this circumstance --24 THE COURT: Are you offering all of these?25 MR. CARROLL: I will offer them, yes, Your Honor.0125 1 THE COURT: All right, they're admitted. 2 (Defendant's Exhibit Number 54 was admitted.) 3 (Defendant's Exhibit Number 55 was admitted.) 4 (Defendant's Exhibit Number 56 was admitted.) 5 (Defendant's Exhibit Number 57 was admitted.) 6 (Defendant's Exhibit Number 58 was admitted.) 7 (Defendant's Exhibit Number 1123 was admitted.) 8 (Defendant's Exhibit Number 1125 was admitted.) 9 BY MR. CARROLL:10 Q What you would do is you would take this stack of documents11 over to Mr. Lay, right?12 A Yes.13 Q And you would sit down -- and I've taken the liberty here14 of putting "Sign here" tabs in all the places that requires15 Mr. Lay to sign. Did you do that, by the way, put the tabs on16 there?17 A An assistant of mine who would have made sure that all of18 the documents were in order would have put these on here.

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051806 us v lay bench v119 Q So when you went over to Mr. Lay's office, they already had20 these little "Sign here" tabs on them, right?21 A Yes.22 Q Okay. And in this 10 or 15 minutes that you got with23 Mr. Lay, because he's a busy guy, you're going to go through24 these seven, eight, nine documents with him, right?25 A Yes.0126 1 Q Now, you're not here telling the Court that you went over 2 in detail every one of these documents in that period of time, 3 right? 4 A No, I'm not. 5 Q Okay. And of course, we talked a lot about Reg U, but 6 there's -- as we've seen before, there's a lot of other 7 important provisions in these loan agreements and other things, 8 right? 9 A Yes.10 Q You spent sometime on some of the other aspects of the11 loans, didn't you?12 A Yes.13 Q Now, you're not here to testify that -- that, when you14 brought this stack of documents over with these little "Sign15 here" tabs on them, that Mr. Lay sat down and read it page by16 page, are you?17 A No, sir.18 Q Okay. In fact, what he did was he visited with you and he19 signed where you told him to sign, right?20 A He did.21 Q Okay. If you look -- let's just look -- well, tell you22 what, it's easier to do it at the very end of the U-1s, the two23 U-1s, Exhibits 1123 and 1125.24 A Okay.25 Q Both of those documents are -- have a signature -- by the0127 1 way, do you know if you were at Mr. Lay's office to get this one 2 signed, this set of documents? 3 A I don't recall. 4 Q Okay. Well, both of these have signatures that say Kenneth 5 L. Lay, right? 6 A Yes. 7 Q Okay. But they also have signatures that say Linda P. Lay, 8 right? 9 A Yes, sir.10 Q Do you recall if Mrs. Lay was present?11 THE WITNESS: Your Honor, I don't think I'm at liberty12 to talk about Mrs. Lay unless you order me to because there are13 federal privacy laws preventing me from doing that.14 MR. CARROLL: I think it's kind of important, Your15 Honor. There's a signature on the document.16 THE COURT: All right, you can answer the question.17 THE WITNESS: Most of the time that I got together18 with Mr. Lay to sign documents, Mrs. Lay was not present. She19 was occasionally.20 BY MR. CARROLL:21 Q Do you recall ever, in fact, talking to Mrs. Lay about --22 you talked about this explanation about margin stock and23 Regulation U and all that kind of stuff. Did you ever -- do you24 recall ever actually talking about that with Mrs. Lay?25 A I don't recall.0128 1 Q But she signed these same documents, right? 2 A Yes. 3 Q Or at least there is a signature on there that says "Linda

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051806 us v lay bench v1 4 P. Lay," right? 5 A Yes. 6 Q As you sit here right now today, you don't know whether she 7 signed Exhibit 1123 or 1125, do you? 8 A I do not. 9 Q Would you be surprised to know that there's a signature10 machine with her name as well?11 MR. HUESTON: Objection to this. This is totally12 irrelevant as to Mrs. Lay. She's not part of the charges.13 MR. CARROLL: I'll move on, Your Honor.14 THE COURT: All right.15 BY MR. CARROLL:16 Q You mentioned that you -- and I guess I should -- let's17 keep that U-1 out for just a minute, one of those U-1s. You18 mentioned this term "margin stock." Looking at Exhibit 1125,19 you can go up to the top there, in the paragraph number 2 on the20 form.21 A Yes.22 Q Now, as we've seen these forms, by the way, except --23 Mr. Hueston, I think, pointed out this is a really short form.24 But of course, it came with, as you've indicated, another seven25 or eight or nine documents, right?0129 1 A Yes. 2 Q So it wasn't like the U-1 was segregated out separately, it 3 came with the others, right? 4 A Yes. 5 Q Okay. This -- this term "margin stock" -- there is a 6 definition up there. Do you know -- do you recall Mr. Lay ever 7 actually sitting down and reading that? 8 A No. 9 Q In fact, when you say "margin stock," don't people10 understand that, don't you understand it when you're not looking11 at a U-1, to mean stock that's bought on margin?12 A Yes.13 Q What is that, by the way? What does stock bought on margin14 mean?15 A It's when you've borrowed to purchase the stock.16 Q Okay. And it's not limited to some particular -- it17 doesn't have some particular Code of Federal Regulations18 definition, right?19 A No.20 Q You're in the securities industry. The term "margin stock"21 like that is used all the time, right?22 A Yes.23 Q And do you know whether, in fact, Ken Lay had that24 understanding, that when you're talking about margin stock, it25 meant margin stock, stock bought on margin?0130 1 A I don't know that. 2 Q You don't know one way or the other, do you? 3 A No, I don't. 4 Q Okay. When you were talking to Mr. Lay about the use of 5 these lines to purchase stock, this conversation all arose in 6 connection with his purchase of stock or exercising options with 7 respect to Enron, didn't it? 8 A Yes. 9 Q And in particular, we've seen other exhibits where, for10 example, you're talking about paying off the Enron line and the11 question arose because the Enron line had been used to exercise12 options on Enron stock, right?13 A Yes.14 Q You really never talked to Mr. Lay about -- even though you

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051806 us v lay bench v115 may have used the term "margin stock" -- and we talked about16 that -- the entire context of the conversation was about Enron17 stock, right?18 A No.19 Q What were the differences? When did that change?20 A Just early on, it's not just Enron stock. It's any21 publicly traded stock. And we would have that conversation when22 we went over the Form U-1.23 Q Okay. I may not have been clear, and I apologize. I24 understand what you're saying in terms of what the definition25 might be. But in Mr. Lay's case, the stock that he was0131 1 interested in purchasing was Enron stock or exercising Enron 2 options, right? 3 A In the original case, yes. 4 Q Well, did it ever change, to your knowledge, that it went 5 to some other kind of stock? 6 A I don't recall if it did change. 7 Q Right. 8 A He just had an investment portfolio of many different 9 securities.10 Q Do you -- you didn't manage that, of course?11 A No.12 Q You were aware, of course, that he had some other13 securities because he also sat on the board of Compaq, right?14 A Yes.15 Q And Lilly?16 A Yes.17 Q TCW?18 A Yes.19 Q Are you aware of him having securities of any company that20 he didn't actually have an affiliation with on the board or21 otherwise?22 A Not in the early days, no.23 Q Yeah. And when you say "the early days," I mean --24 A '93, '94, when we first --25 Q Well, really, throughout the time you were his private --0132 1 his personal banker, right? 2 A I'm not sure that that's correct. I actually urged him to 3 continue to diversify, but I wouldn't know that unless, you 4 know, I saw his financial statement from those times. 5 Q And when you urged him to diversify -- and I think you 6 talked to the Government about this back in 2004 as well -- he 7 continued to tell you he didn't want to because he wanted to be 8 in Enron stock because he believed in that stock, right? 9 A That is correct.10 Q As a matter of fact, what he told you was that, rather than11 selling Enron stock, for example, to finance things, he12 preferred to leverage Enron stock because he believed that the13 stock would go up and he would get greater value by doing that14 than by diversifying, right?15 A Yes, sir.16 MR. HUESTON: Objection to the relevance of this.17 THE COURT: Overruled.18 BY MR. CARROLL:19 Q You mentioned that you talked to Sally Keepers. But20 Ms. Keepers, as you indicated, was -- you regarded her as -- I21 don't know how to say this -- doing ministerial duties, right?22 A Yes.23 Q Did you try to educate her about Reg U?24 A Yes.25 Q This occurred also though in the context of trying to deal

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051806 us v lay bench v10133 1 with the Enron line when we were talking about those 2 conversations in -- in the summer and fall of 1995, right? 3 A Yes. 4 Q With respect to Sherrie Gibson -- now, again, you stopped 5 being relationship manager for Mr. Lay really in January of 6 1998, didn't you? 7 A Yes. 8 Q Took over -- Howard Williams took that over, right? 9 A Yes.10 Q Sherrie Gibson, you know, don't you, came to work for11 Mr. Lay in November of 1997?12 A I don't know that for a fact.13 Q Okay. We'll hear testimony about that later. But the fact14 is you didn't ever have any kind of a Reg U conversation with15 Sherrie Gibson, did you?16 A I don't recall having one with her.17 Q As a matter of fact, would it surprise you if the only18 conversation you had with her was to introduce her to Howard19 Williams?20 A I wouldn't have just introduced her to Howard Williams. I21 would have talked about the relationship that we had and made22 sure that we had made an appropriate hand-off to Howard23 Williams.24 Q Sure. I didn't mean to minimize it. But my point is you25 don't recall ever having a substantive conversation with Sherrie0134 1 Gibson about particular loan documents or U-1s or anything like 2 that, do you? 3 A No. 4 Q Now, when you talked about always, as the best you can, 5 sitting down and trying to talk to Mr. Lay about these loan 6 documents and things and explain things in this brief period of 7 time that you had to do it, is that a practice that you followed 8 with all your other clients? 9 A I did the best I could to do that.10 Q Now, you said you couldn't think of anybody else, any other11 client, that had both a purpose and a non-purpose line, right?12 A Right.13 Q You did have other clients who had non-purpose lines14 though, right?15 A Yes.16 Q So you had other clients that signed U-1s, right?17 A Yes.18 Q Give me the names of a few of those folks.19 A I can't do that, sir.20 MR. CARROLL: Your Honor, we'd ask the Court to21 instruct the witness to answer.22 THE COURT: I don't think it's relevant.23 MR. CARROLL: Well, if I can be heard briefly, Your24 Honor, the fact is we would believe that, in fact, there wasn't25 any detailed conversation with those folks either, just like0135 1 there wasn't here. 2 THE COURT: So you're going to call all these people 3 in? 4 MR. CARROLL: Three or four. 5 THE COURT: No, you're not. 6 BY MR. CARROLL: 7 Q It is the case though that, regardless of what happened 8 with other folks, that, even though you may have tried to talk 9 to Mr. Lay directly, that -- that you did things -- or you sent10 things on several occasions to be signed without being present,

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051806 us v lay bench v111 right?12 A To Mr. Lay?13 Q Yes.14 A Yes.15 Q Okay. So if you look, for example, at Defense Exhibit 355,16 this is a letter dated November 10, 1995, that appears to have17 your name on it sent to Sally Keepers?18 A Yes.19 MR. CARROLL: Move its admission, Your Honor.20 THE COURT: It's admitted.21 (Defendant's Exhibit Number 355 was admitted.)22 BY MR. CARROLL:23 Q This is a document wherein on November 10th of 1995 you24 sent -- the top line of the document says, "Enclosed are the25 following documents to be executed by Mr. and Mrs. Lay with0136 1 respect to recent changes in our collateral." Do you see that? 2 A Yes. 3 Q So on this occasion, for example -- this is about two years 4 after you started your relationship with him -- you just mailed 5 these things over to be signed, right? 6 A Yes. 7 Q So you weren't present when these things were signed? 8 A No, I was not. 9 Q Didn't explain them in person to him, right?10 A No need to explain these documents.11 Q Okay. Look at Exhibit Number -- Defense Exhibit Number12 1597. Pardon the handwriting on this. But the document13 originally is a letter dated June 19, 1995, from you to Kenneth14 L. Lay, correct?15 A Yes.16 MR. CARROLL: Move its admission, Your Honor.17 THE COURT: It's admitted.18 (Defendant's Exhibit Number 1597 was admitted.)19 BY MR. CARROLL:20 Q Here, again, you've asked Mr. Lay -- you've asked Mr. Lay21 to please execute the enclosed pledge certificate which reflects22 the release and substitution of collateral, right?23 A Yes, sir.24 Q So, again, you sent that without going over and talking to25 him, right?0137 1 A That's correct. 2 Q Let's look at 15 -- let's look at Exhibit 98, Defense 3 Exhibit 98. Around this same time frame, a letter, again, to 4 Sally Keepers with your handwriting on it. 5 MR. CARROLL: Move its admission, Your Honor. 6 THE COURT: The number again? 7 MR. CARROLL: 98, Defendant's 98. 8 THE COURT: All right, it's admitted. 9 (Defendant's Exhibit Number 98 was admitted.)10 BY MR. CARROLL:11 Q Again, it says, "Enclosed is a pledge certificate and Rule12 144 rider to be executed by the Lays in connection with Enron13 Corp. Certificate Number HC-11675 for 2,209 shares. Please14 return the executed documents to my attention."15 You mailed that over for that signature purpose,16 right?17 A Yes.18 Q And without going over to talk with him about it directly,19 right?20 A That's correct.21 Q By the way, Sally Keepers, you -- I believe you previously

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051806 us v lay bench v122 testified you didn't regard Ms. Keepers as being, I guess, the23 best way to say it, fully sophisticated in financial matters?24 Would that be fair to say?25 A Yes.0138 1 Q Look at Defense 15 -- well, let's move over one. Let's 2 look at Exhibit Number -- we looked at pledge certificates so 3 far. But look at Exhibit Number 1601, Defendant's Exhibit 1601. 4 This is a letter dated September 23, 1997, from you, again, to 5 Sally Keepers, correct? 6 A Yes. 7 MR. CARROLL: We'd move its admission, Your Honor. 8 THE COURT: It's admitted. 9 (Defendant's Exhibit Number 1601 was admitted.)10 BY MR. CARROLL:11 Q And again, what it says here, first line: "Enclosed are12 the following documents to be executed with regard to the13 renewal and extension of Mr. Lay's credit lines," correct?14 A Yes.15 Q You sent over five substantive documents to be signed by16 the Lays, correct?17 A Yes.18 Q And these are documents that, again, you didn't -- they --19 a lot of them, particularly, the note and the modification and20 renewal agreement, contain a number of provisions and covenants,21 right?22 A Yes.23 Q And you didn't go over to the Lays to explain each of those24 things when you sent them over to be signed, did you?25 A I did not.0139 1 Q This actually happened also even with respect to U-1s on 2 occasion, didn't it? 3 A Yes. 4 Q Okay. For example, if you look at Government Exhibit 116. 5 This is a letter dated September 7, 1994, from 6 Gary Rachlin from Sewell & Riggs to you, correct? 7 A Yes. 8 MR. CARROLL: Move its admission, Your Honor. 9 THE COURT: It's 116?10 MR. CARROLL: Government 116, yes, Your Honor.11 THE COURT: It's admitted.12 (Government's Exhibit Number 116 was admitted.)13 BY MR. CARROLL:14 Q Mr. Rachlin was the bank's lawyer?15 A Yes.16 Q And what he was doing here was to sending -- he was sending17 you what it says is "Original fully executed Federal Reserve18 Form U-1 signed by the investment partnership," right?19 A Yes.20 Q So you, in fact, weren't present for the signature on this21 U-1, this -- in 1994, right?22 A I can't tell that from this letter. That doesn't mean that23 I was not present for this signing.24 Q Well, you had already had a copy if you had been there,25 right?0140 1 A But Mr. Rachlin was our outside counsel, and he pulled 2 together all of the documents for us prior to sending them over 3 to the bank. So I just don't know this for a fact. 4 Q In this case, the only document he sent you was this one 5 U-1 though, right? 6 A That's correct.

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051806 us v lay bench v1 7 Q All right. Look at the -- as a matter of fact, the U-1 is 8 right behind it on page 2 of that document? 9 A Yes.10 Q And do you recall, looking at this document, as you look at11 it now, whether you were present for the signature there?12 A I don't recall.13 Q Keep your finger on that document, but I'm going to ask you14 about another one. Look at Defendant's Exhibit 1596, if you15 will. This is a letter dated April 25, 1995, from you to Sally16 Keepers, right?17 A Yes.18 Q Okay. That's April 25, 1995. That's less than two years19 after you started your relationship with Mr. Lay, right?20 A Yes.21 Q And here it says that -- well, excuse me.22 MR. CARROLL: I move the admission of that document,23 Your Honor.24 THE COURT: It's admitted.25 (Defendant's Exhibit Number 1596 was admitted.)0141 1 BY MR. CARROLL: 2 Q Here it says: "Dear Sally, enclosed are execution copies 3 of the following documents associated with the above-referenced 4 loan," and that's the $750,000 revolving loan to the investment 5 partnership, right? 6 A Yes. 7 Q Now, in this case -- again, these are documents that you 8 sent over by mail or by courier to be signed, right? 9 A Yes.10 Q And if you look down at Number 5 on this list, it's Reg U11 statement. Do you see that?12 A Yes.13 Q So on this occasion you just sent it over to be signed by14 the Lays without sitting down and having a talk with them,15 right?16 A Yes.17 Q Same is true for the other nine documents that are part of18 that loan package, right?19 A Yes.20 Q I want to return to something we talked about very, very21 briefly earlier, which is, if you look back at Exhibit Number22 116 and, particularly, the -- the U-1 that's attached to it --23 A Uh-huh.24 Q -- this is a U-1 dated -- by you dated August 23, 19 --25 well, it's Larry Bell -- dated August 23, 1994. This is a0142 1 non-purpose loan, right? 2 A Yes, it is. 3 Q Okay. What I want to ask you about though is: This is not 4 one that you signed, but you signed a whole bunch of these as 5 well, right? 6 A Over the course of my relationship, yes. 7 Q Right. What I want to look at is on page 3 of this -- 8 MR. CARROLL: The next page. 9 There you go.10 BY MR. CARROLL:11 Q Under part Roman Numeral III, it says, "To be signed by12 bank officer in all instances." Read along with me. "I'm a13 duly authorized officer of the bank and understand that this14 credit secured by margin stock may be subject to the credit15 restrictions of Regulation U. I have read this form and any16 attachments, and I have accepted the customer's statement, part17 1, in good faith as required by Regulation U. And I certify

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051806 us v lay bench v118 that, to the best of my knowledge and belief, all of the19 information given is true, accurate, and complete."20 Do you see that?21 A Yes.22 Q Now, if you go down to the bottom, there's a little23 asterisk. There's a section down there at the bottom that tells24 you what good faith is, right?25 A Yes.0143 1 Q And it says: "To accept the customer's statement in good 2 faith, the officer of the bank must be alert to the 3 circumstances surrounding the credit and if, in possession of 4 any information that would cause a prudent person not to accept 5 the statement without inquiry, must have investigated and be 6 satisfied that the statement is truthful." 7 Did I read that right? 8 A Yes. 9 Q That would include things like getting draw requests that10 said, "Send the money to Goldman Sachs," right?11 A That would be after this was executed, and I believe this12 says you must do this prior to accepting this form, but I get13 your point. And yes, I would agree.14 Q So, for example, what if you had gotten one of those -- one15 of those notices maybe a month before another U-1 came out.16 Wouldn't that put you on notice?17 A I think so.18 Q Yeah. And it goes on to say, though, even lowering the19 threshold a little bit, "Among the facts which would require20 such an investigation are receipt of the statement through the21 mail or from a third party." Do you see that?22 A Yes.23 Q So, for example, when we went back and we looked at24 Defendant's Exhibit 1596 and you just sent those documents over25 to the Lays to sign in April of 1995, really, you had a good0144 1 faith obligation at that point when you got them back in the 2 mail, didn't you? 3 A Yes. 4 Q Okay. Did you make any kind of inquiry or investigation? 5 A His signature was my inquiry. 6 Q Well, the process doesn't even start unless the -- unless 7 the client signs the document, right? Isn't that what you told 8 Mr. Hueston? 9 A I'm sorry?10 Q Sure.11 A I don't --12 Q You're not even going to be called upon to make this13 certification on the last page here unless you first get the14 client's signature, right?15 A That's right.16 Q So if you get it by mail, this document says you got to go17 make a good faith inquiry and investigation into the use of the18 funds, right?19 A That's not the way I read it.20 Q Okay. I took you on voir dire on this question but I want21 to ask it substantively just to be sure we're clear on this.22 You cannot say that you can distinguish between a signature23 placed on a document by an Autopen or signature machine and24 Mr. Lay's original signature, correct?25 A No, that's correct.0145 1 Q If -- well, you could have -- if you were concerned about 2 getting original signatures all the time, you could, in fact,

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051806 us v lay bench v1 3 have insisted either that you be given an opportunity to meet 4 with Mr. Lay or Mrs. Lay or that they come into the bank to make 5 the signatures, right? 6 A Yes. 7 Q You could have insisted that the signatures be notarized, 8 right? 9 A Could have.10 Q In this case, we don't have -- with respect to all these11 documents, we don't have that assurance, do we?12 A No, we do not.13 Q So you can't tell the Court that all the documents that14 have been admitted here, all these U-1s -- and I'm not going to15 go back through them all -- that they -- that they were all16 signed by Mr. Lay or Mrs. Lay versus someone using a signature17 machine, right?18 A That's right.19 Q I said I wasn't going to do this, but I am going to do a20 little bit. If you get the Government's book just briefly21 because there's one thing about it I'm curious about.22 Look at -- let's look at these U-1s. Look at 13323 first. These have all been admitted at this point.24 Now, Mr. Hueston asked you about these documents25 all being dated. Do you remember that?0146 1 A Yes. 2 Q Now, of course, the first problem here is that 9-27-2000, 3 you were at Caprock at that point, right? 4 A That's correct. 5 Q So you don't have any recollection or knowledge about these 6 being dated by Mr. or Mrs. Lay, right? 7 A That's right. 8 Q And if you look at it, looks to me, at least, like, that 9 those two datings on the first page of that, those look like the10 same handwriting. Do they look that way to you?11 A Yes.12 Q Can you tell whether that's Ken Lay's handwriting?13 A It doesn't look like Ken Lay's writing.14 Q If you flip over to 173, this is another U-1. That15 document is dated, too. Now, that handwriting that has the date16 there --17 A Yes.18 Q -- does that look like to you the same handwriting that19 dated 133?20 A No.21 Q If you flip over to 174, there's dates beside Mr. Lay's22 signature and Mrs. Lay's signature. Do either of those look23 like Mr. Lay's handwriting?24 A No.25 Q They look like they're the same handwriting, though, don't0147 1 they? 2 A Yes. 3 Q And they don't look anything like 133 or 173, do they? 4 A No. 5 Q So the fact that there's a date on these documents doesn't 6 really tell us anything about whether Mr. Lay signed it in 7 person or whether it was done by a signature machine, does it? 8 A No. 9 Q I want to return to a situation that we discussed10 previously earlier, which is, if you ran into a situation where11 Mr. Lay -- where you discovered that Mr. Lay wanted to use12 proceeds of loans to buy stock, margin stock, the Code of13 Federal Regulations definition of margin stock, stock traded on

