Week Thirteen of the corporate criminal case of the decade was the Ken Lay week and, based on the media reports, it was alternately either the most boring or the most entertaining week of testimony in the trial to date.

However, from my vantage point of reading the transcript of each day’s proceedings and sitting in occasionally on the trial when I can, Lay’s testimony underscored what the Enron Task Force’s strategy has become in this case — a show trial to degrade Lay and Skilling for denying the presumption that underlies Task Force”s case.

In so doing, the Task Force is hoping that the jury equates humiliation with guilt rather than noticing the gaping holes that have emerged in the Task Force’s case.

Before addressing Lay’s testimony, it’s helpful to step back and review how we got here.

Since shortly after the Enron saga began in late 2001, the Task Force and a large number of media outlets have promoted the now common theme that Enron was merely a house of cards and that the company’s intrinsic instability was hidden from the investing public by a deceitful management team that Lay and Skilling led.

That view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don’t allow facts to get in the way of demonizing unpopular entrepreneurs for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, competing businesspeople and business plaintiff’s lawyers seeking to profit from Enron’s demise and a pliable public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble.

As reflected by this discussion over the gross injustice of what happened to the four Merrill Lynch executives in the Nigerian Barge case (one that hopefully is in the process of being righted), these societal forces believe that they understand the Enron morality play so thoroughly that otherwise thoughtful and intelligent people lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.

This common view of Enron ignores the more nuanced view that has arisen during the Lay-Skilling trial.

In many ways, Enron was an innovative firm, both in its primary business activities and in the ways in which it raised money. Experts in structured finance and derivatives recognize this and have already written extensively about Enron’s innovation in that regard (see, for example, Christopher Culp and William Niskanen‘s Corporate Aftershock: The Policy Lessons from Enron and Other Major Corporate Corporations and Culp’s subsequent book, Risk Transfer: Derivatives in Theory and Practice).

Even Enron’s original purpose in using special purpose entities (“SPE’s”) was sound and creative, at least before former Enron CFO Andrew Fastow and henchman Michael Kopper hijacked a couple of them. With equity owned primarily by investment banks and other financial institutions, the SPE’s were initially intended to be private equity funds with completely separate management from Enron.

The main attraction of the SPE’s for investors was the funds’ preferred right to invest in Enron assets, which benefitted Enron by allowing the company to preserve liquidity and hedge risk.

Thus, the picture that has emerged during Skilling and Lay’s testimony is that Enron was engaged in mostly legitimate and beneficial financial activities, including energy trading, structured finance and other financing transactions that had literally never been attempted before, and certainly never on the scale that Enron generated them.

As a result, it is critically important in determining the truth of what happened at Enron ó particularly when the futures of two men and their families are at risk — to distinguish between Enron’s role as a legitimate, innovative company and the fraud that Fastow and Kopper engineered.

Unfortunately, the Enron Task Force has utterly dispensed with any notion of truth and fairness in pursuing convictions of Lay and Skilling.

A case in point is Enron Task Force prosecutor John Hueston’s first questions out of the box to Lay, which I witnessed on Wednesday afternoon. Toward the end of direct examination, Lay and his counsel, Mac Secrest, discussed Lay’s attempts to repay $7.5 million that he still owes Enron, a point that Hueston railed about during opening argument in the case. After the now-insolvent Lay recounted how he and the Enron Creditor’s Committee had worked out a settlement in 2004 under which he would repay the debt, Secrest asked Lay whether the deal had been consummated. The following exchange ensued:

Q. Did you actually execute the document, along with your wife?

A. I — Linda and I — I think it was early July 2004 ñ did execute this agreement, and a lawyer representing the creditors committee also executed it. [. . .]

Q. Okay. Was that agreement actually finalized?

A. It was not finalized. And it was not finalized because John Hueston blocked that deal.

MR. HUESTON: Objection. That is just outrageous.

THE COURT: I sustain the objection.

MR. HUESTON: I wish I had such power.

THE COURT: The jury will disregard the last answer.

Well, that’s certainly a little detail that Hueston conveniently left out during opening argument in disparaging Lay about the non-payment of the debt. With that backdrop, the following is Hueston’s opening cross-examination of Lay:

Q. I’d like to start by just writing something up here. Mr. Lay, your attorney, in opening statement, said the following: “By our deeds we are known.” You’d agree with that; right?

A. Yes. Yes, at least in part.

Q. Okay. So you’re backing way from that? From the statement of your attorney? Maybe? Sometimes?

A. No. Our deeds are more important. Life is a little more complicated than that, though.

Q. Okay. Well, let’s elaborate. We’re going to come back to that $7.5 million. But just to make it clear, as of today, you have not repaid one dollar of the principal owing on that $7.5 million from Enron as of the end of 2001; correct?

A. We tried to, and you blocked it.

Q. Sir, have you repaid even a single dollar of the principal from November 27th, 2001 until today? It’s a simple question.

A. We have not because you blocked it.

Q. Did the Task Force block you from doing that in January of 2002?

A. Mr. Hueston —

Q. It’s a simple question.

A. — you know you blocked it.

Q. Sir, did the Task Force block it in January of 2002?

A. It was not due in January of 2002.

Q. So you didn’t repay it in January of 2002?

A. We tried to repay it in 2003, 2004, and you blocked it.

Q. Simple — simple question.

A. And simple answer.

Q. Zero is the right response for the principal; correct?

A. It’s not the right response, but you can write it down.

Q. All right. Is that incorrect? Is there more than a dollar? Have you paid more than zero principal balance?

A. Mr. Hueston, when I was sworn in here, I was sworn in to tell the truth and the whole truth, not partial truths.

Q. Okay. I’m going to try to ask simple questions and —

A. Good.

Q. — and so, that one again, once more: No principal paid; correct?

A. No principal paid because you blocked the settlement.

Q. We’ll get to that later. Let’s go to another item.

So, let’s see here.In the corporate criminal case of the decade and the Enron Task Force’s legacy case, the first subject of the Task Force’s cross-examination of the former chairman and CEO of Enron is his failure to repay a $7.5 million debt to Enron that is not even a part of the criminal charges against him and that the Task Force blocked him from repaying, to boot.