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051806 us v lay bench v114 an exchange or otherwise, he could have come to the bank and15 gotten a purpose loan to do that, assuming the collateral was16 there, right?17 A Yes.18 Q Because, of course, the bank had done that before several19 times, right?20 A Yes.21 Q If you look at -- let's look briefly at Exhibit Number --22 Government Exhibit 179. This is a promissory note which has23 behind it a notice of final agreement that you signed, correct?24 A Yes.25 Q And on the bottom there, it says, "1.135,600 purpose,"0148 1 right? 2 A Yes. 3 Q Is that your handwriting? 4 A Down here at the bottom, no. 5 Q Okay. 6 MR. CARROLL: Your Honor I'd move its admission? 7 THE COURT: 179. 8 MR. CARROLL: Yes, Your Honor. 9 THE COURT: All right, it's admitted.10 (Government's Exhibit Number 179 was admitted.)11 BY MR. CARROLL:12 Q This, in fact, is a promissory line for a purpose line and,13 specifically, for acquiring some specific shares of Enron stock,14 right?15 A Yes.16 Q If you flip over to -- let's go to Exhibit 191. That's the17 easiest thing, I think. That would be Government Exhibit 191.18 This is a modification to a credit approval report that you have19 initialed, dated 11-4-93, right?20 A Yes.21 MR. CARROLL: Move its admission, Your Honor.22 THE COURT: That's 191?23 MR. CARROLL: Yes, Your Honor. Government's 191.24 THE COURT: I know. It's admitted.25 (Government's Exhibit Number 191 was admitted.)0149 1 MR. CARROLL: Thank you. 2 BY MR. CARROLL: 3 Q If you flip to the second page under the paragraph number 1 4 there, there's the explanation that: Lay requested the above 5 loan which is actually the 1.135,600 term loan to purchase 66 -- 6 it's hard for me to read -- but 66.8, I guess, 66,800 shares, I 7 think, of Enron Corp. stock. 8 A Yes. 9 Q So this is a loan that the bank specifically made so he10 could go out and buy some Enron stock, right?11 A Yes, sir.12 Q And there were -- I've got others. But the fact is the13 bank had agreed on a number of occasions before to grant Mr. Lay14 purpose loans, right?15 A Yes.16 THE COURT: Hold on a minute. The jury has gone to17 lunch, so the non -- people who are here for purposes of other18 than this riveting testimony --19 MR. COLLINS: Talking about non-purpose lawyers, Your20 Honor?21 THE COURT: Yeah.22 MR. CARROLL: That was my partner, I would like to23 point out.24 THE COURT: Well, the non-purpose lawyers are excused

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051806 us v lay bench v125 until 12:30. The jury, basically, has advised they're going to0150 1 work from 8:00 to 4:00 and take an hour lunch break. So my 2 lunch breaks in this trial may not coincide with the jury's. 3 And if you're not involved in this trial, you don't need to stay 4 here when the jury is not here. But you can. 5 Go ahead. 6 MR. CARROLL: Thank you, Your Honor. 7 BY MR. CARROLL: 8 Q One source of collateral I would like to consider -- I 9 would like to consider with you briefly is Mr. Lay possessed --10 over the period of time that, even when you were the11 relationship manager for his account, he possessed a significant12 number of vested stock options at Enron, right?13 A Yes.14 Q And the bank placed a reliance on that, right?15 A Yes.16 Q So if you look, for example, at Government Exhibit 262.17 MR. CARROLL: I think this has already been admitted,18 Your Honor.19 BY MR. CARROLL:20 Q Look at the very bottom of that page. Mr. Hueston talked21 to you about repayment sources, I believe, or use of proceeds.22 But the very bottom says: "Secondary sources of repayment23 include Lay's earnings from his employment at Enron and the24 substantial value of Lay's unexercised stock options," right?25 A Yes.0151 1 Q And as a matter of fact, the bank kept track of these 2 options as time went on, right? 3 A Yes. 4 Q So if you look at another exhibit that I believe has been 5 introduced, which is Government's 192 -- 6 THE COURT: What is the defense -- what is the 7 relevance of all this? 8 MR. CARROLL: Well, Your Honor, I think -- 9 THE COURT: You haven't given me an opening statement.10 I'd kind of like to know what the defense is to the case.11 MR. CARROLL: Sure. Well -- and I don't mind telling12 you. The fact is that -- that Mr. Lay, particularly, during13 this time period and as we get into the indictment period, had14 absolutely no motive to do what he's accused of doing here15 because, in point in fact, he had plenty of collateral to16 collateralize a purpose loan by exercising options or he could17 have paid it off, paid those lines off.18 And if somebody had told him that he wasn't doing19 the right thing with these lines, he would have fixed it. And20 the fact is the banks themselves were looking at those options21 and placing value on that as they decided whether to renew his22 credit or not. And we're simply going through that purpose,23 Your Honor.24 THE COURT: So with respect to the -- to the false25 statements, the bank charges, your theory is that the statements0152 1 that he made in the U-1s weren't false because he didn't intend 2 to use the funds to buy stock? 3 MR. CARROLL: Your Honor, we got a couple of theories 4 about that, but one of them is that he did not, as the statute 5 requires, specifically intend to make a false statement in that 6 regard. I think the Court will hear testimony regarding that. 7 Frankly, I think the Court will hear that, with 8 respect to some of those, he didn't make the statement. I don't 9 think the Government can prove that.

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051806 us v lay bench v110 THE COURT: You mean, he didn't sign the form?11 MR. CARROLL: I mean, he didn't sign the form or12 there's certainly reasonable doubt as to --13 THE COURT: Is there a distinction if he knowingly14 caused an employee to affix his signature electronically?15 MR. CARROLL: It's actually not electronically, but16 it's a pure mechanical old pen. But if -- the answer is: If17 Mr. Lay, I think -- and I'm extemporizing here. If Mr. Lay had18 the document in front of him and he's out of town and he's19 looking at it and he calls somebody up and says, "I've read20 this. I agree with it. Sign it," then maybe there's not.21 But if somebody sends him a pile of bank22 documents and they've told him that they got to be signed in23 order for him to get the loan done at the particular time but24 they haven't told him what's in all of them, then, I don't think25 it's the same thing, no. It may be a civil issue. Maybe a0153 1 regulatory issue. But it's not a crime. 2 THE COURT: I'd like some law on that if that's the -- 3 if that's going to be an issue. 4 MR. CARROLL: Very well. We'll do that. 5 THE COURT: How much more do you have with him? I 6 thought he was going to be a fairly brief witness. 7 MR. CARROLL: You know how lawyers are, Judge. I hate 8 to say -- 9 THE COURT: I know. I'm trying to hurry you up.10 MR. CARROLL: I know it. I'm just impervious.11 THE COURT: You know how judges are.12 MR. CARROLL: I do know that. I was relieved to see13 there wasn't a clock in the back, actually. But I know you got14 one. I actually have -- I actually only have two pages left.15 So I think I'm pretty close --16 THE COURT: Let's -- I'll give you five minutes to17 cover them.18 MR. CARROLL: I don't think I can do that, Your Honor.19 THE COURT: Just try.20 MR. CARROLL: I'll try. I'll get on the horse.21 BY MR. CARROLL:22 Q Like Mr. Lay, in fact -- if you look at Exhibit Number 195,23 for example, Government Exhibit 195, and particularly, at page 924 of that document, under the ability to meet margin calls --25 MR. CARROLL: This is the document, by the way, that I0154 1 believe -- I believe it's been entered; but if it hasn't, I'll 2 move its admission, Your Honor. It's a credit approval report 3 by the bank. 4 THE COURT: It's admitted. 5 (Government's Exhibit Number 195 was admitted.) 6 BY MR. CARROLL: 7 Q And the last sentence under that first paragraph is: "Lay 8 has stated that in the event of a margin call, he would 9 liquidate Enron savings, ESOP, and deferred income plans,10 exercise options, and sell Enron stock, if necessary," right?11 A Yes.12 Q That is something that he told you, right?13 A Yes.14 Q And you included that in this report for a reason, right?15 A Yes.16 Q Because the bank relied on it?17 A Yes.18 Q And in fact, that same statement appears in a number of19 these credit approval reports, right?20 A Yes.

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051806 us v lay bench v121 Q When we talk about stock options, there came a time, if you22 look at Exhibit Number GX -- Government Exhibit 204 -- and,23 specifically, beginning with page 10 --24 MR. CARROLL: This, by the way, is another credit25 approval report from the bank. We'd move its admission, Your0155 1 Honor. 2 THE COURT: What's the number? 3 MR. CARROLL: 204, Government. 4 THE COURT: It's admitted. 5 (Government's Exhibit Number 204 was admitted.) 6 BY MR. CARROLL: 7 Q If you look about two-thirds of the way down under small, I 8 think they're called Romanette, iii, three, there's a statement 9 that "Including Mr. Lay's stock option income as a source of10 recurring cash flow, forecasted debt service coverage is in11 excess of five times debt," right?12 A Yes.13 Q So the bank was placing significant impact on that, right?14 A Yes.15 Q As a matter of fact, if you go on over to page 13 of this16 document, there's a full chart of Mr. Lay's stock options as of17 this time, right?18 A Yes.19 Q This is something that the bank prepared, right?20 A I wasn't at the bank then but it looks like it was.21 Q Okay. And it was -- because it was important to the bank22 to keep track of how much potential Mr. Lay could get out of his23 options, right?24 A Yes.25 Q And the number that we get here is that the current value0156 1 -- and that's the value of -- after you take out the strike 2 price. The current value was $233 million, right? 3 A Yes. 4 Q And even after tax, it was over almost 160 million, right? 5 A Yes. 6 Q Way more than the amount of debt, correct? 7 A I don't know that. I wasn't there. 8 Q By the way, the after-tax number, they used 32 percent. Is 9 that a reasonable tax rate to use when you're trying to figure10 this -- the after-tax value of these options?11 A It actually seems a little low to me but -- because I12 believe at the time the ordinary income tax rate was 39.6 so --13 Q Okay. So 40 would certainly be reasonable?14 A Yes.15 Q The bank used 32 but 40 would certainly be reasonable,16 right?17 A Yes.18 Q Okay. To be clear about the purpose, non-purpose line, the19 -- there is no more risk to the bank by pursuing a purpose loan20 than a non-purpose loan if both are secured by margin stock,21 right?22 A Right.23 Q As a matter of fact, you could make the argument that24 there's less because you've only loaned on a 2-to-1 level as25 opposed to a 75 percent, right?0157 1 A Yes. 2 Q Okay. There's another element of that though. And if you 3 look at Exhibit -- Government Exhibit 124 just as an example. 4 MR. CARROLL: I'm pedaling, Your Honor, but I don't 5 know if I'm going to get there.

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051806 us v lay bench v1 6 BY MR. CARROLL: 7 Q I believe this document has previously been admitted. 8 Looking at page 2 of this document, this is the commitment 9 letter for the first two loans, the purpose and non-purpose,10 right?11 A Yes.12 Q You mentioned the -- you mentioned the initial advance rate13 on -- on purpose loans as 50 percent, right? Non-purpose can be14 up to whatever the bank will bear but usually about 70 at15 NationsBank, right?16 A Yes.17 Q And that's reflected in the top of the second page there,18 right, those initial advances?19 A Yes.20 Q But when you get down into the collateral maintenance21 requirements --22 A Right.23 Q -- there's another number. And that's the call rate,24 right?25 A That's right.0158 1 Q What's the call rate? What does that mean? 2 A That's if the value of the collateral declines such that 3 the loan-to-value reaches, in this case, 75 percent, then the 4 bank would require the borrower to either pay down the debt or 5 submit or pledge additional collateral to bring the 6 loan-to-value down. 7 Q But I guess the point I'm curious about here is the call 8 rate is 75 percent for both the purpose and the non-purpose loan 9 here, right?10 A That's correct.11 THE COURT: Let me ask you something before we adjourn12 for lunch just to be sure I understand. Was there any13 difference in the rate of interest that the bank charged on a14 purpose as opposed to a non-purpose line of credit, assuming15 they were issued at the same time?16 THE WITNESS: No.17 THE COURT: The only difference was the amount that18 could be borrowed against one?19 THE WITNESS: Yes, sir.20 THE COURT: Stand in recess until 1:00 o'clock.21 (Court recessed at 11:45 a.m.)22 - - - - -23 24 25 0159 1 THE COURT: Thank you. Be seated. 2 All right. Let's finish up Mr. Shelton so he can 3 go make some money for his clients. 4 THE WITNESS: Thank you. 5 MR. CARROLL: Absolutely. 6 Before I do that, your Honor, my colleagues told 7 me that there were four documents that I needed to move 8 admission that I didn't. The first is 192, Government, which 9 is a credit approval report.10 THE COURT: All right. It's admitted.11 (Government's Exhibit Number 192 was admitted.)12 MR. CARROLL: The next is 317, Government, which is a13 note.14 THE COURT: Admitted.15 (Government's Exhibit Number 317 was admitted.)16 MR. CARROLL: The next is 33, Defendant, which is a

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051806 us v lay bench v117 loan agreement.18 MR. HUESTON: Your Honor, 317, there was no foundation19 through the witness that it was his document; so, there is not20 a proper basis for admitting it through this witness.21 There was discussion. He was allowed to22 discuss --23 THE COURT: Well, that's all right. I mean, it's your24 exhibit. You're not questioning its authenticity.25 MR. HUESTON: Your Honor, this is fine. This is fine.0160 1 THE COURT: What's the next one? 2 MR. CARROLL: Your Honor, it was -- it was Defense 33, 3 which is a loan agreement dated -- dated August 23, 1994. 4 THE COURT: Now, are you sure Mr. Lay signed that? 5 MR. CARROLL: Not at all. 6 THE COURT: All right. It's admitted. 7 (Defendant's Exhibit Number 33 admitted.) 8 MR. CARROLL: Thank you, your Honor. 9 The last one is a -- is a substitute. We talked10 about Government Exhibit Number 271, which was a Chase11 Regulation U training manual.12 I have the identical document that we actually13 marked as -- as Defense 1301, and it is covered by our business14 records affidavit so I would offer it on that basis.15 MR. HUESTON: We have no objection.16 THE COURT: All right. Defense 1301 is admitted.17 (Defendant's Exhibit Number 1301 admitted.)18 MR. CARROLL: Thank you.19 BY MR. CARROLL:20 Q. Mr. Shelton, if you -- if you can take your white book21 again, just very briefly, from the Government, I want you to22 take a look at some of these U-1's, beginning with Exhibit 161.23 And if you look at that, in the part 2 there, it says, "If the24 answer is 'no,' describe the specific purpose of the credit."25 If you read along with me, it says, "Business0161 1 commercial investment of similar purposes, other than to 2 purchase, refinance, or otherwise carry margin stock or other 3 securities." 4 Do you see that? 5 A. Yes. 6 Q. That's language that you folks at the bank put in this 7 document before you sent it over to the Lays, right? 8 A. Yes. 9 Q. If you look at 163, it's the identical language, isn't it?10 A. Yes.11 Q. 164, same thing?12 A. Yes.13 Q. And on and on, right?14 A. Yes, sir.15 Q. Throughout the time that you were doing it, that's the16 language you put in there or had someone put in?17 A. It's what inside counsel would put in the documents for me.18 Q. "Inside counsel" being counsel for the bank?19 A. Yes, sir.20 Q. All right. When you -- when you left the bank and you went21 to Caprock, you've told us that you -- you met with Mr. Lay in22 the summer of 1999. You told him that -- I think you said,23 "love to do business with him," right?24 A. Yes.25 Q. And, so, you thereafter met with Beau Herrold, his son,0162 1 about an attempt to get that business, right?

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051806 us v lay bench v1 2 A. Yes. 3 Q. You were seeking out this business relationship with 4 Mr. Lay, right? 5 A. Yes, I was. 6 Q. And sure enough, late in the fall of '99 you did get a 7 million dollars for Mr. Lay to invest, as you've narrated, 8 right? 9 A. Yes.10 Q. You did not check the source of the funds, I believe I11 recall you saying, right?12 A. I did not.13 Q. Didn't feel like you needed to?14 A. No, I didn't.15 Q. Okay. And at that point, of course, you didn't have any16 good faith obligation like you might have had as a banker if17 somebody had said, "This money is going to Caprock to be18 invested"?19 A. I did not.20 Q. Okay. If you look at -- at Government Exhibit Number 75,21 which I believe has been admitted.22 Yes. Government Exhibit Number 75.23 A. Back to the black book here?24 Q. It's in the black book, yes.25 A. Okay.0163 1 Q. Supposed to be. 2 A. Yes, I have it. 3 Q. These -- this is the -- the compilation of the statements 4 for this account at Caprock for Mr. Lay, right? 5 A. Yes. 6 Q. Let -- let me ask you to go toward the very back. This is 7 set up such that the first page of this exhibit actually is 8 a -- is a statement dated June 1 through June 30, 2000, right? 9 A. Yes.10 Q. If you go -- so, it's kind of in reverse chronological11 order. If you go back to the very -- I'm going to see if I can12 get you to find, if you will, the very first statement there.13 MR. CARROLL: For our purposes, Pam, I think it's -- I14 think it's 71.15 BY MR. CARROLL:16 Q. It's dated November 1, 1999, through November 30, 1999?17 A. Yes.18 Q. You found that?19 A. I have it.20 Q. Okay. If you flip two more pages back for you --21 MR. CARROLL: Not you, I'm afraid. I'm sorry, Pam.22 Let's stay on 71.23 BY MR. CARROLL:24 Q. Okay. This is the opening statement for the account,25 right?0164 1 A. Yes. 2 Q. So, for example, the starting account value for this period 3 you see is zero, right? 4 A. Yes. 5 Q. And you see that -- that the money added is a little over a 6 million dollars, right? 7 A. Right. 8 Q. Because that takes into account there's another $614, which 9 is earnings on the million, right?10 A. That's correct.11 Q. Okay. There is a category on the left-hand side of that12 front page that says, "Money market fund, non sweep."

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051806 us v lay bench v113 Do you see that?14 A. Yes.15 Q. It's $750,000. If you flip over to the next page, page 72,16 there is an entry there under "Investment holdings for money17 market funds, non sweep."18 Do you see that?19 A. Yes.20 Q. It says, "Schwab Muni Money Funds, $750,000."21 That's the entry for that -- that investment; and22 that's what you did with some of the money that Mr. Lay sent23 over, right?24 A. Yes, sir.25 Q. If you flip over specifically to -- I think two more pages0165 1 over. 2 MR. CARROLL: Pam, 74 for us. 3 BY MR. CARROLL: 4 Q. It records that activity right at the top, "Money market 5 funds, non sweep activity." 11-23 is when the settlement date 6 was, right? 7 A. Yes. 8 Q. And what was bought was something called "Schwab Muni Money 9 Fund Value Advantage Shares," right?10 A. Yes.11 Q. And to the tune of three-quarters of a million dollars,12 right?13 A. Yes.14 Q. Now, in all this characterization, including on this very15 page, it says those are money market funds. Is that what they16 were?17 A. Yes.18 Q. Okay. Money market funds are not margin stock, are they?19 A. No, they are not.20 Q. Okay. When we talked about Mr. Musolino introducing --21 having -- introducing you to Mr. Lay, introducing that22 relationship, when you talked to Mr. Musolino about this23 relationship, did you ever -- or Mr. Lay, either one -- did you24 ever find out whether Mr. Musolino ever said anything about25 Reg U to Ken Lay?0166 1 A. No, I don't know. 2 Q. Okay. You also talked about the fact that there was an 3 increase in the borrowings that Mr. Lay did over the period of 4 time that you were his relationship manager. Do you recall 5 that? 6 A. Yes. 7 Q. That actually was a good thing for the bank, wasn't it, 8 because you made a lot more money, didn't you? 9 A. Yes.10 Q. Mr. Lay paid his bills to the bank while you were the11 relationship manager?12 A. Yes, he did.13 THE COURT: Were all these loans repaid?14 THE WITNESS: I wasn't an employee of the bank at the15 time. I've heard from newspapers and others that they were.16 MR. CARROLL: They were.17 THE COURT: Are you through?18 MR. CARROLL: Excuse me, your Honor?19 THE COURT: Are you about through?20 MR. CARROLL: I am. I've got about -- less than ten21 questions.22 BY MR. CARROLL:23 Q. You also, during the course of this time, while you were --

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051806 us v lay bench v124 while you were Mr. Lay's relationship manager, you folks were25 actually trying to meet competition from other banks, right?0167 1 A. Yes, we were. 2 Q. So, if you look at Government Exhibit 197 right quick, this 3 is a document that you initialed, dated December of 1995, 4 correct? 5 A. Yes. 6 MR. CARROLL: Move its admission, your Honor. 7 THE COURT: What's the number? 8 MR. CARROLL: 197, Government. 9 THE COURT: It's admitted.10 (Government's Exhibit Number 197 admitted.)11 MR. CARROLL: Thank you.12 BY MR. CARROLL:13 Q. There's some handwriting up in the middle of this, where14 you're talking about what's being done here. It says that15 relation -- "RM," that's "relationship manager," right?16 A. Yes.17 Q. -- "has requested reduction in pricing effective18 10-13-95 due to intense competitive pressures from Compass19 Bank."20 Is that your handwriting?21 A. Yes.22 Q. Is that really what happened here?23 A. Yes.24 Q. You, in fact, were facing pretty intense competition from25 Compass Bank, right?0168 1 A. Yes, we were. 2 Q. Also happened with respect to Chase, as well, too, at least 3 later on? 4 A. I don't recall that; but there was pressure -- competitive 5 pressure for Mr. Lay's business at the time, yes. 6 Q. And that continued throughout the time that you were his 7 relationship manager, right? 8 A. Yes, it did. 9 Q. So, that was something you-all tried to do at NationsBank,10 was to work to safeguard and maintain that relationship, right?11 A. Yes.12 Q. And expand it to the extent you could?13 A. Yes.14 Q. The indictment in this case starts with a transaction on15 January the 13th of 1999. Now, at that point you had not been16 Mr. Lay's relationship manager for more than a year really,17 right?18 A. Yes, sir.19 Q. So, just to be sure that we're clear on this, you actually20 had no role as a banker in any transaction as part of this21 indictment, did you?22 A. No, sir.23 Q. That's correct, right?24 A. That is correct.25 MR. CARROLL: Pass the witness.0169 1 REDIRECT EXAMINATION 2 BY MR. HUESTON: 3 Q. Mr. Shelton, they showed you -- you were just shown a 4 number of additional bank loan documents, including Defense 5 Exhibit 54, which was a restated loan agreement -- do you 6 remember that -- dated December 7th, 1994? 7 A. Yes. 8 Q. All right. Sir, in those documents and in all the other

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051806 us v lay bench v1 9 documents having to do with non purpose loans, they all said10 one very same thing, didn't they, about what can be done with11 non purpose monies with respect to buying stock? Isn't that12 right?13 A. Yes.14 Q. What did they say?15 A. Well, it was specific as to what could not be done.16 Q. And you could --17 A. Which was --18 Q. -- not do what?19 A. -- purchase or carry margin stock.20 Q. And that was so important that it was in all the CAR's,21 right, the credit approval reports?22 A. Yes.23 Q. And all the other documentation of the loans, right?24 A. Yes.25 Q. As well as in those form U-1's. Is that right?0170 1 A. Yes. 2 Q. That never changed, did it? 3 A. No, it did not. 4 Q. In fact, sir, did you ever have a conversation with Mr. Lay 5 where you suggested something other than, "You can't buy stock 6 with your non purpose loan"? 7 A. No. 8 Q. And there was some discussion earlier about margin stock. 9 Maybe that's confusing.10 In your early meetings with Mr. Lay, did you just11 state it plain and simple, "Sir, you can't buy stock with a non12 purpose line"?13 A. Yes, I did.14 Q. And in these meetings, these early meetings -- you said you15 met more early on. Why were you meeting more early on?16 A. Because I didn't know Mr. Lay very much at the time and was17 being -- trying to gain an understanding of what his needs18 were, trying to develop a relationship, understand what his19 goals and objectives were.20 Q. And were you also trying to understand whether he got it,21 whether he understood this black and white, "You can't buy22 stock with Reg U proceeds -- with the non purpose loan23 proceeds"?24 MR. CARROLL: Objection, leading.25 THE COURT: Overruled.0171 1 A. Yes. 2 BY MR. HUESTON: 3 Q. And did you -- did you become satisfied that he knew? 4 A. Yes, I did. 5 Q. So, you had conversations; but you also confirmed this 6 understanding by having him sign Reg U U-1 forms. Is that 7 right? 8 A. Yes. 9 Q. And because he had both purpose and non purpose lines, you10 also took extra pains to make sure he understood?11 A. Yes.12 Q. More than with your other clients. Is that right?13 A. Yes.14 Q. Sir, did you ever have any doubt in your mind at any time15 that Lay somehow didn't understand that he couldn't buy stock16 with his non purpose proceeds?17 A. No.18 Q. You were also shown a compliance manual from another bank,19 right? It had a lot of pages about Reg U?

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051806 us v lay bench v120 A. Yes.21 Q. And you had training on that because Reg U had a lot of22 impact to the bank, right?23 A. Yes.24 Q. In fact, risk of loss was one possibility that was out25 there for these sorts of loans, right?0172 1 A. Yes. 2 Q. And in the loan documentation that you filled out with 3 Mr. Lay, there were notations about how that lower 50 percent 4 LTV was a mitigation factor, right, for risk of loss? 5 A. Yes. 6 Q. And, so, that was a factor, wasn't it, in terms of 7 protection for the bank? Whether or not it actually resulted 8 in loss or not, that was a factor that was important for the 9 bank, was it not?10 A. Yes.11 Q. Now, you didn't hand compliance manuals to your clients,12 did you?13 A. No.14 Q. The banks -- sir, as a relationship manager, did you try to15 just make it simple for your clients, to create some black and16 white rules for them as a condition to getting those loans?17 A. Yes.18 Q. The Reg U-1 form, I heard you say earlier, "The signature19 is my inquiry." What did you mean by that?20 A. That was -- to me, was evidence that my clients understood21 what they were signing, that they understood the -- the Reg U.22 Q. Right. And one big part of that is you can't buy stock23 with the proceeds of the non purpose loan, right?24 A. That's correct.25 Q. All right. And if a client -- once that client -- is that0173 1 Reg U form a precondition to getting the loan? 2 A. Yes, it is. 3 Q. So, there's no negotiation, "Well, listen, Mr. Lay, you 4 have got a lot of collateral. You have a lot of resources. 5 We're just going to waive this for you"? 6 Did you ever have any waiver negotiations or any 7 sort of -- any negotiations at all about whether he could just 8 kind of -- the bank could skip the requirements with Mr. Lay? 9 MR. CARROLL: Objection. I know this a bench trial;10 but this is argumentative, your Honor.11 THE COURT: Well, it's several questions together.12 Was the regulation -- was signing a Reg U form a13 condition to getting a loan?14 THE WITNESS: Yes, sir.15 THE COURT: Let's move along, Mr. Hueston. I think I16 understand this.17 MR. HUESTON: All right. Okay.18 THE COURT: This is not like resegmentation to the19 jury.20 MR. HUESTON: All right. I -- I understand that.21 Thank you. All right.22 BY MR. HUESTON:23 Q. And in your experience, you went to Mr. Lay, not once, not24 twice, but over and over again to have meetings to ascertain25 his understanding of those basic principles, correct?0174 1 A. Yes. 2 Q. And to witness his signature on that form, as well, to 3 confirm those understandings? 4 A. Yes.

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051806 us v lay bench v1 5 Q. There's also been some discussion about maybe Autopen 6 signatures. 7 MR. HUESTON: Let's put up -- if I can have the -- the 8 Defense, please, put up Exhibit 98 -- Defense Exhibit 98, the 9 first page.10 And if you could blow out the handwritten11 notation up there.12 BY MR. HUESTON:13 Q. That's a notation with an S -- is that -- that could be14 Sally Keepers -- to Ken and Linda. "Please sign two places15 each."16 That's what's noted there. Is that right?17 A. Yes. Yes.18 MR. HUESTON: Let's go to 1596, Defense 1596, please.19 BY MR. HUESTON:20 Q. Again, a handwritten notation on the top of this one,21 "Linda needs to sign." And then there's another indication of22 needing to sign.23 These are the notations that are coming up on24 these documents you've just been shown by the Defense, right?25 A. Yes.0175 1 Q. All but one of which have nothing to do with form U-1. 2 There were things like pledge, collateral requirements and some 3 other loan documentation, right? 4 A. Yes. 5 Q. In fact, at one point, you said, "I didn't need to meet 6 regarding pledge certificates." Why did you say that? 7 A. I didn't -- I thought they were self-explanatory; and, in 8 fact, most of the time, those were requests initiated by 9 Mr. Lay or Ms. Keepers to release and substitute collateral.10 I think there was one there where we were11 splitting up shares into multiple stock certificates.12 Q. Okay. Let's talk about -- there's been some issues here13 about motive or reasons.14 Sir, when you talked about Mr. Lay and bringing15 his business to the bank and having that first meeting with16 him, your understanding was that he came originally to Bank of17 America there to get a higher LTV than 70 percent, to try to18 get 75 percent, right?19 A. It was my understanding that -- that the discussion he had20 with Mr. Musolino, it would be up to 75 percent, yes.21 Q. And that's what he wanted right? Mr. Lay.22 A. Yes.23 Q. And when you had the first meeting with him and you told24 him the bad news, that he could only get 50 percent -- a25 50 percent LTV, that -- that was breakdown in the negotiations0176 1 at that point, right? 2 A. Yes. 3 Q. You walked out of that meeting; there was no agreement to 4 go ahead with the loan, right? 5 A. That's correct. 6 Q. Regardless of the amount of collateral he had, he didn't 7 want just the 50 percent; he wanted higher than that. And he 8 was not going to sign off on a loan with 50 percent at that 9 time, right?10 MR. CARROLL: Objection. Your Honor, this is11 repetitive. We have been through all of this on direct.12 THE COURT: Overruled.13 A. That is correct.14 BY MR. HUESTON:15 Q. And, in fact, sir, did you have an understanding that

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051806 us v lay bench v116 Mr. Lay had a lot of Enron stock as collateral but he wasn't --17 he didn't want to sell it off, he wanted to hold it all and18 borrow as much as he could against it?19 A. Yes.20 Q. And did he express that to you?21 A. Yes.22 Q. So, the goal was hold as much collateral as possible and23 borrow as much as he possibly could off it for the investment24 strategies?25 A. Yes.0177 1 MR. HUESTON: Let's go to -- I think it was 2 Exhibit 204, which has now been admitted. 3 BY MR. HUESTON: 4 Q. In fact, you were shown this document which -- by the 5 Defense, where there were discussions about collateral. 6 MR. HUESTON: I'm sorry. If I could get you to switch 7 the authorization. 8 There you go. And we can pull this up. 9 BY MR. HUESTON:10 Q. You were shown this modification of CAR request, sir. Do11 you remember seeing this?12 A. Yes.13 Q. And there were discussions in the backup paperwork about14 sufficiency of collateral, right?15 A. Yes.16 Q. In fact, what this reflects "requested change." Now the17 request is to up it to 80 percent of the advance rate or18 80 percent call rate, right, from the 70 percent advance rate?19 A. Yes, that's what it looks like.20 Q. Once again, the client wants an increase in the amount of21 borrowing power regardless of the amount of collateral, right?22 A. Yes.23 Q. And when you increase those percentages, there's always a24 little more risk to the bank potentially that they're looking25 at in terms of looking at the collateral, right?0178 1 A. Yes. 2 Q. There's a risk? 3 A. Yes. 4 Q. Is that right? 5 A. Yes, there is. 6 Q. And part of what you do in your job is to assess risk based 7 on the truthful information that the clients are presenting, 8 right? 9 A. Yes.10 Q. And when they sign these documents, including U-1's, you11 take them at their word they're signing them fully, honestly,12 and in good faith and truthfully, right?13 A. Yes.14 Q. And they're going to stand by their word that they're not15 going to go into a gray area, ignore the rules and just go16 ahead and buy stock anyway with non purpose credit proceeds,17 right?18 MR. CARROLL: Objection, leading, argumentative.19 THE COURT: Sustained.20 MR. HUESTON: No more questions, your Honor.21 MR. CARROLL: Two if I can, your Honor -- three.22 Sorry.23 RECROSS-EXAMINATION24 BY MR. CARROLL:25 Q. Mr. Hueston just asked you about 1596. If you look at the0179

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051806 us v lay bench v1 1 handwritten note at the top there, one of the things it says 2 is, "Linda needs to sign this and then all the kids sign the 3 last page." Do you see that? 4 A. Yes. 5 Q. Did you ever talk to any of Mr. Lay's kids about Reg U? 6 A. No. 7 MR. HUESTON: It's beyond the scope, your Honor, and 8 outside the indictment. 9 THE COURT: Sustained.10 BY MR. CARROLL:11 Q. With respect to Mr. Hueston's question about Exhibit12 Number 204, the CAR, credit -- the credit approval report13 modification to move the advance and the call rate to14 80 percent, the bank can say "no," right?15 A. Yes.16 Q. But if the bank says "yes," it's comfortable that it's in a17 situation where it's adequately protected, right?18 A. Yes.19 Q. And if it said "yes" here, then it met that standard,20 right?21 A. Yes.22 Q. Finally, Mr. Hueston asked you about whether Reg U23 prohibited you -- prohibited a client from using a non purpose24 loan to buy stock. That's not right, is it?25 Because you can use non purpose money to buy0180 1 stock as long as it doesn't fall within that fancy definition 2 in the Code of Federal Regulations, right? 3 A. That is correct. 4 Q. So, you can buy startup company stock, right? 5 A. As long as it's not publicly traded on a national exchange 6 or over the counter, yes. 7 Q. Right. You can -- you can buy foreign stock, right? As 8 long as it's not traded on -- on an American exchange, 9 U.S. exchange?10 A. I don't -- I don't know the answer to that question.11 Q. So, this is another one of those kind of complex things12 about Reg U, right?13 A. Yes.14 Q. Okay. So, if, in fact, there was a blanket statement, "You15 can't buy stock," that would have been wrong, right?16 A. Yes.17 MR. CARROLL: Nothing more.18 MR. HUESTON: Just one more word.19 FURTHER REDIRECT EXAMINATION20 BY MR. HUESTON:21 Q. You explained no publicly traded stock can be bought with a22 non purpose loan, right, sir?23 A. Yes, sir.24 Q. Did it more than once?25 A. Yes.0181 1 THE COURT: Thank you, sir. You're excused. 2 All right. Let's pick up the pace. 3 MR. ADKINS: Yes, your Honor. We'll do that. 4 Robert Hanisee is the next witness the Government 5 will call. 6 THE CASE MANAGER: Please raise your right hand and be 7 sworn. 8 (Robert Hanisee, Government's witness, sworn) 9 THE COURT: You may proceed, Mr. Adkins.10 MR. ADKINS: Thank you, your Honor.11 ROBERT HANISEE, DULY SWORN, TESTIFIED:

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051806 us v lay bench v112 DIRECT EXAMINATION13 BY MR. ADKINS:14 Q. Good afternoon, Mr. Hanisee.15 A. Good afternoon.16 Q. I know I've misspelled your name a couple of times. Could17 you please spell it for the record?18 A. It's H-A-N-I-S-E-E, two E's on the end.19 Q. Could you tell us a little bit about your educational,20 professional background?21 A. Sure. I have a Master's degree in economics from the22 University of California at Berkeley. And after that, I went23 to work on Wall Street at the JP Morgan company. And I've been24 involved in the investment business for all of my professional25 career.0182 1 Q. And who are you currently employed with? 2 A. I am employed by Trust Company of the West, a Los Angeles 3 based investment management firm. 4 Q. Okay. And when did you go work at TCW? 5 Do you often call it "TCW"? 6 A. TCW, yeah. 7 Q. Okay. When did you first go to work there? 8 A. April 1, 1990. 9 Q. And just to cut through this, was your position by 199810 private client services group chief investment officer?11 A. Yes, that is correct.12 Q. Okay. And what were your responsibilities as chief13 investment officer in that regard?14 A. I had a variety of responsibilities. I served as a chief15 investment officer for the group called Private Client Services16 that handled high net worth individuals, endowments, and17 foundations. My responsibility included seeing that we had18 uniformity of outcome across all of our various client base in19 terms of asset allocation, client suitability, that sort of20 thing.21 In addition to that, I had a -- a fairly heavy22 load of direct client servicing responsibility, including23 several -- several directors of the firm.24 Q. Okay. Do you know who Ken Lay is?25 A. Yes, I do.0183 1 Q. You mentioned directors. Was Mr. Lay on the board of TCW? 2 A. Yes, he was. 3 Q. In addition to being a board member, was he also an 4 investor with TCW? 5 A. Yes, he was. 6 Q. Okay. How long had he been on the board, approximately? 7 A. I think Mr. Lay went on the board in 1992 until he left the 8 board, I think, at the end of 2001. 9 Q. And approximately how long had he been investing with TCW?10 A. Well, essentially most of that time. I don't know when he11 first -- his first investments but certainly in the early12 1990s.13 Q. I want to talk to you a little bit about the contact that14 you would have had with Mr. Lay. Can you describe that for us,15 please?16 A. I would typically see Mr. Lay at board of directors17 meetings when there would be a lunch for managing directors of18 the firm, in a sort of a cocktail greeter. And I would say19 hello to -- to Ken and the other directors of TCW.20 And then, after I assumed responsibility for21 overseeing his investments with the firm, I again would see him22 at board meetings. I never did meet with him down here in

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051806 us v lay bench v123 Houston. He was always out of town when I was here.24 Q. Okay. I want to refer you to a conversation. Do you25 recall a conversation that you had with Mr. Lay -- a meeting0184 1 you had with Mr. Lay in April of 2000? 2 A. That was at a board meeting. 3 Q. Yes. 4 A. I -- I just grabbed him and pulled him aside and gave him a 5 quick review of -- of -- of the outcome of the returns of his 6 various investments with TCW, just to try and make sure he 7 was -- he was up to date on -- up to speed on everything that 8 he had. 9 Q. And do you recall any specific investments you discussed10 with him?11 A. I'm sure I -- I -- at that time he had just made a fairly12 sizeable investment in a mid cap growth strategy and a small13 cap growth strategy and put some more money into a product14 called Concentrated Core, which was a large cap growth15 strategy.16 And, of course, bear in mind that the market had17 turned down in late March of 2000. And, so, things were pretty18 rocky at the time; and I wanted to make sure he was aware of19 what was going on.20 Q. Okay. Now, I want -- you mentioned a couple of these21 accounts that Mr. Lay was invested in. I want to go through22 that just quickly with you.23 MR. ADKINS: If we could put up Exhibit 248,24 Government's Exhibit 248, please.25 BY MR. ADKINS:0185 1 Q. If you could look in your binder, it should be in front of 2 you. Do you recognize that document? 3 A. Yeah. It's a -- it's a TCW marketing piece describing the 4 various mutual funds that exist within the Galileo family of 5 mutual funds. 6 Each of the funds listed on the second page is 7 one of the stylized portfolios, a couple of which Mr. Lay was 8 invested in. 9 MR. ADKINS: Are you able to pull that up,10 Mr. Denault?11 There we go.12 If we could go to the page he's referring to,13 Page 2.14 If you could blow that out, please, and -- and15 make it a little larger. It's a little hard to read.16 BY MR. ADKINS:17 Q. Okay. Now, you mentioned that there were some investments18 that Mr. Lay had. The first one I wanted to direct your19 attention to is TCW Galileo select equities fund. Is that one20 of the investments Mr. Lay invested in?21 A. Yes.22 Q. And it describes it in this brochure as "Invests in common23 stock of large capitalization companies."Is that accurate?24 A. Yes, it is.25 Q. Okay. It also mentions the TCW Galileo aggressive growth0186 1 equities fund. Is that another fund that Mr. Lay invested in? 2 A. Yes. 3 Q. And invested -- it describes it as "Invests in equity 4 securities issued by companies that appear to offer superior 5 growth prospects." Is that a correct description? 6 A. Yes, it is. 7 Q. Finally, Galileo -- TCW Galileo small cap growth fund. Is

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051806 us v lay bench v1 8 that another investment -- 9 A. Yes.10 Q. -- that Mr. Lay made?11 A. Yes.12 Q. "Invests in equity securities issued by small13 capitalization growth companies." Is that an accurate14 description?15 A. Yes, it is.16 MR. ADKINS: If we go to Exhibit 279, please?17 THE COURT: Are you offering these?18 MR. ADKINS: Yes, your Honor. I'd offer it. I19 apologize.20 THE COURT: All right. They're both --21 MR. SECREST: No objection.22 THE COURT: They're both admitted.23 (Government's Exhibit Number 248 admitted.)24 (Government's Exhibit Number 279 admitted.)25 BY MR. ADKINS:0187 1 Q. And do you generally recognize what this type of document 2 is? 3 A. It's a custody agreement. 4 MR. ADKINS: Okay. If we could go to the last page. 5 BY MR. ADKINS: 6 Q. Is this signed by Mr. Lay, let me just ask you? I believe 7 it's on page 7. 8 A. Well, it certainly appears to be. 9 MR. ADKINS: Okay. If we could go to Schedule B,10 please.11 If you could just blow out the top.12 BY MR. ADKINS:13 Q. This lists TCW mid cap equity --14 A. What page is that? Excuse me.15 Q. I'm sorry. Schedule B to the same document, towards the16 end.17 A. Oh, okay. Got it.18 Q. Do you recognize that?19 A. Yeah.20 Q. And it lists a TCW mid cap equity and describes the -- "The21 account seeks long term capital appreciation through investment22 principally in publicly traded equity transactions of medium23 capitalization companies, including common and preferred24 stocks."25 Is this an investment that Mr. Lay had with TCW?0188 1 A. Yes. 2 Q. Is that an accurate description of the investment? 3 A. Yes, it is. 4 Q. Then, finally, Exhibit 280, which would be the last one, if 5 you could turn to that in your binder, please. Do you 6 recognize what that document is? 7 A. Yes. 8 Q. Same thing? 9 A. Same thing.10 MR. ADKINS: Okay. We'd move this in, as well, your11 Honor.12 MR. SECREST: No objection.13 THE COURT: It's admitted.14 (Government's Exhibit Number 280 admitted.)15 BY MR. ADKINS:16 Q. And just for the record, signed by Mr. Lay on page 7?17 A. It appears to be his signature.18 MR. ADKINS: Okay. If we could go to Schedule B

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051806 us v lay bench v119 again?20 It should be towards the end.21 If we could just blow that up.22 BY MR. ADKINS:23 Q. Here it lists TCW concentrated core equity; and it24 describes down towards the bottom, "The concentrated core25 equities portfolios managed by TCW are generally fully invested0189 1 in equities with typically more than 90 percent of assets 2 invested in common stocks as market conditions warrant." 3 Is this another account that Mr. Lay invested in? 4 A. Yes. 5 Q. And is that an accurate description of the account? 6 A. Yes, it is. 7 Q. Okay. Now, to recap, we've talked about Galileo select 8 equity funds, Galileo aggressive growth equity fund, Galileo 9 small cap growth fund, TCW mid cap account, TCW concentrated10 core account. Do all of those accounts invest entirely in11 publicly traded stock on national exchanges?12 A. Yes, they do.13 Q. Okay. Now, based on your interaction you had with Mr. Lay,14 did you observe him to be a fairly sophisticated investor?15 A. Yes.16 Q. Do you know whether Mr. Lay was aware of the nature of his17 investments with TCW?18 A. I'm reasonably certainly he was, yes.19 Q. And why are you reasonably certain?20 A. Well, because when we talked about it -- well, he was on21 the board of TCW. He had regular presentations at board22 meetings on these different products. He had the opportunity23 to meet the portfolio managers in a number of instances. And24 the few times that I did talk to him about it, he seemed to25 understand exactly the nature of the investments and how they0190 1 fit within the investment spectrum. 2 Q. Does TCW send out monthly statements, as well? 3 A. Yes, they do. 4 Q. There's been some discussion during this trial about 5 Sherrie Gibson. Did you have any contact with Sherrie Gibson 6 as it related to the Lay accounts at TCW? 7 A. Yes. I met with her several times in the Lay family 8 offices here in Houston, and we communicated with her on the 9 phone fairly frequently.10 Q. Is it fair to say that your contact with her dealt mostly11 with administrative and tax matters?12 A. Precisely.13 Q. And what about Robert Herrold, also known as Beau Herrold;14 do you know who that is?15 A. Yes. I met with him on a number of occasions, as well.16 Q. Do you recall a conversation that you had with Mr. Herrold17 in October, towards the end of 1999?18 A. I think that was when Mr. Herrold first took over the19 position in -- in Mr. Lay's family office, overseeing his20 various investments.21 MR. SECREST: Excuse me, sir. I object to the hearsay22 attempting to being elicited.23 THE COURT: Well, I have to hear what the question is.24 MR. SECREST: I'm with you. I'm just trying to alert25 the Court.0191 1 Thank you. 2 BY MR. ADKINS: 3 Q. Maybe I can short circuit it. Based on your conversations

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051806 us v lay bench v1 4 with Mr. Herrold, what was your understanding of his 5 sophistication with investments at that time? 6 A. He had just been moved into that position. I think prior 7 to that he was in -- in the oil property management role for 8 Mr. Lay's various interests. 9 At that particular time, he was not terribly10 sophisticated about -- either about the stock market overall or11 Mr. Lay's investments. And part of what I was attempting to do12 is to educate him and bring him up the curve by carefully going13 over each of the investments, explaining what they were, what14 the strategies were, the portfolio managers, the philosophy,15 etcetera.16 Q. Based on your conversations with Mr. Lay or those who17 worked with him, what was your understanding of who the18 decision maker was for the account at TCW?19 A. It was obviously my understanding that Mr. Lay made the20 decisions.21 Q. Did Mr. Herrold ever make any decisions without first22 saying he would check with Mr. Lay?23 A. Not to my knowledge.24 Q. Okay.25 MR. ADKINS: I'll pass the witness, your Honor.0192 1 THE COURT: Mr. Secrest? 2 MR. SECREST: Your Honor. 3 CROSS-EXAMINATION 4 BY MR. SECREST: 5 Q. Mr. Hanisee, good afternoon. How are you, sir? 6 A. Very good. Thank you. 7 Q. My name is Mac Secrest. I'm one of Mr. Lay's lawyers. I 8 don't believe we've had the pleasure of meeting before now. 9 A. No, but I've seen your name in the papers.10 Q. Well, don't believe everything you've read.11 Just a few questions. If I -- so how long -- how12 long has it been since you've known Mr. Lay?13 A. I met him in the early 1990s for the first time.14 Q. Okay. And were those opportunities you had to visit with15 him, were they cordial?16 A. Always.17 Q. Were they professional?18 A. Always.19 Q. Did you ever have any reason to doubt the man's ethics or20 integrity?21 A. No, I did not.22 Q. Is it fair to say that when you did try to meet with23 Mr. Lay here in town that you were trying to do business with24 him?25 A. Yes.0193 1 Q. And I think you said that it seemed like nearly every time 2 you came to town and tried to put yourself in a position to be 3 able to visit with Mr. Lay that, in fact, he was out of town? 4 A. That's correct. 5 Q. And, so, was it your understanding that basically he had to 6 rely on other individuals to assist him in his financial 7 affairs? 8 A. Yes. 9 Q. Okay. And, so, you -- you met a few occasions with10 Mr. Herrold?11 A. Yes.12 Q. And what was your understanding of who Mr. Herrold was?13 A. I -- I was under the impression that he was Mr. Lay's14 son-in-law.

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051806 us v lay bench v115 Q. Okay. And if I told you that he was Mr. Lay's son, would16 that surprise you?17 A. Yes.18 Q. That's fine. Consider yourself surprised. Okay?19 A. I apologize.20 Q. No, no. You owe us no apology.21 And -- and, basically, how often did you get a22 chance to meet with Mr. Herrold?23 A. You have the detailed avenue notes, which is the track24 record we kept internally at the firm; and you can go and count25 the number of times. But it seems like I was meeting with him0194 1 a minimum of two to sometimes three and four times per year. 2 Q. Would it be fair to say that, in fact, you don't have 3 personal knowledge as to exactly how decisions were made in the 4 Lay household but you assume that basically Mr. Herrold would, 5 by definition, at least confer with his dad from time to time 6 with respect to these investments? 7 A. That was my understanding, yes. 8 Q. But do you know exactly how that went down or -- or how 9 those discussions progressed in any way?10 A. No.11 Q. With respect to Sherrie Gibson, can you help me out here12 with your best memory of approximately how many times would you13 have visited with her?14 A. I think I visited with Ms. Gibson probably twice. And we15 spoke to her on the phone more frequently and typically about16 tax matters.17 Q. Okay. Was it your impression that she tried to stay on the18 ball and tried to assist Ms. Lay the best she could?19 A. Absolutely. She was very professional.20 Q. Okay. These investments that you testified to on direct21 examination, let me ask you this. Did any of them involve any22 investment in a Taiwan fund?23 A. Yeah. Those were not brought up; but TCW also is a sponsor24 of a number of what's known in the trade as "alterative25 investments," which would include private equity funds. And0195 1 that's what the Taiwan fund was. 2 And, yes, Mr. Lay was invested in the Taiwan 3 fund. 4 Q. And is -- the Taiwan fund, is that basically companies 5 that, I guess, were capitalized -- what? In Taiwan? 6 A. It's -- it's companies that were domiciled and did business 7 from Taiwan, yes. 8 Q. Okay. Did you ever sit down -- when you had a chance -- it 9 seems like you had to basically pigeonhole Mr. Lay at cocktail10 parties and luncheons because he's somewhat of a moving target?11 A. Yes.12 Q. Okay. I mean, did -- was he trying to be courteous and13 professional when he met with you; but the bottom line is he14 didn't have a lot of time to spend with you? Is that a fair15 statement at all?16 A. Yes, it is.17 Q. Okay. And, obviously, the reason he didn't have a lot of18 time to spend with you was, no doubt, related to Enron?19 A. He was a very busy man, yes.20 Q. Okay. At any time did he give you any reason to believe21 that if he understood something that he would try to honor his22 commitment, he would try to follow through on his promises?23 A. That was my experience with him, yes.24 MR. SECREST: Thank you very much.25 No further questions.

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051806 us v lay bench v10196 1 MR. ADKINS: Very brief, your Honor. 2 REDIRECT EXAMINATION 3 BY MR. ADKINS: 4 Q. Mr. Secrest asked you a question about whether you have any 5 personal knowledge about how the business arrangements were 6 taken care of vis-a-vis Mr. Lay and his son. Do you remember 7 that question? 8 A. I do. 9 Q. And he asked you whether you had any knowledge at all as to10 how that was taken care of. Do you have any knowledge,11 including with your conversations with Mr. Herrold, as to how12 that was done?13 A. Well, on -- on very many occasions when we would talk about14 one of the new investments products that TCW had or some15 suggestion we had, he said, "I'll talk to Ken and get back to16 you."17 MR. ADKINS: Okay. No further questions, your Honor.18 MR. SECREST: I have no further questions.19 THE COURT: Thank you, sir. You're excused.20 The Government may call its next witness.21 MR. HUESTON: Yes, your Honor. The Government calls22 Ms. Sally Ballard.23 THE COURT: Mr. Adkins takes a lot less time. I may24 have him question.25 MR. HUESTON: I'd be happy to turn it over, your0197 1 Honor. Tough draw today. 2 (Sally Ballard, Government's witness, sworn) 3 THE CASE MANAGER: Please be seated. 4 THE COURT: You may proceed. 5 MR. HUESTON: Thank you, your Honor. 6 SALLY BALLARD, DULY SWORN, TESTIFIED: 7 DIRECT EXAMINATION 8 BY MR. HUESTON: 9 Q. Ms. Ballard, can you please describe the extent of your10 college education just to start?11 A. I have a year of college.12 Q. All right. And afterwards did you work as a secretary in13 public schools for awhile?14 A. Yes, I did.15 Q. And after that, in general, over the next few years,16 through 1985, what kind of positions did you hold?17 A. Secretarial position, payroll position.18 Q. Okay. And in 1985 did you join a company that would19 eventually be known as Enron?20 A. Yes.21 Q. And what was your first position there?22 A. I don't recall the title. I worked in Mr. Lay's office.23 Q. All right. And, generally, what did you do?24 A. The majority of my time was spent on doing personal items,25 handling Lay's personal finances or --0198 1 THE COURT: Ma'am, would you pull the microphone a 2 little closer to you? I'm having difficulty hearing you. 3 THE WITNESS: Okay. 4 THE COURT: Thank you. 5 A. Basically, I handled their personal affairs. 6 BY MR. HUESTON: 7 Q. All right. You were, effectively, like an administrative 8 assistant, right? 9 A. Yes.10 Q. And did you continue in that function, more or less,

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051806 us v lay bench v111 through 2001 at Enron?12 A. I did, yes.13 Q. All right. And after 2001, did you continue to work with14 Mr. Lay but not at Enron?15 A. That's correct.16 Q. And in what capacity? Where were you working?17 A. Where was I working?18 Q. Yes, after Enron. You went to work for --19 A. I was working for the Lays out at their -- the office at20 the time was out in the River Oaks Bank building.21 Q. And how long did you continue to work for the Lays?22 A. I am still working for them.23 Q. You are still employed by them today?24 A. I am part time, correct.25 Q. All right. And your attorney is Mr. George Murphy?0199 1 A. That's correct. 2 Q. And he -- that was legal representation provided for you, 3 at least in part, by the Lay family. Is that right? 4 A. That's correct. 5 Q. All right. Let's talk about the time period where you 6 worked as an administrative assistant before Sherrie Gibson 7 arrived. 8 A. Okay. 9 Q. All right. Can you describe what kind of work you were10 doing to assist Mr. Lay in the handling of his accounts and --11 and finances during that period of time?12 A. Well, I would -- I handled the paying of the bills,13 incoming invoices. I made -- you know, I kept up with the --14 we had financial software, and I input most of that. I handled15 their -- or I was the coordinator for their insurance of all16 types, whether it be property insurance, life insurance,17 automobile insurance --18 Q. All right.19 A. -- etcetera.20 Q. And let's -- let's talk a little bit about the "etcetera."21 If there was a need to fund an investment, would Mr. Lay22 provide instructions to you as to how to fund it?23 A. An investment?24 Q. Yes.25 A. He might have.0200 1 Q. Okay. In fact, do you remember in the grand jury a couple 2 years ago saying absolutely it would be every time he would 3 provide those instructions to you? 4 A. Well, if I said that, then I'm sure that's -- 5 Q. All right. Do you remember anyone else -- from time to 6 time were you required to provide monies -- let's say there was 7 a $2 million investment that needed to be made -- 8 A. Uh-huh. 9 Q. -- and you had to find the money to fund it. You wouldn't10 figure that out on your own, would you?11 A. No.12 Q. And, in fact, the instructions would come from whom?13 A. Well, I would likely have let Mr. Lay know that -- or he14 might have told me, you know, "Sally, we need to make an15 investment. We need to send X-number of dollars." But he16 would have been the one to tell me --17 Q. Right.18 A. -- where to take the money.19 Q. Yes. And he asked you -- when he asked you to move monies,20 he told you from where to move monies, right, from what account21 to which investment?

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051806 us v lay bench v122 A. Yes.23 Q. Is that right?24 A. Yes.25 Q. And he would do that every time, correct?0201 1 MR. SECREST: It's a compound question, Judge. Can we 2 break that down? 3 MR. HUESTON: I think I gave the second part as a 4 second question. There was a "yes," wasn't there? 5 THE COURT: Did he tell -- when he moved the money, 6 did he tell you from what account the money should be taken 7 from? 8 THE WITNESS: Yes. 9 THE COURT: Did he tell you what account it should be10 paid into?11 THE WITNESS: Yes. Or I would have been provided that12 information, yes.13 THE COURT: All right. Thank you.14 BY MR. HUESTON:15 Q. All right. And -- just skip through here.16 In other words, Mr. Lay would tell you what17 source of money to use for the investment, right, ma'am?18 A. Yes.19 Q. And precisely which --20 MR. SECREST: Excuse me, Mr. Hueston. Can we have a21 time frame here? We're talking about a period of about a22 decade. I would like to have a little better focus.23 THE COURT: Can you clarify that?24 MR. HUESTON: Sure.25 BY MR. HUESTON:0202 1 Q. I asked you openly was there a time where this changed for 2 you. You just described that he would provide the instructions 3 directly to you from what source of money to take money to fund 4 which investment, correct? 5 A. Yes. 6 Q. Did that ever change during your time of employment with 7 him through 2000? 8 A. Yes. 9 Q. What time -- when did that change?10 A. That would have changed when Sherrie Gibson came aboard.11 Q. And when did she arrive?12 A. I believe it was '97 or '98, but I'm not -- I'm not certain13 of that.14 Q. All right. And that's because she took over some more of15 the financial responsibility, right?16 A. Yes, she did.17 Q. And let's talk about her for a moment. Is it your18 understanding that Ms. Gibson -- would Ms. Gibson, to your19 understanding, make her own decisions about moving the money,20 without guidance from Mr. Lay?21 A. I wouldn't know that.22 Q. Okay. Do you recall in the grand jury actually stating23 that you did not think that Ms. Gibson would ever make24 decisions without consulting Mr. Lay?25 A. I don't recall that.0203 1 MR. SECREST: First of all, I would object. What she 2 said to the grand jury calls for speculation, asking what 3 another person -- 4 MR. HUESTON: Well -- 5 THE COURT: Well, I don't -- haven't heard her grand 6 jury testimony yet. So --

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051806 us v lay bench v1 7 MR. SECREST: I understand. 8 MR. HUESTON: Let's post July 1, 2004, at 14, please. 9 Okay. And I'm sorry. Can we blow that out a10 bit?11 BY MR. HUESTON:12 Q. And it says at the top, "Well, I was keying off some of13 your earlier grand jury testimony. Let me just clarify" --14 "ANSWER: Okay."15 MR. SECREST: Can we have a page, counsel? I can't16 tell if that's --17 MR. HUESTON: That's page 14.18 MR. SECREST: Thank you.19 BY MR. HUESTON:20 Q. -- "and have you say it in your own words.21 "Once Ms. Gibson arrived, she took over a lot of22 that prior responsibility that you had moving monies, correct,23 and creating reports about where the monies are coming and24 going to. Is that right?25 "Yes."0204 1 A. Uh-huh. 2 Q. And you're saying -- you said, "Asking me if that's what 3 she did? 4 "Yeah. 5 "And if that's my understanding of it. I would 6 think so, but she still got her direction from Mr. Lay." 7 A. Okay. 8 Q. That's what you said, right? 9 A. Okay.10 Q. That was your understanding, correct?11 A. Now that I'm reading that, I see that I said that.12 Q. Okay. And you worked in close contact with Ms. Gibson?13 A. Yes, I did.14 Q. All right. And this was two years ago, even closer to the15 time of the activity I'm discussing with you today, right?16 A. (No response).17 Q. That -- and were your -- a fresher recollection two years18 ago, right, ma'am?19 A. Absolutely.20 Q. Okay.21 A. Somewhat.22 Q. All right.23 MR. HUESTON: Okay. We can take that down. Thank24 you.25 BY MR. HUESTON:0205 1 Q. Now, Ms. Ballard, when you moved the monies -- at times 2 where you moved monies at Mr. Lay's direction, you created 3 reports, that have been referred to as "dailies," that you sent 4 to Mr. Lay and others to confirm those movements of money. Is 5 that right? 6 A. That's correct. 7 Q. All right. Let's go through some examples of that. Let's 8 have you take a look at, in the book in front of you, 9 Exhibit 255, please.10 A. 255? Oh, I'm sorry.11 Q. Yes. They should be in numerical order.12 A. Okay.13 Q. All right. And is that an example of one of the dailies14 that you were preparing -- the daily reports that reflected15 movements of money?16 A. Correct.17 And you say it -- you're calling it a "daily."

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051806 us v lay bench v118 It wasn't really a daily. It wasn't every day, but it was19 certainly every time that money was either borrowed or paid20 down.21 Q. Okay.22 A. So --23 Q. So, every time money was borrowed or paid down, you would24 generate this report, right?25 A. That's correct.0206 1 Q. And you would send it to Mr. Lay and some others, right? 2 A. Correct. 3 Q. And you would send it -- when you sent it, you were 4 confirming with Mr. Lay, in fact, the directions he had already 5 provided you to move monies, right, during the time where you 6 were the mover of monies? 7 A. Yes. 8 MR. HUESTON: Okay. We would move this one into 9 evidence at this time, your Honor.10 MR. SECREST: No objection.11 THE COURT: It's admitted.12 (Government's Exhibit Number 255 admitted.)13 MR. HUESTON: Okay. Let's post this, please, 255.14 BY MR. HUESTON:15 Q. These were generally one page in length?16 A. Yes.17 Q. And at the bottom there, there are some handwritten18 notations. Whose handwriting is that?19 A. That's mine.20 Q. Okay. And can you read what that says there? It's 5-6-96.21 First of all, why are you writing in handwriting22 on this report; can you explain that?23 A. Yes. What my procedure would be was the -- the typewritten24 was the one from 4-29. And when I made a change for my25 purposes only, then I would just -- it was a go-by. And, so, I0207 1 would just update it, write in the changes that I wanted to 2 make on the new report. 3 Q. Right. 4 A. So, I just put this in for my purposes -- 5 Q. Okay. 6 A. -- so that I could also have a copy of what I had done 7 previously. 8 Q. All right. And, so, taking a look at this, this one 9 appears to be dated with a change May 6, 1996.10 A. Uh-huh.11 Q. And what did you write in handwriting there next to it,12 next to the date?13 A. "Thursday I borrowed $100,000 from NP for expenses and" --14 Q. And?15 A. -- I guess "5,000 shares of Eli Lilly stock."16 Q. Okay. And what does "NP" stand for?17 A. Well, it would have to be for "non purpose."18 Q. Okay. That's that line up above, right?19 A. Yes. Yes.20 Q. And, in fact, just pulling back out on that for a moment,21 this paper --22 A. Uh-huh.23 Q. -- it was generally one page that was being circulated,24 right?25 A. Yes. Occasionally it would go to -- to two pages, but most0208 1 times it was one. 2 Q. And why were these accounts, the ones listed on this page

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051806 us v lay bench v1 3 that was circulated, why these accounts in particular? 4 Mr. Lay had other accounts, didn't he? 5 A. These were the bank lines. Those were all the bank lines. 6 Q. And these would be the bank lines that were being used -- 7 A. Yes. 8 Q. -- for movements of money? 9 A. Well, they were the only bank lines that he had at the10 time.11 Q. Okay. And, then, the circulation was "cc: KLL." Is that12 Mr. Lay?13 A. Correct.14 Q. And, then, "LPL" is who?15 A. Would be Mrs. Lay.16 Q. And, then, who is "TLH"?17 A. It would be Terri Hodges, and she was an accountant that we18 used -- that we used as a consultant.19 Q. Okay. And she was -- you described her as a bookkeeper,20 right?21 A. Correct.22 Q. She didn't actually move monies during this time?23 A. No, she didn't.24 Q. And looking up above to NationsBank, then, you would25 change -- as the money comes out to be used for 5,000 shares of0209 1 Eli Lilly, you would change the non purpose entry to reflect 2 that the money came from the non purpose line, right? Is that 3 what that -- 4 A. Yes. 5 Q. Okay. And then this would be typed in final format -- 6 A. Correct. 7 Q. -- and circulated to those folks, right? 8 A. Right. Uh-huh. 9 Q. Okay. And, once again, ma'am, this is the 1996 time10 period. You would have typed this after moving that money from11 the non purpose line, in this case for the purchase of Eli12 Lilly stock, at the direction of Mr. Lay. Is that right?13 A. Yes.14 MR. HUESTON: Let's go to the next exhibit, 256,15 please.16 BY MR. HUESTON:17 Q. Is this another similar report of movements of money,18 ma'am, that you created?19 A. Yes.20 MR. HUESTON: Move this -- this into evidence at this21 time, your Honor.22 MR. SECREST: No objection.23 THE COURT: It's admitted.24 (Government's Exhibit Number 256 admitted.)25 MR. HUESTON: Let's post this, please.0210 1 BY MR. HUESTON: 2 Q. Okay. And going down to the bottom, once again, this is 3 your handwritten notations, ma'am? 4 A. Yes, it is. 5 MR. HUESTON: And can we blow out the bottom? 6 BY MR. HUESTON: 7 Q. It's -- this one is dated November 12th, 1998. Is that 8 right? 9 A. Correct.10 Q. Now, the people here -- before I have you read the11 handwriting, now the people include Mr. Lay, Mrs. Lay, and SBG.12 Who is that?13 A. That would be Sherrie Gibson.

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051806 us v lay bench v114 Q. And even after Ms. Gibson arrived, you were still creating15 these reports to reflect movements of money, right?16 A. Yes.17 Q. "Yes"?18 A. Yes.19 Q. And here the notation is on the 12th, "Today I borrowed20 1M" -- is that one million?21 A. Yes.22 Q. -- "from the NationsBank line of credit to open a new23 Schwab account." Is that right?24 A. Yes.25 MR. HUESTON: All right. And then going back up0211 1 quickly. 2 BY MR. HUESTON: 3 Q. And that came, because you can see the change put into the 4 report, from the non purpose line of credit. Is that right? 5 A. That's right. 6 Q. All right. And that, in fact, is the reference to 7 NationsBank line of credit, right? 8 A. Yes. 9 Q. And I notice there are a number of things listed under "Non10 purpose." Thirteen million and change for investments; 281,00011 for Kingston; and a number of other items.12 A. Yes.13 Q. Is that some sort of running tally list of investments to14 date? Why is there that listing there?15 A. Well, from Kingston down through Petite Circle, those were16 properties. They're properties.17 Q. Okay. What's "Investments"?18 A. I guess investments. I couldn't tell you what was included19 in that.20 Q. Okay. Well, part of it would be when you moved it to,21 like, Eli Lilly?22 A. Right. But I don't know what the rest of it would be.23 Q. Okay. And you're the one who would make those changes,24 right?25 A. Yes.0212 1 Q. All right. And then circulate it to the folks on the list, 2 correct? 3 A. Correct. 4 MR. HUESTON: Let's move quickly to a couple others 5 here, 257. 6 BY MR. HUESTON: 7 Q. Just if you can take a quick look at that, is that 8 another -- 9 A. That's correct.10 Q. -- report you've done, ma'am?11 MR. HUESTON: Move this into evidence, your Honor.12 THE COURT: It's admitted.13 (Government's Exhibit Number 257 admitted.)14 MR. HUESTON: Let's post this, please.15 BY MR. HUESTON:16 Q. This one is dated now 12-10-98, also during the time where17 Ms. Gibson is there, right?18 A. Yes.19 Q. And this states, "Today I have borrowed $800,000" -- is20 that right?21 A. Yes. I think that's probably what it was, uh-huh.22 Q. Okay.23 -- "from NationsBank and the rest, 336,347 for KM24 Stock." Is that right?

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051806 us v lay bench v125 A. "For expenses" -- let's see. "800,000" -- let's see.0213 1 "Today I borrowed" -- "credit 336 for KM Stock and the rest for 2 expenses," yes. 3 Q. Okay. So -- and, so, 336,000 -- "KM," that's "Kinder 4 Morgan"? Is that short for "Kinder Morgan"? 5 A. I couldn't tell you what it's for. 6 Q. All right. But it was stock, is what you reference there? 7 A. It's a stock. 8 Q. All right. Let's go to -- and, again, notation is made to 9 change amount of NationsBank, circulated to the same group,10 right?11 A. Yes.12 MR. HUESTON: Let's go to the next exhibit, please,13 which is Exhibit 4. It's not in sequential order. I14 apologize.15 BY MR. HUESTON:16 Q. Go to the front of your book, ma'am. You'll find Exhibit 417 there, which should be another money movement report that you18 created.19 A. Okay.20 Q. Do you recognize it?21 A. Yes.22 Q. And you created this report?23 A. Yes.24 MR. HUESTON: Move it into evidence, your Honor,25 permission to post it.0214 1 THE COURT: All right. It's admitted. 2 (Government's Exhibit Number 4 admitted.) 3 BY MR. HUESTON: 4 Q. Okay. And, here, this one is January 13th of 1999. Is 5 that right, Ms. Ballard? 6 A. That's what it says. 7 Q. Okay. Just trying to read the information in. 8 A. Okay. 9 Q. Could you read your handwriting, please?10 A. Oh, I'll sure try.11 Q. All right.12 A. "Today I have borrowed 2,300,000 from NationsBank line of13 credit. 2 million for" -- is that Feyez Serafim? I can't --14 Q. Uh-huh, "Feyez Serafim, GS" --15 A. -- "account" -- oh, "Goldman Sachs account, 240,000" --16 Q. "Investment"?17 A. Okay. "For Charles" -- something -- "Charles Apartments18 and the remainder for expenses."19 Q. All right. And that you would type up and circulate to20 your list, right?21 A. Correct.22 Q. And, by the way, there's a number of, like "I borrowed,"23 "we borrowed." When you used those words, it was at the24 request of Mr. Lay, right? It wasn't you making your own25 borrowing decisions?0215 1 A. Oh, that's correct. That's my wording, not his. 2 Q. All right. And let's go to -- I'm just going to have you 3 look quickly now instead of going through every one of these -- 4 Exhibits 11, 21. 5 MR. HUESTON: And I'm going to move these others into 6 evidence, your Honor. 79 -- I'm sorry. 78 and 79 and 41. 7 THE COURT: All right. They're admitted. 8 (Government's Exhibit Numbers 78 admitted.) 9 (Government's Exhibit Numbers 79 admitted.)

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051806 us v lay bench v110 (Government's Exhibit Numbers 41 admitted.)11 BY MR. HUESTON:12 Q. All right.13 A. 71 -- 70 and 71?14 Q. I'm sorry. Let me go in sequential order for you.15 11 and 21.16 A. Right.17 Q. Those are your reports, correct?18 A. That's correct.19 Q. And 41.20 A. Yes.21 Q. And 78 and 79.22 A. Yes.23 Q. Okay. And we'll put up a couple -- couple more just to run24 you through them.25 MR. HUESTON: Exhibit 79, please.0216 1 BY MR. HUESTON: 2 Q. Okay. Looking at this one -- 3 A. Here is 79. Okay. 4 Q. I've got it up on the screen for you, ma'am. 5 A. I know, but I can't -- 6 Q. Can you see it all right now? 7 A. I can see it from here. I can see it there, but -- okay. 8 Q. This is dated July of '99, correct? 9 A. Uh-huh.10 Q. And, then, the second entry says, "SBG borrowed $2 million11 from the Chase line of credit for the GS large cap."12 Is that what you wrote?13 A. Just a minute. Oh, on 7-13 I borrowed 200,000 from -- on14 7-15, "SBG borrowed." Okay.15 Q. So, this is your log of --16 A. That's correct.17 Q. -- who is moving money from what line to which ultimate18 investment, right?19 A. Yes.20 Q. And you're notifying and confirming with Mr. Lay and the21 others on the left-hand side?22 A. Yes.23 Q. All right. And, again, with notations and changes made to24 the appropriate bank?25 A. Accounts.0217 1 Q. Bank line, right? 2 A. Uh-huh. 3 MR. HUESTON: All right. Let's move to one last 4 example, Exhibit 41, which dates from March of 2000, 5 March 15th, 2000. 6 Okay. Blow that out. 7 BY MR. HUESTON: 8 Q. In this one, ma'am, it says, "Yesterday we borrowed" -- is 9 that "$5 million"?10 A. Yes.11 Q. -- "from Bank of America for the TCW investment"?12 A. Yes.13 Q. And looking up there at the lines of credit under Bank of14 America, there's one for 30 -- there's a $35 million line of15 credit. That's the one that's being borrowed from, right?16 A. Uh-huh.17 Q. All right. And circulated also --18 A. Yes.19 Q. -- to the same distribution list --20 A. Yes.

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051806 us v lay bench v121 Q. -- correct?22 A. Yes.23 Q. Okay. Ma'am, in your experience with Mr. Lay, was he a24 very active manager of his accounts?25 A. "Active"? Explain what do you mean by "active."0218 1 Q. Well, let's put up your prior grand jury testimony where 2 you, in fact, stated that. 3 A. Okay. That's a good idea. 4 MR. HUESTON: That's July 1st, 2004, at 14, 15 -- 5 pages 14 to 15. 6 Okay. That's the end of page 14. And if we can 7 blow out the latter part. 8 All right. I'm sorry. Get my bearings here. 9 And my question starting on line 25.10 BY MR. HUESTON:11 Q. And that's, "Mr. Lay, he was a very active manager of his12 accounts, right?"13 And you said, "ANSWER: That's -- in my14 experience."15 Right? That's what you believed, correct?16 A. Uh-huh.17 Q. And that's, in part, why, ma'am, you wrote these confirming18 memos, right? They were at his request?19 A. Well, they -- they -- yes. He and Mrs. Lay wanted to be20 able to have a snapshot of the lines and what was available,21 what had been used and of that that was -- had been drawn down,22 what they were for, yes.23 Q. Sure. Each time, in fact, the monies were moved?24 A. Yes.25 Q. All right. Let's move on to a different topic.0219 1 A. Okay. 2 Q. You remember I showed you in the grand jury a few memos? 3 I call them "memos." They were little notes that 4 you wrote that had reference to something called "Reg U." Do 5 you remember that? 6 A. Vaguely. 7 Q. Okay. Let's go to Exhibit -- there are just a couple here 8 I want to show you. 9 A. Okay.10 Q. Why don't you turn to Exhibit 317, which I think has been11 previously admitted; but I think you're the person who can tell12 us a little about it.13 A. Well, okay.14 Q. All right. You see that there, ma'am?15 A. Uh-huh.16 Q. Is that something you prepared?17 A. Yes.18 Q. All right.19 MR. HUESTON: Okay. I believe this is in. Is this20 the one in?21 All right. Let's post it, please. And if we22 could blow out the first part.23 BY MR. HUESTON:24 Q. This says, "Note to file. Reg U requirements for repaying25 Enron Corp. line for advance to NationsBank in paying down0220 1 purpose line per James Shelton." 2 Have you had a chance to review this prior to my 3 putting this before you right now? 4 A. I saw this a couple of weeks ago. 5 Q. Okay. I didn't show it to you a couple weeks ago.

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051806 us v lay bench v1 6 A. No, you didn't. 7 Q. All right. Ma'am, do you remember why you wrote this note 8 to file? 9 A. No.10 Q. All right. It wasn't to advise you how to move the lines11 of credit with Regulation U, right?12 A. (No response).13 Q. Did you pass on this information to Mr. Lay?14 A. I can't -- I -- I have no idea whether I -- this is a note15 to file; so, I don't -- I wouldn't have passed this piece of16 paper to him. I might have passed something else.17 Q. And I'll show you examples of that.18 A. Okay.19 Q. Do you recall -- you don't remember ever getting an20 understanding or ever having an understanding about21 Regulation U requirements, right?22 A. I don't recall.23 Q. Right. You remember in the grand jury you don't remember24 ever having any --25 A. I don't remember what I said in the grand jury, but I can't0221 1 recall. 2 Q. Okay. Sitting here today, you don't recall anybody ever 3 explaining Reg U to you, right? 4 A. No. 5 Q. All right. 6 MR. HUESTON: Let's go to Exhibit 316. 7 BY MR. HUESTON: 8 Q. And this is a memo that you sent on to Mr. Lay. 9 A. Okay.10 Q. And I think you have seen this before in the grand jury.11 Do you recognize that document, ma'am?12 A. I recognize it as something that I did, yes.13 MR. HUESTON: All right. I'd move this into evidence14 at this time, your Honor.15 THE COURT: It's admitted.16 (Government's Exhibit Number 316 admitted.)17 MR. HUESTON: Let's post this, please.18 Pull this out.19 BY MR. HUESTON:20 Q. This is dated November 29th, '95, right?21 A. Uh-huh.22 Q. And "K," that's for Ken, right?23 A. Yes.24 Q. "Ken Lay."25 "I realize that we were advised by James" -- who0222 1 is that in reference to, "James"? 2 A. James Shelton. 3 Q. -- "that according to Reg U we cannot use borrowed funds to 4 pay off this purpose line." 5 And, then, there's information listed below. Is 6 that right? 7 A. Yes. 8 Q. And, then, at the bottom it says, "Please advise."Is that 9 right?10 A. Yes.11 Q. You were seeking direction from Mr. Lay. Is that right?12 A. Yes.13 Q. And, in fact, Mr. Lay often circled and underscored with14 sort of a heavy ink, correct?15 A. Uh-huh.16 Q. That's his circling of "Reg U" and that underlining there?

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051806 us v lay bench v117 A. I -- I don't know that, but it could be.18 Q. It appears to be, based on what you've seen and the way19 he's underlined and circled?20 A. Could be.21 Q. It's not you circling and underlining?22 A. No.23 Q. All right.24 A. I don't think so.25 Q. Okay. Let's go to Exhibit 117, ma'am. And I'll ask you if0223 1 this is another memo you sent on to him during this time 2 period, also, with respect to Regulation U. 3 A. Did you say 117? 4 THE COURT: Let me understand, again, ma'am. Who 5 drafted this document? 6 THE WITNESS: I did. 7 THE COURT: And you -- 8 THE WITNESS: The -- the paying off of Enron loan? 9 THE COURT: Yes.10 THE WITNESS: Yes, I typed that.11 THE COURT: And you sent it to Mr. Lay?12 THE WITNESS: Yes, I did.13 THE COURT: Thank you.14 BY MR. HUESTON:15 Q. Let's go to Exhibit 117, and I'll ask you if you can16 recognize that as another memo to Mr. Lay.17 A. Yes.18 MR. HUESTON: All right. I move that one into19 evidence at this time, your Honor.20 THE COURT: It's admitted.21 (Government's Exhibit Number 117 admitted.)22 MR. HUESTON: Okay. Post that, please.23 BY MR. HUESTON:24 Q. This is another memorandum that you typed, ma'am?25 A. Yes.0224 1 Q. And you sent it on to Mr. Lay? 2 A. Yes. 3 Q. And it says, "Further to paying off the Enron loan, Carol 4 St. Clair" -- who is she, by the way? 5 A. She was an in-house attorney. 6 Q. All right. 7 -- "advises that even though Enron is not a 8 lending institution, the issue here is that you are technically 9 bound by the Reg U law when it comes to paying it off with10 borrowed funds from lending institutions."11 Do you remember typing this up and passing on12 this information?13 A. I don't actually remember typing it up, but I -- I'm -- I14 can see this, that I would have done that.15 Q. You're passing on this information about Regulation U. Is16 that right?17 A. Yes.18 Q. Okay. Let's go to a related topic.19 A. Uh-huh.20 Q. In your book you should have an exhibit there, 152. I21 showed you in the grand jury a number of these forms U-1,22 ma'am. Do you remember that, Regulation U forms?23 A. Yes.24 Q. And looking at Exhibit 152, which is previously admitted --25 MR. HUESTON: Let's post that, please.0225 1 All right. We have a business record

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051806 us v lay bench v1 2 certification for this U-1, your Honor. We would move this in 3 at this time. 4 THE COURT: What's the number again? 5 MR. HUESTON: It's 152. 6 THE COURT: All right. It's admitted. 7 MR. SECREST: No objection except our continued issue 8 regarding the authenticity of the signature. 9 (Government's Exhibit Number 152 admitted.)10 BY MR. HUESTON:11 Q. And, ma'am, when I showed you this in the grand jury, I12 asked you about whether you assisted in preparing these forms13 from time to time. You did assist Mr. Lay in preparing these14 forms from time to time?15 A. From time to time.16 Q. Okay. And, in fact, I asked you about this form; and you17 said that you believe you typed in, "Personal expenses and18 investments"?19 A. Uh-huh.20 Q. Is that right? Do you remember that?21 A. I remember saying that.22 Q. Okay. And you remember saying that at the time -- from23 time to time you would put those entries in at Mr. Lay's24 request?25 A. I've said that in the -- I believe I said that in the grand0226 1 jury testimony. 2 Q. Uh-huh. 3 A. But I would like to say something, if I may, at this 4 time -- 5 Q. Sure. Yes. 6 A. -- to clarify it a bit. 7 Any time that I would have done this, I would 8 have used what was -- what is commonly referred to as a 9 "go-by."10 Have you heard of a "go-by" before?11 Q. Just go ahead and give me your best explanation.12 A. Okay.13 Q. I'll present what you said in the grand jury, but --14 A. Okay. But, at any rate, I would -- there would have been15 occasions if I did this, in fact, I would have just gone back16 to maybe the first one that was ever done and -- and just type17 it in, the same thing.18 Q. All right.19 A. I wouldn't have asked Mr. Lay each time.20 Q. But you -- you would have asked him -- you remember in the21 grand jury, in fact, that you actually did this at the22 direction of Mr. Lay; and you mentioned nothing about a go-by,23 correct?24 A. But in the grand jury --25 Q. Yes.0227 1 A. -- I didn't have the opportunity to really think these 2 items through. I had no idea it was going to be asked of me. 3 Since that time, I've had plenty of opportunity 4 to think it through -- 5 Q. And you -- 6 A. -- a lot of things through. 7 Q. Yes. And you've done so in meetings with Mr. Lay's 8 attorneys, correct? 9 A. Yes.10 Q. Yes. And with Mr. Murphy, who was hired by the Lay family,11 correct?12 A. That's correct.

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051806 us v lay bench v113 Q. Subsequent to the time when you were asked questions about14 this in the grand jury?15 A. Yes.16 MR. HUESTON: Let's post your grand jury testimony at17 page 42, lines 10 to 16.18 BY MR. HUESTON:19 Q. All right.20 "QUESTION: All right. But in general, you21 recollect from time to time filling these forms out at the22 direction of Mr. Lay?23 "Yes."24 A. Uh-huh.25 Q. "And putting in those reasons that he directed you to put0228 1 in, right? 2 "Yes, sir." 3 A. Okay. 4 MR. HUESTON: All right. Let's go to page 35, please, 5 lines 12 to 25. 6 BY MR. HUESTON: 7 Q. "And do you, in fact, remember typing in these things, 8 quote, "Will any part of the credit be used to purchase or 9 carry margin stock?10 "Answer: On the form type 'no.' And then, if11 the answer is "no," describe the specific purpose of the12 credit, 'personal investments.'"13 I asked, "Do you remember preparing these forms14 for their assistance," meaning the Lays' assistance.15 "Yes. I feel sure I prepared that.16 "Okay. So, you remember preparing these from17 time to time when these forms arrived?18 "Yes.19 "And it would be at their" -- meaning the Lays --20 "directions?21 "Yes.22 "And when I say 'their direction,' Mr. Lay or" --23 going to the top of the next page -- "or would Mrs. Lay also24 tell you how to fill these out?25 "ANSWER: I would say Mr. Lay.0229 1 "QUESTION: Okay. And that's who you remember 2 having conversations with, right? 3 "ANSWER: Yes." 4 And -- 5 A. (Nodding head). 6 Q. Yes, ma'am? 7 A. No. I'm agreeing with you. 8 Q. Oh, you're nodding. I just -- we have to make sure we get 9 it on the record.10 A. Okay.11 Q. "Yes"?12 A. Yes.13 Q. Okay.14 A. Yes, I see that.15 Q. And you didn't indicate in the grand jury at any time16 "Actually, I was working with a go-by" or "I'm just not sure,"17 correct?18 A. No, I didn't.19 Q. All right. Let's go to -- I'd like to have you turn to20 Exhibit 128, please.21 I also showed you something called "pledge22 agreements" in the grand jury.23 A. Just a moment. Let's get 128.

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051806 us v lay bench v124 Okay.25 MR. HUESTON: Your Honor, we have a business0230 1 certification for this. I'd like to move Exhibit 128 in, which 2 is a bank line pledge agreement. 3 THE COURT: It's admitted. 4 (Government's Exhibit Number 128 admitted.) 5 MR. HUESTON: All right. 6 BY MR. HUESTON: 7 Q. Do you have that in front of you, Ms. Ballard? 8 A. Yes, I do. 9 Q. All right. And do you recall me presenting you with a10 number of these pledge agreements, ma'am?11 A. Uh-huh.12 Q. And I asked you whether -- what you did with them when they13 came into the office.14 A. Uh-huh.15 Q. What did you do with them when they came into the office?16 A. I would -- if they hadn't been reviewed by an attorney, I17 would -- I would have them review -- no, I need to see the date18 on this; but Sherrie was already there.19 Q. Do you recall when you received those pledge agreements,20 you would --21 A. I would probably --22 Q. -- forward them --23 A. -- take them in to Mr. Lay or put a note on it. I might24 not necessarily see Mr. Lay. If he was busy, I might put a25 note on the front of it.0231 1 Q. You would either take them in to Mr. Lay for him to sign, 2 correct? 3 A. Correct. Or I would put a note on it and say, "Mr. Lay" -- 4 Q. So that he -- I'm sorry. Go ahead. 5 A. Or I would say -- you know, a note on something to -- 6 "Mr. Lay, this -- this needs your signature." 7 Q. And you -- where would you leave that document? On his 8 desk or -- 9 A. If I couldn't see him -- no, I don't think I would have10 left it on his desk. I would probably have given it to his11 assistant.12 Q. All right. And you would forward them for his review,13 correct?14 A. I'm not sure I would give them to him to review.15 MR. HUESTON: All right. Let's put up page 42,16 lines 17 to 25, please. Page 42, yes.17 BY MR. HUESTON:18 Q. I want to have you turn briefly to Exhibit 11. These are19 pledge agreements.20 MR. HUESTON: And I'll ask you to turn the lights on21 because it's hard to see there. It's a little better here.22 BY MR. HUESTON:23 Q. "Do you recall seeing these sorts of documents?24 "ANSWER: Yes.25 "And how would you see these? Would you help0232 1 complete these, as well? 2 "ANSWER: No. As I recall, the bank would have 3 completed those." 4 So, that's what you remember for these 5 agreements -- 6 A. Yes. 7 Q. -- right, ma'am? 8 A. Okay.

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051806 us v lay bench v1 9 Q. Is that right?10 A. Yes.11 MR. HUESTON: All right. And to the top of the next12 page.13 Q. (BY MR. HUESTON) "These are pledge agreements?14 "Yes.15 "But if you turn to the last four or five pages,16 they call for Mr. Lay's signatures?17 "ANSWER: Right.18 "But I think as far as this question --19 "Oh, yeah.20 "That's a printed form?21 "ANSWER: Yes. And they would send those to me22 traditionally, to my attention.23 "QUESTION" -- I just said, "Okay."24 And you said, "And then I would secure the25 signatures."0233 1 A. Uh-huh. 2 Q. That's what you said, right? 3 A. Uh-huh. 4 Q. "And how would you do that? Explain how you would get the 5 signatures. Would you walk it in to Mr. Lay? 6 "ANSWER: If he was available. 7 "QUESTION: Okay. 8 "ANSWER: If not, I would put the little memo, 9 sticky memo, on there and say, 'Ken, if this' -- 'Ken and10 Linda, if this is your understanding of what you want, please11 sign.'"12 A. Okay.13 Q. Right?14 A. Okay. Yes.15 Q. And you wrote that because you were trying to get a -- if16 he wasn't there, you wanted him to sign it if it was his17 understanding, right?18 A. I think -- yes, but his -- his understanding of probably19 the -- the amount of the loan and the term -- the term of the20 loan.21 Q. It's for him to review, right?22 A. Well --23 Q. In other words, you didn't send this on to somebody for an24 automated signature without him looking at it, right? You25 didn't bring that up in the grand jury, did you?0234 1 A. No, I didn't. 2 Q. Okay. Let's go to another set of exhibits, ma'am, which 3 I'm going to -- 4 MR. HUESTON: Your Honor, I'm going to ask that all 5 these be moved in. So, here's the list. Exhibit 3, 9 -- 6 BY MR. HUESTON: 7 Q. These should be wiring -- wiring instructions, ma'am. All 8 of which I showed you in the grand jury. 9 MR. HUESTON: But it's 3, 9, 10, 20.10 THE COURT: Twenty?11 MR. HUESTON: Yes, your Honor.12 THE COURT: Are there going to be objections to any of13 these?14 MR. SECREST: I've got to get them first, Judge. I do15 not think so.16 MR. HUESTON: Okay.17 THE COURT: 3, 9, and 10 are admitted.18 (Government's Exhibit Number 3 was admitted.)19 (Government's Exhibit Number 9 was admitted.)

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051806 us v lay bench v120 (Government's Exhibit Number 10 was admitted.)21 THE WITNESS: Twenty.22 MR. HUESTON: Okay.23 And Number 20.24 You have that, ma'am?25 THE WITNESS: Yes.0235 1 MR. HUESTON: All right. And, then, Number 26. 2 THE COURT: Those two are admitted. 3 (Government's Exhibit Number 20 was admitted.) 4 (Government's Exhibit Number 26 was admitted.) 5 MR. HUESTON: Thank you, your Honor. 6 THE WITNESS: Uh-huh. 7 MR. HUESTON: Number 27. 8 THE COURT: It's admitted. 9 (Government's Exhibit Number 27 admitted.)10 THE WITNESS: Okay.11 MR. HUESTON: Number 33.12 THE COURT: Admitted.13 (Government's Exhibit Number 33 admitted.)14 MR. HUESTON: Number 69.15 THE COURT: It's admitted.16 (Government's Exhibit Number 69 admitted.)17 THE WITNESS: Okay.18 MR. HUESTON: Number 70.19 THE COURT: Admitted.20 (Government's Exhibit Number 70 admitted.)21 THE WITNESS: Okay.22 MR. HUESTON: And Number 82.23 We're almost done.24 THE COURT: Admitted.25 (Government's Exhibit Number 82 admitted.)0236 1 MR. HUESTON: And 85. 2 THE COURT: Admitted. 3 (Government's Exhibit Number 85 admitted.) 4 THE WITNESS: Okay. 5 BY MR. HUESTON: 6 Q. All right. Ma'am, these are all wiring instructions that 7 you created to actually cause the monies to be moved from one 8 particular Lay line of credit to another account. Is that 9 right?10 A. One was not from me.11 Q. Okay. Which one was not from you?12 A. Let's see. Exhibit 27.13 Q. All right. With the exception of Number 27, all the others14 reflected --15 A. Okay. Yes.16 Q. -- that?17 "Yes"?18 A. Yes.19 Q. And on each occasion, each of these instructions reflected20 movements of funds that you were directed to do by Mr. Lay --21 A. Yes.22 Q. -- correct?23 All right. And just to show Exhibit 3 for an24 example -- and this is something -- it says, "From Sally25 Keepers." And this is to someone at NationsBank, right?0237 1 A. Yes. 2 Q. It says, "Please advance 2.3 million from KLL's secured 3 line over to the '0707 account today." 4 That was the checking account, right?

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051806 us v lay bench v1 5 A. Yes. 6 Q. And then, "Please wire $2 million from the '0707 account as 7 follows: Chase Manhattan Bank" -- there's -- we have blacked 8 out some of that for privacy reasons -- and then "for credit to 9 Goldman Sachs & Company," right?10 A. Okay.11 Q. And then further credit to another account. Is that right?12 A. Yes.13 Q. All right. And by the way, that '0707 account, the money14 would sort of skip through there as a way to kind of keep track15 of the monies, right? In other words, it's moving --16 A. I --17 Q. Let me just explain.18 It's moving all in the same fax cover sheet19 request, right?20 A. Right.21 Q. From the original line of credit --22 A. Uh-huh.23 Q. -- moving into that '0707 general checking account. That's24 what that was, right?25 A. Yes.0238 1 Q. And then moving right away, same action, to the destination 2 account, including Goldman Sachs. 3 A. Uh-huh. 4 Q. Is that right? 5 A. Yes. 6 Q. And, in fact, that was the pattern of the movements of 7 money that you did, was to move it -- kind of moving it 8 directly through that '0707 account on the way to the 9 destination account. Is that right?10 A. I think it probably was.11 MR. HUESTON: Okay. Pass the witness.12 THE COURT: Why don't we take a 15-minute break?13 (Recess taken from 2:18 p.m. to 2:32 p.m.)14 THE COURT: Be seated, please.15 Mr. Secrest, you may continue.16 MR. SECREST: Thank you, your Honor.17 CROSS-EXAMINATION18 BY MR. SECREST:19 Q. Ms. Ballard, how are you doing?20 A. Very good. Thank you.21 Q. You have been kind enough to meet with me and let me ask22 you questions. Fair statement?23 A. Yes.24 Q. And when we met and we sat down, was Mr. Murphy always25 present?0239 1 A. Yes, he was. 2 Q. Okay. Now, I want to ask you and his Honor -- this is a 3 bench trial so the dynamics are different, and his Honor well 4 knows the way that prosecutors can behave in grand juries, but 5 I want to -- it just seems like a moment ago -- I don't know 6 whether you testified or -- or counsel for the prosecution 7 testified, because he asked you a whole series of leading 8 questions. Okay? 9 A. Yes.10 Q. And he's entitled to do that.11 Is it fair to say that when you were in the grand12 jury he did that in spades in the grand jury?13 A. Yes.14 Q. Okay. So, let me back up. We're not going to go through15 your entire grand jury testimony, but I want to put a couple of

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051806 us v lay bench v116 things in focus for the Court if we could.17 For instance, you were asked in the grand jury18 whether or not when money went from a line to go to an19 investment or -- or money was used for an investment did20 Mr. Lay ultimately make that decision. Certainly, you didn't21 make it on your own, correct?22 A. Correct.23 Q. But do you have personal knowledge as to what took place24 when Ms. Gibson came on board?25 A. No.0240 1 Q. And let me ask you, just so his Honor can focus, when was 2 it that Ms. Gibson came into the picture? 3 A. I believe it was '98 or '99. 4 Q. Okay. And, in fact, when you were asked in the grand jury 5 about whether Ms. Gibson would have been relying upon 6 direction, if you will, from Mr. Lay as far as the movement of 7 funds, you said that you believed that she did. And you also 8 said -- and I quote -- "That's probably conjecture on my part." 9 So, bottom line is do you really have personal10 knowledge --11 A. No, I don't.12 Q. -- as to what input Mr. Lay would have with respect to13 Ms. Gibson and the time frame that she took this over?14 A. No, I really don't.15 Q. Okay.16 THE COURT: When did Ms. Gibson arrive?17 THE WITNESS: I believe it was either 1998 or '99.18 I'm not positive on that.19 MR. SECREST: And Ms. Gibson will testify, and we can20 get you the exact date.21 THE COURT: What will she tell me?22 MR. SECREST: She's going to, I think, tell you '97.23 THE WITNESS: Oh, good. Okay.24 MR. SECREST: I think November, '97.25 THE WITNESS: That shows what I know.0241 1 BY MR. SECREST: 2 Q. Okay. And, also -- again, his Honor knows the procedure; 3 but just to make sure we're on the same page because sometimes 4 there is a difference the way that an examination is held, when 5 you went before the grand jury, did Mr. Hueston or anybody with 6 the Task Force supply you documents ahead of time so you could 7 review them and try to refresh your recollection? 8 A. No. 9 Q. And is it fair to say that in many respects the kind of10 questions that you were asked dealt with your memory going back11 in some instances ten years or more?12 A. That's correct.13 Q. Okay. In fact, in front of the grand jury, Mr. Hueston14 imposed what he called "the rules of the book." Do you15 remember that?16 A. I don't.17 Q. Where he said, "Okay. Let's go now. I have a book in18 front of me, and here are the rules of the book. Okay. Just19 to keep it real simple, just turn to the tab that I direct you20 to; and then, when you finish with it, just close it back up."21 Is that the way it happened?22 A. I do remember that, yes.23 Q. So, basically he had some documents and basically he asked24 you to turn to a certain tab, asked you a question, and asked25 you to close the book?0242

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051806 us v lay bench v1 1 A. Correct. Correct. 2 Q. Okay. Since that time have you had an opportunity to see a 3 whole bunch of additional documents? 4 A. I've seen some, yes. 5 Q. Okay. 6 A. Yes. 7 Q. And have you had a chance to try to refresh your 8 recollection and put things in a perspective and everything? 9 A. I have had that opportunity.10 Q. Are you refuting any -- your grand jury testimony; is that11 why you're here today?12 A. I don't know -- I don't think I'm refuting it.13 Q. Okay. Okay. Fine. But, I mean, the bottom line, for14 instance, with respect to the U-1's and your testimony that you15 would use a go-by, I want to make sure his Honor completely16 understands --17 A. Yes.18 Q. -- what you mean by that. What is a "go-by"?19 A. Well, it would be -- it would be -- the exhibits we went20 through on the -- the little "dailies," as Mr. Hueston called21 them, that had -- for instance, Exhibit 4, that would -- that22 lined all of the -- the different lines, the availability, the23 amount that was used and then I would write -- do my24 handwriting on that, that -- the original was the go-by.25 Q. So, let me --0243 1 A. And then I'd make changes to the go-by. 2 Q. Is it kind of like a template? 3 A. Yes. Yes, similar to a template. 4 Q. So, a lot of the times you would try to go by or use, if 5 you will, kind of a format that had been used before? 6 A. Correct. That's right. 7 Q. For instance, if we can look at Government Exhibit 152, 8 where it says here, "Item Number 2," and it looks like it's 9 typed in --10 MR. SECREST: I'm sorry, Pam. It's going to be the11 typed information -- thank you.12 BY MR. SECREST:13 Q. -- where it says, "Personal expenses and investments, not14 investments in margin stock," do you have a memory of Mr. Lay15 looking over your shoulder and telling you to type that phrase16 in or did you take that phrase from previous documents of this17 nature?18 A. I would have -- I would have taken that from prior19 documents.20 Q. Okay. We'll come back to that in a little bit. But I want21 to make sure his Honor understands basically what it was you22 were doing for -- for Mr. Lay. Again, when did you start23 working -- you worked --24 A. 1985.25 Q. And that was what? InterNorth?0244 1 A. It was HNG InterNorth. 2 Q. Okay. And then did you start working for Mr. Lay at that 3 time? 4 A. Yes, I did. 5 Q. Okay. And, then, basically what was your initial job 6 function, Ms. Ballard? 7 A. I was an executive administrative assistant. I handled 8 their personal business. I say I handled it. I -- you know, I 9 was a coordinator --10 Q. Sure.11 A. -- handled insurance, all the personal side. Then I would

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051806 us v lay bench v112 help with the office phones and, if they needed me to do13 something -- Mr. Lay's assistant needed some help or a break,14 then I would help them out, too. But my major function was15 assisting the Lays with their personal business.16 Q. Was part of your job function to include helping Mrs. Lay17 out with some of her --18 A. Yes, it was. Yes.19 Q. Basically she was involved in real estate?20 A. Yes. And in the community a great deal, yes.21 Q. So, did you help her out, as well?22 A. Yes, I did.23 Q. I mean, when the dust settled -- we've heard a lot -- we're24 going to talk a little bit more about it in a second; but when25 the dust settled, we're talking about Reg U and U-1's, I mean,0245 1 how much time did you really spend on that? 2 A. Very minute. 3 Q. Okay. Now -- 4 A. Only when the loan documents came through, which were -- 5 what? Once a year. I think they were probably renewed 6 annually, I believe. 7 Q. Okay. And we'll talk about that a little bit more. 8 Mr. Hueston testified -- or actually asked you a question; but 9 this business about Mr. Lay being hands-on in his finances, I10 want to make sure that I get my hands on what "hands-on" means.11 A. Okay.12 Q. It would be fair to say, obviously, if there's going to be13 any kind of substantial investment, he's going to make a14 decision --15 A. That's correct.16 Q. -- about that investment?17 A. Yes.18 Q. But does he have his fingers in the checkbook?19 A. No, not at all.20 Q. In fact, do you know whether Mr. Lay ever opens up mail21 himself?22 A. I have never seen it.23 Q. Okay. Is that because he's too good?24 A. No.25 Q. Okay. Why is that?0246 1 A. He was -- he was in charge of Enron. He had other things 2 to do. That's why we were there -- 3 Q. Okay. 4 A. -- to assist, to take those responsibilities from him. 5 Q. Did there come a point in time that not only were you 6 involved in his finances but, in fact, it even got more 7 complicated? 8 A. Absolutely. 9 Q. And, basically, can you peg it to a time or event as to10 when and why all this even got more complicated than it was11 before?12 A. I would say -- I would estimate the time about the time13 that the partnerships were formed.14 Q. All right. Let's be clear here, and we don't need to spend15 a lot of time on it.16 A. Okay.17 Q. But what are we talking about, "partnerships"?18 A. There's an investment partnership, a family partnership,19 and family foundation.20 Q. Okay. That's enough of that. And, then, basically, when21 was that?22 A. You know, it could have been '96, '95. I'm not positive on

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051806 us v lay bench v123 that.24 Q. Okay. That's fine. But mid Nineties, give or take?25 A. Yes.0247 1 Q. Okay. Now, let's talk about dealing with bankers. 2 A. Oh. Okay. 3 Q. Obviously, you haven't been in this courtroom; but did you 4 see Mr. Shelton come in and -- 5 A. No, I didn't. 6 Q. Okay. But do you know who he is? 7 A. Yeah, I do. 8 Q. I want you to be able to tell the judge exactly, based upon 9 your best recollection, how much of your time was spent dealing10 with bankers.11 A. Very small amount.12 Q. Okay.13 THE COURT: Could you speak up, ma'am?14 THE WITNESS: Oh, I'm sorry. I'm sitting back. Yes.15 A. A very small amount.16 BY MR. SECREST:17 Q. Were you the one who received bank correspondence?18 A. Yes.19 Q. Okay. And when bank correspondence -- and I'm talking --20 again, so we're cutting to the chase, not wasting time, we're21 talking about bank correspondence with respect to Mr. Lay's22 personal financial affairs --23 A. Yes.24 Q. -- Mr. and Mrs. Lay.25 A. Yes.0248 1 Q. When the bank correspondence came in, what would you do 2 with it after you received it? 3 A. I would -- if it came to Mr. and Mrs. Lay and I opened 4 it -- 5 Q. Yes, ma'am. 6 A. -- if it needed signatures, I would put a note on there and 7 send it on to them. 8 Q. Very well. At any time did you ever receive, like, formal 9 documents or contracts, those kinds of things, that you would10 send to somebody else to look at --11 A. Yes.12 Q. -- before the Lays would look at it?13 A. Review, yes.14 Q. Tell his Honor about that. What would you do in that15 regard?16 A. Well, the procedure was that if a bank document, a loan17 document came in, I -- the normal procedure would be for me to18 send it to an in-house attorney to review so that by the time19 it came back and they said, you know, "Looks okay to me,"20 then -- then I would put a note on it or take it to him and21 say, "Ken, this has been reviewed; and it's okay to sign."22 Q. Okay. Now, I mean this no disrespect because I would be in23 the same situation as I think you're probably in. Did you feel24 capable and comfortable in reviewing the loan documents and25 trying to understand what that was all about?0249 1 A. No. No. I would -- I would say I would look at the amount 2 and make sure that, you know, if I had -- if I knew, had been 3 told or knew what to expect from a banker about the amount of a 4 loan or the amount of the renewal and the terms, the dates, I 5 would look at that; but that would be the extent of it. 6 Q. Okay. When you got the documents back from the attorneys 7 on those occasions where an attorney would look at it, then

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051806 us v lay bench v1 8 would there be any, like, stickies on there as to where to sign 9 or would they --10 A. Oftentimes --11 Q. -- already come that way?12 A. Well, sometimes they came that way from the bank.13 Q. Okay.14 A. Other times, if they didn't, then I would go through and15 put a sticky on there where he needed to sign --16 Q. Okay.17 A. -- or where Mrs. Lay needed to sign.18 Q. Okay. And, then, would those specific documents be made19 available for Mr. Lay to sign them whenever he could sign them?20 A. Yes.21 Q. Okay. Was it your understanding, based upon the protocol22 in the office, that when Mr. Lay finally was presented23 documents it was his understanding that others had looked at24 those documents and had made any corrections or additions or25 any suggestions with respect to their content?0250 1 A. Yes, that's correct. 2 Q. Now, how much time did you spend with Mr. Shelton? 3 A. What do you mean how much time? You mean how much time in 4 my day or -- 5 Q. Well, bad question. And thank you. I asked yet another 6 bad question in these proceedings. Let me be more specific. 7 Can you give us an idea approximately how many -- 8 let's say how many times a year would you actually be in a 9 meeting with Mr. Shelton.10 A. As far as being in a meeting with him, maybe once a year.11 Q. And can you -- let me follow up on that. Can you give his12 Honor an idea as to approximately how many times in a year13 would Mr. Shelton find himself in a meeting with Mr. Lay?14 A. I would -- my recollection would be maybe once a year.15 Q. Okay. And when those meetings took place, at any time did16 you participate in those meetings?17 A. I think I did on some occasions.18 Q. Does anything really stick out as to what was discussed19 between those two gentlemen?20 A. Not really.21 Q. Did you really take part in the conversation --22 A. Oh, I didn't take part in the conversation, no.23 Q. Okay. When those conversations took place, can you give24 his Honor an approximation of about how long those meetings25 would take?0251 1 A. Maybe 15 to 20 minutes. 2 Q. Okay. Were there a number of bankers that wanted to meet 3 with Mr. Lay? 4 A. Well, there were bankers that would call and -- and, yes, 5 and want to see him or want to speak with him on the phone. 6 Q. Were you somewhat of a gatekeeper as far as kind of -- 7 A. For a period of time I was, yes. 8 Q. During what period of time would you have been the 9 gatekeeper -- or a gatekeeper?10 A. Probably in the early to mid Nineties, up through the time11 when Sherrie came.12 Q. To your knowledge, was Mr. Lay at any time having any13 difficulty in getting banks to loan him money?14 A. Not to my knowledge, no, not at all.15 Q. Now, dumb question, got to ask it for the record. Was16 Mr. Lay a busy man in this time frame?17 A. Yes, he was.18 Q. Was he traveling a lot in this time frame?

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051806 us v lay bench v119 A. A great deal, yes.20 Q. How often would you actually be able to sit down with him21 and -- and go over issues or ask him questions concerning his22 personal financial affairs?23 A. Not often.24 Q. Okay. Can you help his Honor out with that? I mean, is25 that like, you know, once a month, once a year, once a week?0252 1 A. Mr. Lay would make -- if I said -- ever said, "Mr. Lay, I 2 really need to sit down with you for five minutes or ten 3 minutes," he would find the time. It might not be that day, 4 unless I said, "I need to see you," that day. But if I said, 5 you know, "I just need to get with you maybe this week whenever 6 you have time," he would make the time. 7 Q. Okay. 8 A. But I tried not to take his time unless it was something I 9 really needed to talk with him about, because he had other10 things to do.11 Q. Would it be fair to say that sometimes you would,12 literally, go several weeks, even a month or more before you'd13 finally have an opportunity --14 A. Yes.15 Q. -- to get a few minutes with him?16 A. When he was traveling, yes.17 Q. Okay. Now, I want to talk about how it was when -- and you18 kind of alluded to it -- how you would present documents to19 Mr. Lay for his signature. If he was available, would you be20 able to walk in and present documents for him to sign or would21 you give them to yet another individual for him to sign, would22 you leave them on his desk; how would that happen?23 A. More often than not, I would not be able to see him. He24 would have -- maybe be in meetings. And, so, occasionally I25 would have the opportunity to go over and, you know, say,0253 1 "Rosalee or Nancy, you know, does Ken have a couple minutes to 2 see me today? I have documents to sign." It would either be 3 yea or nay. 4 I would say the majority of the time I would just 5 simply put a sticky on it and give it -- hand it over to 6 Rosalee if she was sitting -- if she was there, or whomever, 7 and say that, you know, "Would you pass these on to Mr. Lay? 8 Give this to Mr. Lay. He needs to see this" or "He needs to 9 sign it."10 Q. Okay. Let me ask you this. Those occasions when you were11 able to be in his presence --12 A. Uh-huh.13 Q. -- when documents were to be signed --14 A. Yes.15 Q. -- were you physically there when he actually picked up the16 pen and wrote his name?17 A. Sometimes, yes.18 Q. Can you give his Honor the benefit of what normally took19 place? And I'm talking really about formalized, like,20 contracts, you know, banking documents --21 A. Yes.22 Q. -- those kind of things that have our interest here. What23 was your experience with respect to the kind of time that he24 would spend with a document before he signed it, if you have25 any experience with respect to that?0254 1 A. Okay. My experience would be that he would -- he would do 2 essentially what I did. He would look at the -- at the amount 3 to make sure that that was what his -- what it needed -- what

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051806 us v lay bench v1 4 it was supposed to be and the date. And then I would, you 5 know, pull over the sheet and say, "You need to sign here, Ken. 6 Sign here. Sign here." 7 And, you know, there were just reams of paper. 8 And, so, you know, in the interest of both of our times and 9 because it had been reviewed, he would simply sign; and we10 would turn over to the next sheet, and he would sign there.11 Q. Was it -- based upon your recollection going back to that12 time frame, did it appear that a lot of these -- especially13 these banking documents, appeared to be kind of the same thing14 over and over again?15 A. Yes.16 Q. All right. We've heard a little bit about this Reg U17 business, and I'm just going to ask you a few questions about18 it. But as we sit here today, do you recall much about Reg U?19 A. No.20 Q. Okay. Would it be fair to say that at some point in all21 this you would have had some kind of conversation, in all22 probability, with Mr. Shelton --23 A. Yes.24 Q. -- about Reg U?25 A. Yes.0255 1 Q. Okay. Did he seem to be knowledgeable about things that he 2 spoke to you about in the banking world? 3 A. Yes, he was. 4 Q. Okay. Did it resonate in any way with you? What -- did it 5 resonate what Mr. Shelton was telling you? 6 A. I think at the time it did. 7 Q. I'm sorry? 8 A. I think at the time it did, you know. 9 Q. Well, I mean, did you feel at the time that you had a10 working knowledge of Reg U or did you not?11 A. Probably for -- it didn't stay with me --12 Q. Okay.13 A. -- for any length of time.14 Q. Were you able to -- do you ever recall sitting down --15 we've seen correspondence, and I'm going to ask you some16 questions about the correspondence in a few moments. But do17 you really have a memory of sitting down with Mr. Lay with any18 kind of regularity or spending any kind of substantial time19 with him, talking about Reg U kind of issues?20 A. No.21 Q. Do you have a memory of that?22 A. No.23 Q. And, in fact, if we could look quickly at three exhibits24 that the Government asked you questions about, Government --25 let's see. I guess let's just go sequentially, make it0256 1 easier -- Government Exhibit 117 -- and this is again -- 2 appears to be a letter from you -- or a little note from you 3 dated -- 4 A. Uh-huh. 5 Q. -- November 3, '95 -- 6 A. Yes. 7 Q. -- to Ken. 8 And who is Carol St. Clair? 9 A. She was in-house attorney.10 Q. Okay.11 A. I -- she was eventually an in-house attorney, and I know I12 said earlier she was. She may have been at this time, but I13 think before she -- she was previously at Baker & Botts. So, I14 don't -- I can't say for certain at the time this memo was

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051806 us v lay bench v115 written that she was with Enron. She may have been with16 Baker & Botts at the time I talked with her. She may have been17 at Enron by that time. I'm not certain; but, yes.18 Q. Okay. So, says, "Further to paying off the Enron loan,19 Carol St. Clair advises that even though Enron is not a lending20 institution, the issue here is that you are technically bound21 by the Reg U law when it comes to paying it off with borrowed22 funds from lending institutions."23 You know, bottom line, did it appear to you at24 the time that whatever it was that Carol St. Clair was saying25 about Reg U, it was in the context of the Enron loan?0257 1 A. No. 2 Q. I mean, the first line, "Further to paying off the Enron 3 loan" -- 4 A. The Enron loan. 5 Q. -- what are we talking about there? 6 A. Well, it would appear from looking at this that we were 7 considering -- or Ken was considering paying off the Enron 8 loan. 9 Q. Well, I guess --10 A. Maybe with borrowed funds.11 Q. Okay. But, I mean -- I guess maybe I can ask the question12 this way. The exchanges that you had with Ms. St. Clair --13 A. Uh-huh.14 Q. -- did it have anything to do with purpose versus non15 purpose, that kind of thing?16 A. I don't recall that there was.17 Q. Okay. If you look at the Government Exhibit 117 --18 A. Well, that's what I'm -- okay.19 Q. Actually, we just looked at that. I mean Government20 Exhibit 317.21 Now, is this, again, a memo that you prepared?22 A. Yes. Yes.23 Q. And it says, "Note to file"?24 A. Uh-huh.25 Q. Did you actually give this to Mr. Lay?0258 1 A. No, I would not have. 2 Q. Do you recall? 3 A. This was to the file. 4 Q. Again, does it really deal with Reg U in the context of the 5 Enron Corp. line of credit? Is that what that's about, 6 Reg U -- 7 A. Yes. 8 Q. -- requirements for repaying -- 9 A. Yes.10 Q. -- Enron Corp.?11 A. Uh-huh. That's what it says.12 Q. Now, do you know the difference between a purpose and a non13 purpose loan?14 A. I don't now.15 Q. Do you think maybe back then you had some inkling of an16 idea?17 A. I think that probably initially I did. I asked about it,18 and I was told but --19 Q. If you asked about it, who would you have asked?20 A. I would have asked James Shelton.21 Q. Okay. Do you ever recall sitting down and talking with Ken22 about purpose versus non purpose?23 A. I don't recall that at all.24 Q. Okay. Was it your understanding that there was any25 restrictions on these lines of credit from the bank --

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051806 us v lay bench v10259 1 A. No. 2 Q. -- at the time? 3 You have -- you didn't think there was any 4 problem? 5 Okay. 6 A. I don't -- 7 Q. Let me ask you this. In fact, let's go to these 8 periodic -- what I call "periodic reports." You said they're 9 not really dailies. Let's look at Government Exhibit 255.10 MR. SECREST: And let's blow up the kind of middle11 part of that exhibit and make sure that we're on the same page.12 BY MR. SECREST:13 Q. This is kind of a schedule, if you will, of the existing14 lines of credit --15 A. Yes.16 Q. -- that the Lays had at that time?17 A. Yes.18 Q. Okay. And we're looking at the -- at the NationsBank19 lines. It looked like he had a -- a 20 and a half20 million-dollar non purpose line.21 A. Uh-huh.22 Q. Do you see that?23 A. Yes.24 Q. He had an unsecured line for 750,000; and then he had a25 partnership line --0260 1 A. Yes. 2 Q. -- for 1.250. 3 Where did you get the nomenclature or the 4 phraseology to put on this -- this -- what I call a "periodic 5 report," this "Non Purpose" and right above it, it says 6 "Purpose," $2 million purpose -- 7 A. Uh-huh. 8 Q. -- where did that come from, Ms. Ballard? 9 A. I'm not -- I don't have total recall. I would just say I10 likely would have possibly called James.11 Q. Okay.12 A. Unless it was in some correspondence that was on a cover --13 cover letter accompanying the loan document. Otherwise, I14 would have -- if it was in the cover letter, then I would have15 gotten it from there. If it wasn't, I would have called James.16 Q. Now, is it fair to say that Mr. Lay and, in fact, Linda Lay17 wanted some kind of a schedule so they would have kind of an18 idea of what their existing lines of credit availability was?19 A. Yes, that's right.20 Q. Okay. But did they actually prepare this format?21 A. No.22 Q. Okay. Now, it's clear -- and, in fact, I want to -- I want23 to talk about just a few of these exhibits that Mr. Hueston put24 up. I won't go through them all. But if we look, for25 example --0261 1 MR. SECREST: Let's go to 256, Government 256, Pam. 2 I'm sorry. And, again, we can go to the middle section of that 3 exhibit, please. 4 BY MR. SECREST: 5 Q. And it shows a 37 and a half million-dollar loan capacity. 6 Is that what that means? 7 A. Yes. 8 Q. Okay. And, then, there's a breakdown; and Mr. Hueston went 9 through some of this with you, I think, on a previous one. But10 it shows that there's several real estate investments, right?

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051806 us v lay bench v111 A. That's correct.12 Q. Also shows $13 million worth of investments?13 A. Yes.14 Q. Okay. And if we can go to the bottom of the page --15 A. Uh-huh.16 Q. In fact, he did show you this one. It shows that on17 November the 12th of '98 they borrowed a million dollars from18 the NationsBank line of credit to open up a new Schwab account.19 A. Uh-huh.20 Q. Do you see that?21 A. Yes.22 MR. SECREST: Go back -- just for a second, go back to23 the NationsBank, middle of the page.24 A. Uh-huh.25 BY MR. SECREST:0262 1 Q. That would have been from this non purpose 37 and a half 2 million-dollar line, is it not? 3 A. Yes. 4 MR. SECREST: And if we -- let's go to Government 5 Exhibit 255 for just a second, 255. 6 BY MR. SECREST: 7 Q. And, again, it looks -- 8 MR. SECREST: Like, if we can go to the bottom there, 9 Pam.10 Thank you very much.11 BY MR. SECREST:12 Q. -- that you borrowed funds from the NationsBank non purpose13 line, you identified it --14 A. Yes.15 Q. -- for the purchase -- for some expenses as well as the16 purchase of 5,000 shares of Eli Lilly stock?17 A. Yes.18 Q. Clearly that's what that shows.19 A. Uh-huh.20 Q. And, then, let's go to Government 257 just for a second.21 We won't go through all of these.22 Same kind of thing. It looks like in December of23 '98 that you borrowed $800,000 from the Nations non purpose24 line for expenses and to buy KM stocks, which it looks like25 that constituted some 336,000 of the 800,000.0263 1 A. Uh-huh. 2 Q. So, clearly, based upon the records that you were -- you 3 were making at the time, you're borrowing money from a non 4 purpose line of credit and it's being used to buy stock. Okay? 5 A. Yes. 6 Q. At the time did you think there was anything wrong with 7 that? 8 A. No. 9 Q. Okay. Even though you had a conversation with James10 Shelton before about Reg U and the Enron line of credit, did11 you at the time believe that using a non purpose line of credit12 for investments, including the purchasing of stock, was in13 violation of some bank rule or in violation of some federal14 regulation?15 A. No, I didn't.16 Q. Did you at any time have any conversation with Mr. Lay17 where you told him that, "Mr. Lay, we can't do this"?18 A. No.19 Q. At any time did he indicate to you that, in fact, he knew20 that you -- when I say "you," actually I mean him. He takes21 responsibility, not you.

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051806 us v lay bench v122 But at any time did he indicate to you that he23 believed that using a non purpose line of credit to purchase24 stock was illegal?25 A. No, absolutely not.0264 1 Q. Now, do you recall at any time a banker ever telling you 2 that the use of a non purpose line of credit to purchase stock 3 was illegal -- 4 A. No. 5 Q. -- in any way, or violated any statute? 6 A. No. 7 Q. Let's go to another topic, and I'm going to come back to 8 these in a moment. 9 Now, let's talk about a signature machine. Did10 Mr. Lay have access to a signature machine?11 A. Yes.12 Q. Okay. Tell his Honor about that.13 A. Okay. It was a machine that we kept in a small conference14 room. I had a key. We kept the key separately, and there were15 plates that had their signatures. Mr. Lay had -- have you16 ever -- I shouldn't ask you that.17 Q. You can't ask the judge a question. He only gets to ask18 you questions.19 THE COURT: I don't have a machine like that.20 THE WITNESS: Okay. Well, it's not uncommon when --21 THE COURT: This is the federal government. We have a22 very limited budget.23 MR. SECREST: I understand.24 A. -- people have hundreds of letters that they're sending out25 or whatever. And, so, at any rate, there were plates made of0265 1 Mr. Lay's signature and Mrs. Lay's signature and -- 2 THE COURT: Why don't you push that pitcher out of the 3 way so I can see. 4 THE WITNESS: Oh, okay. 5 THE COURT: Thank you. 6 A. Not just Mr. Lay. We had several other officers, senior 7 officers, that used plates, too. So, that was what the 8 signature machine was for. And there were only those few of us 9 in Mr. Lay's office that used that signature machine to do his10 signature or Mrs. Lay's when they weren't available and told us11 to use it.12 BY MR. SECREST:13 Q. Okay. We'll get to that in a second. Let me ask you this.14 Did Mr. Lay have more than one signature?15 A. Yes.16 Q. Okay. Tell his Honor about that.17 A. He had one that said -- was written Kenneth L. Lay; he had18 one that was Ken Lay; and then there was a third one that said19 Ken. So, he had three plates.20 MR. SECREST: Okay. Pam, can we put our demo up?21 BY MR. SECREST:22 Q. All right. Is that the infamous signature machine?23 A. Yeah. Ours was a considerably older version of that, but24 this -- yes.25 Q. Okay. And you said something about a plate, there was some0266 1 kind of a -- 2 A. The plate that fit -- you lifted up the back of it there at 3 the top. That would lift up, and you would put a plate in 4 there and close it down; and then you would put the key in, 5 turn it on; and it would write the signature of the plate that 6 you had put in.

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051806 us v lay bench v1 7 Q. Why would you-all use a signature machine? 8 A. Well, there were -- Mr. Lay, as the chairman, had -- there 9 were a lot of letters that went out. He was on a lot of10 committees and a lot of letters that went out. And once he11 approved the letter, if it was a letter --12 Q. Right.13 A. -- and he approved it, then he would say, "It's okay to use14 my signature" or whatever; and people would use the signature15 machine. When he wasn't available, he was out of town,16 traveling, and he felt that something had been reviewed and he17 couldn't sign it, he would say, "Use the signature machine."18 Q. Was this machine kept kind of under wraps --19 A. Yes.20 Q. -- so other people couldn't gain access to it?21 A. Yes. It was in a room behind a door, and we kept the key22 separate from the machine.23 Q. Okay. Are you trying to suggest to his Honor that at no24 time Mr. Lay ever signed any document, that everything was25 signed by machine?0267 1 A. No, I'm not. 2 Q. Okay. Let me ask you this. Would there be occasions -- 3 and you just mentioned that he may be out of town. But would 4 there be occasions when he was out of town that there may be 5 legal type documents, including bank type documents, that 6 needed to be signed and he wasn't available at the time to sign 7 them? 8 A. Yes. 9 Q. Okay. Now, would you, in fact, seek permission from him or10 through Rosie or someone to utilize the machine in that regard?11 A. Absolutely.12 Q. What kind of input would Mr. Lay have as to -- let me13 rephrase that.14 What kind of effort would be made to educate15 Mr. Lay as to the nature of the document that he was16 authorizing the signature machine to be used on?17 A. You're speaking of loan documents, I presume?18 Q. Well, cut to the chase. Let's talk about loan documents.19 A. Okay. Once they were -- once I received them, if they20 had -- if I knew that they had been reviewed by an attorney and21 Ken knew they were in the process of being worked up and he22 knew that the information had been reviewed, if he wasn't23 available, he was out of town, traveling, then -- and he -- I24 would let him know that they'd been reviewed -- or Rosalee25 might -- or I might put it on his messages, "The loan documents0268 1 have been approved, have been reviewed." 2 Q. Okay. 3 A. "We need to get this -- maybe we need to get this renewed 4 by a certain date." On those occasions, then, he would either 5 tell me or he would tell likely Rosalee, you know, "It's okay 6 to use the signature machine" -- 7 Q. Okay. 8 A. -- "on those documents." 9 Q. Now, did you testify about the signature machine in the10 grand jury?11 A. No.12 Q. Were you asked about anything --13 A. No.14 Q. -- to do with the signature machine?15 Let's look at Government -- Defense Exhibit 1055.16 A. I'm sorry?17 Q. Well, actually, it's not in evidence.

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051806 us v lay bench v118 A. Oh, okay.19 Q. Let me show you Defense Exhibit 1055. Are you familiar20 with that document?21 A. Yes.22 Q. And for the record, what is it, just if you could identify23 it, Ms. Ballard?24 A. It's a letter from Compass Bank to me, enclosing items25 which required Mr. Lay's signature.0269 1 Q. Does it involve a bank loan? 2 A. Yes, it does. 3 Q. Very well. 4 MR. SECREST: Your Honor, I would offer Exhibit 1055 5 into evidence. 6 THE COURT: 1055? 7 MR. SECREST: Yes, sir, 1055. 8 THE COURT: Letter from Boone to Keepers? 9 THE WITNESS: Yes.10 MR. SECREST: Yes, your Honor.11 THE COURT: All right.12 MR. SECREST: Compass Bank.13 THE COURT: It's admitted.14 (Defense Exhibit Number 1055 was admitted.)15 MR. SECREST: Thank you.16 BY MR. SECREST:17 Q. All right. Let's go to kind of the middle of the page18 first, please.19 A. Okay.20 Q. And, again, that's addressed to you from Ms. Boone,21 "Enclosed are the following forms which require Mr. Lay's22 execution." In this particular transaction it's a commercial23 security agreement for Eli Lilly and Company stock, a24 disclaimer of oral agreements, stock power; they talk about25 some collateral receipts.0270 1 Now, we go to the top of that page, if you will. 2 Is this in your handwriting? 3 A. Yes, it is. 4 Q. And, Ms. Ballard, read that out loud for us, please. 5 A. This would have been to Mrs. Lay, Linda. "To add 5,000 6 shares of Lilly stock that KLL requested, please initial and 7 sign and return so I can use signature machine for his 8 signature. Thanks." 9 Q. Okay. Do you have independent recollection of where10 Mr. Lay was and why he was not available in order to execute11 these --12 A. I really don't.13 Q. -- documents?14 Okay. Now, have I asked you, before you came15 into court today, to look at some documents to see whether or16 not you can offer an opinion as to whether the signatures on17 those documents would be the signature of Mr. Lay as opposed to18 the signature of the machine?19 A. Yes, you have.20 Q. Let me show you initially Defense Exhibit 128. Now, this21 is the pledge agreement, I think, in fact, Mr. Hueston asked22 you about. If we could go to the back page, I think it's 1271823 on the Bates.24 A. Okay.25 Q. Look at the very last page of that document, Government0271 1 Exhibit 128. 2 A. Uh-huh.

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051806 us v lay bench v1 3 Q. It's Government Exhibit 128. 4 MR. SECREST: Do you have that, Pam? 5 Thank you. 6 I'm sorry. 7 MS. RADFORD: I'm sorry. Which page? 8 MR. SECREST: Kind of maybe blow up the signature 9 part.10 A. Oh, I'm sorry. What page is that?11 BY MR. SECREST:12 Q. That's the very --13 A. Is it the very last page?14 Q. Yes, ma'am. And I'm using a term you may not be familiar15 with, where they call it a Bates number --16 A. Okay.17 Q. -- which is this number here.18 A. Okay.19 Q. Yes, ma'am.20 So, with respect to Mr. Lay's signature, do you21 have an opinion as to whether that's truly his signature or the22 signature of the machine? Can you tell one way or the other?23 A. I'm not real certain on that if you --24 Q. That's fair enough. That one you're not certain of.25 A. Okay.0272 1 Q. Let's go to Defense 186. 2 A. Okay. 3 Q. And let me maybe expedite this. 4 MR. SECREST: I'm sorry, your Honor. I'm trying to -- 5 Teena, do you see 186? 6 MS. CALOTIS: I have it right here. 7 MR. SECREST: Thank you. Let's do it that way so I 8 don't waste his Honor's time. 9 Thank you very much.10 BY MR. SECREST:11 Q. Again, if you go to the last page of that document.12 A. Is this the U-1?13 Q. No, ma'am. It's --14 A. Oh, okay.15 Q. In fact, let me just show you to save time. I think you've16 got it, 186.17 A. Right here?18 Q. Well --19 A. I have two pages on 186.20 Q. Actually, that's Government's 186. Let me go to21 Defendant's 186 just to save time.22 A. Okay.23 Q. Look at the last page of Government 186.24 MR. SECREST: I'm sorry, your Honor.25 A. Okay.0273 1 BY MR. SECREST: 2 Q. Defendant's 186, Pledge Agreement, NationsBank, dated 3 February 3rd, 1999. 4 A. Okay. 5 MR. SECREST: If we could blow up the signature. 6 BY MR. SECREST: 7 Q. Do you have an opinion as to whether or not that would be 8 Mr. Lay's authentic signature -- 9 A. It's not.10 Q. -- or whether that's the machine?11 A. No, it is absolutely not his signature.12 Q. Why do you say that? Please let his Honor know why you13 have that opinion.

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051806 us v lay bench v114 A. Because on any document he always wrote "Kenneth L. Lay."15 He only used "Ken Lay" for more personal letters, things like16 that. So, this was -- and it wouldn't have been -- I didn't17 use this. I would have used the other plate that said18 "Kenneth L. Lay" if I had used the signature machine on this,19 but it's clearly the signature machine.20 Someone else in the office -- I was out maybe on21 vacation or whatever, and someone -- another assistant in the22 office picked that plate out and used it. That's not anything23 that Mr. Lay would have signed like that.24 Q. Okay. Let's go briefly to Defense Exhibit 180 -- what25 number did you have here?0274 1 A. One hundred eighty-six. 2 Q. Yes. 3 THE COURT: Are you offering that? 4 MR. SECREST: I am, your Honor. 5 THE COURT: All right. It's admitted. 6 (Defendant's Exhibit Number 186 admitted.) 7 MR. SECREST: Let me go to Defense Exhibit 187. I'd 8 offer that. That's a pledge agreement dated February the 3rd 9 for NationsBank, your Honor.10 THE COURT: All right. It's admitted.11 (Defendant's Exhibit Number 187 admitted.)12 MR. SECREST: Thank you.13 BY MR. SECREST:14 Q. And, again, Ms. Keepers [sic], if you go to the last page.15 A. One eighty-seven?16 Q. Yeah, but it's Defense 187.17 A. I don't have that.18 Q. You've got the wrong book. That's okay. That's okay.19 You can go right here to my copy.20 A. Okay.21 Q. Assuming that you're in a position to offer an opinion,22 does that, in your view, look like Mr. Lay's, quote, unquote,23 authentic signature or does that look like the machine?24 A. I would say my best opinion on this would be that it was25 the signature machine.0275 1 Q. Why do you say that? 2 A. Because, if you'll notice, the first name, "Kenneth," is 3 darker than "L. Lay." And there were times when we had 4 problems with the -- maybe the pen wasn't in correctly; and 5 that's what -- that was one of the things that it could do, 6 would -- would not write the entire signature the same 7 intensity. 8 Q. Okay. That was your experience with respect to the use of 9 the machine?10 A. That's correct.11 MR. SECREST: Let's go to Defense Exhibit 189, your12 Honor. That's the pledge agreement, February 3rd, 1999,13 NationsBank. I'd offer it into evidence.14 THE COURT: It's admitted.15 (Defendant's Exhibit Number 189 admitted.)16 BY MR. SECREST:17 Q. Let me show you again, Ms. Ballard. It's the last page.18 MR. SECREST: Again, we'll blow up the last page, Pam.19 BY MR. SECREST:20 Q. And, again, take a chance, if you would, Ms. Ballard, look21 at that and let me know --22 A. Okay.23 Q. -- what your thoughts are.24 A. My thoughts on that would be the identical thing.

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051806 us v lay bench v125 Q. And the "identical thing" being?0276 1 A. Being that it was the signature machine. 2 Q. Okay. All right. Now, I want to talk to you about some 3 wiring instructions Mr. Hueston went over with you. And I'm 4 not going to cover them all, but I do want to talk about some 5 of them. 6 Let's go to Defense Exhibit 781. 7 MR. SECREST: And I'd offer that into evidence, your 8 Honor. It's a wiring instruction -- 9 THE COURT: All right. It's admitted.10 MR. SECREST: -- from Ms. Keepers.11 (Defense Exhibit Number 781 was admitted.)12 BY MR. SECREST:13 Q. Now, for the record, that's January 13th, 1999, is it not?14 A. Yes.15 Q. Now, I want to make sure that we're on the same page,16 especially his Honor.17 How was it that you would go about to instruct18 the bank as to what to do with funds that had been drawn down19 from a line of credit and where to send those funds if20 anywhere?21 A. After Sherrie came aboard, it's my recollection that she22 would have called me or sent an e-mail, probably called, one of23 the two, and said, "Sally, this is what we need to do; and24 would you send the instructions to Tiffany?"25 Q. And for the record, so his Honor is clear, who is Tiffany?0277 1 A. Tiffany Pace was at that time James Shelton's assistant. 2 Q. Okay. So, and let me kind of cut to the chase. It says, 3 "Please advance 2.3 million from Kenneth L. Lay's secured line 4 over to the 266-253-0707 account today." 5 So we're all clear, what account was the 6 266-253-0707 account? 7 A. That was our main checking account. 8 Q. "Our" main checking? 9 A. I say "our." It wasn't mine.10 Q. I understand. But just so we're clear --11 A. Mr. and Mrs. Lay's.12 Q. Mr. Mrs. Lay's?13 A. Yes.14 Q. So, they're telling James' assistant --15 A. Yes.16 Q. -- to draw down $2.3 million on January 13th, '99, and on17 that day deposit it into that account?18 A. Yes.19 Q. Okay. And, then -- let's go back and pick up just for a20 second. And just so we're clear here, do you know when21 Mr. Shelton would have left NationsBank?22 A. I don't.23 Q. Okay. So, do you know even at that time if Mr. Shelton was24 there?25 A. I think he was gone because I believe he left shortly after0278 1 Sherrie came aboard. 2 Q. Okay. Okay. Let's -- let's go to the very last paragraph, 3 if we could; and then we'll move on from this exhibit. So, 4 you're telling Ms. Pace, who works for -- 5 A. And she may not have worked for James if he wasn't there. 6 She worked for whomever took James' place, whomever was at that 7 spot. 8 Q. She was working for -- but she was working for one of 9 Mr. Lay's loan officers?

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051806 us v lay bench v110 A. Yes. Yes.11 Q. And instructing the bank to draw down $2.3 million and, on12 the same date, to send money to the Goldman Sachs and Company?13 In fact, if you go back a little bit, I think it14 gives us the amount.15 A. Yes, 2 million.16 Q. Two million dollars. Okay. Right?17 A. Yes.18 Q. Okay. So, bottom line, "We want to borrow 2.3 million and19 wire 2 million of those funds to Chase Manhatten Bank for the20 credit of Goldman Sachs"?21 A. Yes.22 Q. Okay. Let's go quickly to Defense 805.23 MR. SECREST: Offer this into evidence, your Honor.24 It's the same kind of thing, a fax.25 THE COURT: All right. It's admitted.0279 1 (Defendant's Exhibit Number 805 admitted.) 2 BY MR. SECREST: 3 Q. Again, that's from you, is it not, Ms. Ballard? 4 A. Yes. 5 Q. You have since been -- got married, and that's why your 6 name has changed? 7 A. That's right. 8 Q. Okay. Who is Sherry Womack? 9 A. Sherry Womack may be -- was this --10 Q. This is June, 1999.11 A. Was this after or before? She was one of the assistants12 over there, too. I don't know whether she -- she took13 Tiffany's place or Tiffany took her place. I'm not certain.14 But she would have been an assistant to the loan officer.15 Q. So, here it is that on behalf of Mr. Lay you're sending a16 fax --17 A. Uh-huh.18 Q. -- to Bank of America, attention of Ms. Womack, who works19 for one of the loan officers, directing them to advance20 $190,000 out of a secured line, transfer it to the Lays'21 account --22 A. Yes.23 Q. -- and, then, from that wire the same amount of money to24 PaineWebber?25 A. Yes.0280 1 Q. Okay. Let me show you Defense Exhibit 827. 2 MR. SECREST: And, Judge, I'm only going to do a 3 couple of these. I know I don't want to overstay my welcome 4 because you're getting the picture. 5 THE COURT: All right. It's admitted. 6 (Defendant's Exhibit Number 827 admitted.) 7 MR. SECREST: Thank you. 8 BY MR. SECREST: 9 Q. Same kind of thing here. If we look at 827, asking for10 $100,000 on October 27, '99, to be drawn down from the secured11 line right into the Lays' account in the same lending12 institution, then wired on to Sanders Morris and Mundy. That's13 a brokerage firm?14 A. Yes.15 Q. Is there any, any doubt in your mind that the lending16 institution was on notice that money from the secured lines of17 credit were being sent to brokerage firms?18 MR. HUESTON: Objection. There's not a proper19 foundation for this witness for that.20 THE COURT: Sustained.

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051806 us v lay bench v121 MR. SECREST: All right. I tried.22 BY MR. SECREST:23 Q. Let me ask you this. At any time did you-all ever ask the24 bank to extend funds from a -- on a line -- on the lines of25 credit and send it to some other bank?0281 1 A. Uh-huh. 2 Q. Kind of -- kind of listen to what I'm saying here. Do you 3 ever recall money being borrowed on a line of credit -- let me 4 phrase it this way. 5 Is it your memory that when money was borrowed on 6 a line of credit that it went from the line straight into an 7 account in the same lending institution and then from there it 8 was wired to a brokerage firm? 9 A. Yes.10 Q. Okay. I mean, at any time do you recall money coming from11 a line, going to some other bank, then going to some other12 bank, and then going to a brokerage firm --13 A. No.14 Q. -- at any time like that?15 A. I don't recall that at all.16 Q. Okay. I mean, in your view -- well, I won't ask you that17 either.18 Okay. At any time did Mr. Lay ever ask you to19 accomplish a transfer of funds in such a way that the bank20 wouldn't know what's going on?21 A. Oh, no.22 Q. Okay.23 A. No.24 Q. At any time did he ever ask you to do anything you felt25 uncomfortable about?0282 1 A. Absolutely not. 2 Q. Did you actually have -- on top of these faxes, did you 3 actually have telephone conversations with some of these 4 individuals at the lending institutions and tell them on the 5 telephone where you wanted money to be sent? 6 A. Oh, I think I did, because there's some letters that say, 7 "To confirm our conversation" -- 8 Q. Okay. 9 A. -- "To confirm our phone conversation."10 Q. That's kind of where I was going to. Is it your11 recollection that at least on some occasions you would have a12 telephone conversation where you would speak to the assistant13 and let them know that Mr. Lay and Mrs. Lay wanted to borrow a14 million dollars, whatever it was, on a secured line of credit,15 deposit it into their account, they were going to want you to16 wire that sometimes more than one place, send half -- 500,00017 to Goldman Sachs and 500,000 to Charles Schwab, that kind of18 thing?19 A. Yes.20 Q. And, then, later on you would follow that up with a fax?21 A. Yes.22 Q. Okay. At any time did you ever get any information back23 from any of those individuals or any of the bankers saying,24 "What are you-all doing? This can't be accomplished. Do not25 do this"? Or was any effort made to make further inquiry as to0283 1 what you were doing? 2 A. No. 3 Q. When is the first time that you became aware that there may 4 have been a problem with what you-all were doing with these 5 secured lines of credit?

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051806 us v lay bench v1 6 A. I guess when Mr. Lay was indicted. 7 Q. So, prior to that time had anybody ever suggested, 8 intimated in any way, told you, or asked you questions about 9 any of -- suggested to you that you-all had done anything10 wrong?11 A. No.12 Q. Would you have knowingly participated in any kind of13 violation if you thought that it was in any way against the14 law?15 A. No, I wouldn't have.16 Q. How long you been working for Mr. Lay?17 A. Almost 22 years.18 Q. Okay. Is there anything that you've seen in the way he19 conducts his affairs to suggest to you that he would in any way20 have wanted you to violate the law?21 A. No. Mr. Lay never asked that or he would never have done22 that, to begin with.23 MR. SECREST: Pass the witness.24 THE COURT: Briefly, Mr. Hueston.25 MR. HUESTON: Okay. A few items.0284 1 REDIRECT EXAMINATION 2 BY MR. HUESTON: 3 Q. Now, Ms. Ballard -- 4 MR. HUESTON: And, your Honor, also to save time, I'd 5 like to move in as Government Exhibit 1014 the grand jury 6 transcript. 7 MR. SECREST: The entirety of it? 8 MR. HUESTON: Yes. 9 MR. SECREST: No objection.10 BY MR. HUESTON:11 Q. And, in fact, ma'am, in the beginning you were asked and12 you were --13 A. No. There were two grand jury investigations.14 Q. I'm talking about the appearance that you made --15 A. The second one, the one that you --16 Q. Yes. July of 2004.17 A. Yes. Okay.18 Q. You were there with an attorney that day. It was19 Mr. Murphy --20 THE COURT: I don't have that on my exhibit list.21 Just let me have another page, and I'll introduce it.22 A. But I didn't have an attorney with -- in the room with me.23 BY MR. HUESTON:24 Q. Of course not.25 A. Okay.0285 1 THE COURT: He was out in the hall. We know how it 2 works. 3 THE WITNESS: Okay. 4 THE COURT: Go ahead. 5 BY MR. HUESTON: 6 Q. All right. And you were told in the grand jury that if you 7 wanted to take a break and confer with him you were free to do 8 so, correct? 9 A. Correct.10 Q. And you didn't ask for any breaks. Is that correct?11 A. That's correct.12 Q. All right. Just a couple of items.13 First of all, in the grand jury, you were asked14 about your procedure in getting Mr. Lay's signature, right?15 A. Uh-huh.16 Q. And you said, "I would either walk in and get him to sign

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051806 us v lay bench v117 it," right, if he was there?18 A. Yes.19 Q. Or you would write a memo which would include the language,20 "If this is the understanding" -- "If this is your21 understanding of what you want"; and you would wait for his22 signature, correct?23 A. Yes.24 Q. You never once mentioned, ma'am, that there was some other25 way, where if some other folks reviewed it, it would somehow0286 1 make its way to a signature machine and then come back that 2 way; you didn't mention any of that in the grand jury, correct? 3 A. I didn't. 4 Q. And, in fact, ma'am, it's true that you never went to the 5 signature machine to get a signature without Mr. Lay giving you 6 authorization to do so, right? 7 A. Right. But he would have done that over the phone if he 8 did that. 9 Q. Right. But he would tell you. You would inform him --10 either provide him with the documents or he would be making a11 decision to say, "Okay. It's time now for you to apply my12 signature through the signature machine," right?13 A. Right.14 Q. All right. And you don't remember -- have any specific15 recollection taking any Reg U forms and feeding them into the16 signature machine, right?17 A. I have no recollection of -- any of it.18 Q. You've had little recollection of Reg U. I understand19 that. Let me just put --20 A. It's been many, many years.21 Q. Okay.22 MR. HUESTON: If I could have the Defense, please,23 ma'am, if you would, just put back up Defense Exhibit 1055.24 BY MR. HUESTON:25 Q. And this is the Compass Bank memo that you were shown; and0287 1 there was handwriting at the top. 2 MR. HUESTON: If you could blow that out, please. 3 BY MR. HUESTON: 4 Q. And this is something to L. This is to Linda Lay because 5 she needed to sign these documents, right? 6 A. Yes. 7 Q. Correct, ma'am? 8 A. Yes. 9 Q. And it says, "Please initial and sign and return so I can10 use the signature machine for his signature." Now, you don't11 recollect sitting here whether or not you had authorization by12 that time for Mr. Lay to get you to use --13 A. I don't recollect that. I don't recall.14 Q. But one thing you -- you wouldn't have done is simply taken15 the document and just fed it into the signature machine without16 him telling you, "It's okay to put my signature on it," right?17 A. You know, on that, if we're talking about the stock powers,18 he wouldn't have necessarily told me to use the signature19 machine. I would just have used it.20 Q. But with respect to his bank documentation or Reg U, you21 don't recall a time just walking in and just getting his22 signature without checking with him first, correct?23 A. You mean using the signature machine?24 Q. Right. Without make --25 A. I don't recall.0288 1 Q. You don't recall ever doing that?

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051806 us v lay bench v1 2 A. I don't recall doing that without his authorization. 3 Q. In fact, throughout your grand jury testimony, you 4 essentially testified you didn't do anything with respect to 5 Mr. Lay without checking with him first, right? 6 A. That's right. 7 Q. All right. 8 A. Am I allowed to say anything? You don't want me to say 9 anything?10 THE COURT: Go ahead.11 BY MR. HUESTON:12 Q. Mr. Secrest can --13 A. Okay. In the grand jury investigation -- or whatever you14 want to call it -- I -- things were coming off the top of my15 head from many years ago, and I really didn't have -- didn't16 take the time or didn't feel like I had the time to really17 think things through.18 Q. You didn't ask for any additional time during the grand19 jury session, correct?20 A. Right.21 Q. Okay.22 A. I may have not been aware that I could have asked for23 additional time but -- anyway.24 Q. In fact, you were talking earlier about Regulation U; and25 you mentioned that this only came up when the loan documents0289 1 came through. Is that what you were stating earlier when you 2 were answering questions for Mr. Secrest? 3 A. Other than the little notes if -- if something jogged my 4 memory, then I -- 5 Q. Yeah. That's what I was going to get to. The little notes 6 are, in fact, records that you, in fact, were dealing with 7 Reg U more than just the once a year when the loan documents 8 were coming through, right? 9 A. But -- I suppose so.10 Q. Okay. And, in fact, in the grand jury and, frankly, here11 today you still can't remember really anything about those12 memos except that you'll acknowledge that you did write those13 memos?14 A. That's correct.15 Q. All right. And you certainly, ma'am, couldn't recall in16 the grand jury two years ago anything at all about Reg U.17 MR. HUESTON: And I'd just like to put up page 29,18 please, starting at line 15.19 BY MR. HUESTON:20 Q. Because you gave some testimony here about what you21 remembered in meetings with Mr. Shelton, right?22 A. Okay.23 Q. And you couldn't recollect much. Is that right?24 MR. HUESTON: Oh, if we can switch the machines,25 please?0290 1 BY MR. HUESTON: 2 Q. And, in fact, two years ago you couldn't recollect anything 3 at all -- 4 MR. HUESTON: Let's see. Go to line 15. 5 BY MR. HUESTON: 6 Q. And this is the same memo you were just being shown by 7 Mr. Secrest. It says, "Ken, Further to paying off the Enron 8 loan, Carol St. Claire advises that even though Enron is not a 9 lending institution" -- and that was the rest of your memo?10 A. Uh-huh.11 Q. And, then, I asked, "Well, why did you write that note?12 "ANSWER: Why did I write the note?

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051806 us v lay bench v113 "QUESTION: Well, first of all, let me ask you.14 Did you know what Reg U law was?"15 Your answer was, "No," you didn't know that.16 MR. HUESTON: Okay. Let's go to the next page. And17 the first 20 lines -- yeah.18 BY MR. HUESTON:19 Q. "Did you understand the issues that you were referring to20 there?21 "ANSWER: Very vaguely.22 "Well, was -- vaguely, what do you remember?23 "Well, I don't really actually even remember24 this.25 "Okay. Do you remember roughly talking to him or0291 1 writing memos about Reg U? 2 "No. No, I don't. 3 "QUESTION: But this, in fact, is something that 4 you prepared, right? 5 "Yes, it was. 6 "QUESTION: And you may have been passing on 7 Ms. St. Claire's advisement? 8 "Yes." 9 MR. HUESTON: A couple more lines, please, to 20.10 BY MR. HUESTON:11 Q. "And sitting here today, do you have any recollection about12 what Reg U was?13 "No.14 "And what the bounds of the requirements of Reg U15 are?16 "No, sir."17 Ma'am, you were passing on advisements in that18 memo about Reg U; but you didn't remember anything about Reg U19 when I asked you in 2004, right?20 A. Right.21 Q. And today you've testified you don't really remember much22 about Reg U being discussed in meetings with Mr. Shelton and23 Mr. Lay, but even two years ago you couldn't remember anything24 generally about Reg U.25 A. Okay.0292 1 Q. Correct? 2 A. Correct. 3 Q. Okay. That doesn't mean that Reg U wasn't discussed, 4 ma'am, because you just don't remember even Reg U as it's -- 5 A. That's correct. 6 Q. -- encapsulated in your own memos, right? 7 A. That's correct. 8 Q. All right. Now, you mentioned earlier, too, that Mr. Lay 9 didn't open up his mail, right?10 That was asked of you, correct?11 A. Correct.12 Q. But he did want reports that showed the movement of monies13 when the monies were moved, right?14 A. Yes.15 Q. That's something he wanted?16 A. Yes.17 Q. He made choices about what he wanted to review and what he18 didn't want to bother with, correct?19 A. Correct.20 Q. And some of the reports I showed you were movements of not21 small amounts of money; they were 500,000, a million, even22 $5 million, right?23 A. Correct.

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051806 us v lay bench v124 Q. And there was discussion about Ms. Gibson coming onboard,25 but we had admitted into evidence and I've shown you a number0293 1 of these reports that you compiled and circulated to Mr. Lay 2 after Ms. Gibson came on, correct? 3 A. Yes. 4 MR. HUESTON: For the record, your Honor, those are 5 Numbers 4, 11, 21, 41, 78, 79, 256, and 257. 6 BY MR. HUESTON: 7 Q. Let's talk a little bit about the wiring instructions. As 8 you testified in the grand jury, ma'am -- let's just go to page 9 45 because I -- there was some answer you gave that perhaps it10 wasn't always at the direction of Mr. Lay in the grand jury11 when I asked you about the jury instructions.12 Starting line 25 --13 A. I'm sorry. Did you say -- what number?14 Q. I'm going to -- actually, I'm going to put up the grand15 jury testimony.16 A. Oh, okay.17 Q. In fact, at line 25, "I showed you the wiring instructions.18 Are these the wiring instructions that you" -- going to the19 next page -- "created to actually cause the monies to be moved20 from Account A to Account B or to Investment C?21 "Yes. Most of the times, I probably -- could22 possibly have been all the time; but, certainly, that was what23 my general practice was.24 "QUESTION: In each of these occasions this would25 reflect the movement of funds that you were directed to do by0294 1 Mr. Lay, right? 2 "ANSWER: Yes." 3 That's what you said, then, correct? 4 A. Yes. 5 Q. And in these wiring instructions, there were a few 6 different names that showed up, even as shown by defense 7 counsel. 8 A. Yes. 9 Q. There was a Sherry Womack.10 A. Yes.11 Q. There was another person, there was even a Glynell, without12 a last name, right?13 A. Yes. Yes.14 Q. These were not high ranking officers at Bank of America,15 were they?16 A. That's correct.17 Q. They were people who were actually moving the monies and18 speaking with you, like administrative assistants, right?19 A. Yes.20 MR. HUESTON: All right. No more questions.21 THE COURT: May the witness be excused?22 MR. SECREST: She may.23 THE COURT: You're excused, ma'am.24 THE WITNESS: Thank you.25 THE COURT: We're going to take a break. But before0295 1 we do, I'd like Mr. Ramsey, Mr. Petrocelli, and Mr. Berkowitz 2 to approach the bench for a minute. 3 And this will be sealed. 4 (Proceedings had at the bench were sealed by Court order.) 5 THE COURT: We'll take a 15 minute break. 6 (Recess was had from 3:38 p.m. to 3:55 p.m.) 7 THE COURT: Be seated, please. 8 All right. You may call your next witness.

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051806 us v lay bench v1 9 MR. HUESTON: Your Honor, our next planned witness, we10 were informed yesterday, had to have surgery; and, so, the11 witness we're going to call next, Special Agent Kenaine,12 Defense had objection to. It's 4:00 o'clock. What I was going13 to suggest --14 THE COURT: Thank goodness. I'm ready to stop.15 MR. HUESTON: All right. We are, as well, your Honor.16 And I promise a shorter presentation. We'll be done by Monday17 morning.18 THE COURT: Yeah. I normally spend -- I don't spend19 six hours normally in trial on a bench conference because I20 have to pay even greater attention, I'll say.21 All right. Who do we have Monday morning?22 MR. HUESTON: Special Agent Kenaine and Sherrie23 Gibson. I anticipate those will be the only two remaining24 Government witnesses.25 THE COURT: I thought that you had -- you don't have0296 1 Kelly Bennett? 2 MR. HUESTON: That's the one who had surgery. So, we 3 may not have her any longer. That's the one we lost. We're 4 trying over the weekend -- we may have a substitute from her, 5 essentially a custodian from the accounting firm. We'll figure 6 it our out over the weekend. 7 THE COURT: So, you're not going to -- you don't need 8 any other bank employees to talk about any of the other 9 documents referred to in the indictment?10 MR. HUESTON: No. We anticipate just bringing them in11 through the certifications, the business record certification.12 THE COURT: All right. And you will get me the copy13 of the indictment?14 MR. HUESTON: Yes, with the exhibit references.15 THE COURT: And the copy attached to your motion is16 not readable in some ways --17 MR. HUESTON: In fact --18 THE COURT: -- because it's blacked over.19 MR. HUESTON: I've got a copy here. I think it's a20 better copy, your Honor, with exhibit references already in.21 THE COURT: Okay. Well, you can just file it22 tomorrow.23 MR. HUESTON: All right, your Honor.24 THE COURT: So, you're going to have Ms. Gibson and25 then Special Agent --0297 1 MR. HUESTON: Kenaine. 2 THE COURT: -- Kenaine. And that's it. 3 MR. HUESTON: I believe that's it. We may have one 4 other. We'll consider it over the weekend, but we're looking 5 to cut back as much as -- 6 THE COURT: How many -- so, it's time for your first 7 three witnesses. 8 MR. SECREST: All right. Can I kibitz for one moment? 9 (Sotto voce discussion at counsel table between counsel.)10 MR. SECREST: Rosalee Flemming, Sherrie Gibson --11 THE COURT: She's on their list.12 MR. SECREST: We're going to call her back. Is that13 okay with the Court?14 THE COURT: That's fine.15 MR. SECREST: And Mr. Lay.16 THE COURT: Who?17 MR. SECREST: Mr. Lay.18 THE COURT: Okay.19 MR. SECREST: There may be another one or two and --

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051806 us v lay bench v120 but maybe not. We have pared ourselves down.21 THE COURT: So, we probably -- we might finish Monday?22 MR. SECREST: I hope so, yes, sir.23 MR. CARROLL: You're very optimistic, Mac.24 THE COURT: What?25 MR. CARROLL: I think it's more likely sometime0298 1 Tuesday, but -- 2 THE COURT: No. I like his estimate much better. 3 If there's some law you want me to consider -- 4 MR. SECREST: We're going to file something for you. 5 THE COURT: Okay. 6 MR. SECREST: We definitely will. I promise. 7 THE COURT: All right. 8 All right. Well, you-all have a good weekend. 9 We'll stand in recess until 8:30 Monday morning.10 (Proceedings recessed for the evening)11 * * * * *12 COURT REPORTERS CERTIFICATION13 14 We certify that the foregoing is a true and correct15 transcript from the record of proceedings in the above-entitled16 cause, to the best of our ability.17 18 19 ____________________________________ May 19, 2006 1 to 15820 Gayle L. Dye, CSR, RDR, CRR Date Pages21 22 ____________________________________ May 19, 2006 159 to 29823 Cheryll K. Barron, CSR, CMR, FCRR Date Pages24 25

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