Hueston followed that dubious initial line of questioning with the following subjects, which were not any more substantive:

Making the absurd suggestion that Lay was witness tampering by attempting to make contact with a couple of prospective witnesses in the trial. Since when is it wrong to attempt to talk with potential witnesses in a trial? Only in the Lay-Skilling case, where the Task Force has effectively precluded dozens of important witnesses with exculpatory testimony for Lay and Skilling from testifying at trial by designating those witnesses as unindicted co-conspirators in a conspiracy that the Task Force has not come close to proving during the trial.

Chastising Lay for his attorney Mike Ramsey calling key Task Force witness Ben Glisan a “monkey” to media reporters after Glisan’s testimony several weeks ago. Frankly, Ramsey’s characterization of Glisan was mild in comparison to how Task Force and government representatives have referred to Lay in the media. For good measure, Hueston then bizarrely criticized Lay for approaching Glisan during a courtroom break and expressing his sorrow for what Glisan and his family had been put through by the Task Force.

Paralleling a major cross-examination point with Skilling, criticizing Lay for not following Enron’s Code of Ethics regarding disclosure to the Enron board of his investment PhotoFete, a small Enron vendor operated by a former girlfriend of Skilling. It is one of the more revealing indications of the fundamental weakness of the Task Force’s case that the prosecution has asked dozens — maybe hundreds — of questions to Lay and Skilling over the past two weeks about PhotoFete and none to date about such key issues as the alleged Global Galactic agreement and the alleged huge conspiracy that Lay and Skilling supposedly orchestrated at Enron.

On Thursday morning, Hueston made a big deal out of the fact that Lay’s son had shorted Enron stock in 2001. Apparently, Hueston was attempting to cast aspersions on Lay’s earlier testimony that short sellers had contributed to the market panic that prompted Enron’s collapse in late 2001, but Hueston’s questioning was typically disingenuous. Neither Lay nor Skilling have ever blamed legitimate short-sellers as being a material cause of the market panic that doomed Enron. Rather, Lay and Skilling have testified that certain short-sellers’ planting of false and misleading information about Enron in the financial media fanned the flames of the market panic. Not surprisingly, Hueston did not ask Lay if he thought his son had planted any false information about Enron with the media.

Is there any question about what is really going on here? As Larry Ribstein noted last week in regard to the similarly vacuous cross-examination of Skilling, the Task Force is betting that guilt in this case will not be determined by the sometimes messy and difficult process of sorting out the truth, but on ephemeral matters to the charges that the jury can easily understand.

Lay’s sales of stock to meet margin calls and use of his line of credit with Enron is another case in point. The Task Force has not charged Lay with insider trading for selling his Enron stock or that Lay did anything illegal with regard to using the board-approved line of credit, but that has not stopped the prosecution from hammering Lay with regard to the sales, which approximated $70 million in 2001. The Task Force’s theory is that Lay’s entirely legal decision not to advertise his sales of stock back to the company publicly is evidence that Lay was hiding other bad news about Enron from the markets.

“If the market had found out you had sold $70 million of stock in that time, that actually would have caused the stock to tumble?” asked Hueston about the stock sales.

“It depends, Mr. Hueston,” responded Lay, who went on explain that using cash from internal stock sales to Enron to preserve his Enron stock as collateral for private loans was a sign that he had faith in Enron stock. Lay shot back at Hueston: “There was no requirement that I disclose any of that. You’re trying to mislead the jury as to somehow I was doing something illegal, and I was not.”

When the Task Force did dip into the evidence relating to the substance of its charges against Lay — such as the resegmentation of the retail unit or the international division’s water unit (Wessex) — the dubious nature of its actual charges quickly becomes evident. On Thursday afternoon, Lay calmly but firmly refuted each area that Hueston addressed and — although one might disagree with Lay’s business judgment — none of his answers came close to indicating that this was a man who was desperately conspiring to cover up a massive fraud so that he could dump more Enron stock.

Finally, late in the day, Lay observed to Hueston: “You can go where you want with this, but I think this is a real waste of the juryís time.” Judge Sim Lake agreed with Lay and made the following observation upon ending the week a half-hour early: “Any jury that has sat through two-and-a-half hours of alleged Wessex impairment deserves the right to leave early.” Although courtroom observers related to me that the jurors, lawyers and courtroom spectators cracked up over Judge Lake’s dry wit, Hueston — who is wound pretty tight — was apparently not amused.

Of course, who knows how all of this is playing out with the jury? On Wednesday afternoon, my sense was that the jurors — whose apparent leaders appear to be closer in age to the 64 year-old Lay than Hueston, who is about 40 — appeared put off with Hueston’s initial cross-examination, much in the same way that I perceived them to be in regard to Huestonís similarly misguided cross-examination of former Enron general counsel Jim Derrick during Week Ten of the trial. Peter Lattman of the WSJ Law Blog noted the same dynamic, although most others in the media simply breathlessly reported that Hueston was having his way with a beleaguered Lay. It’s anyone’s guess what the jurors are really thinking.

As for Lay’s direct examination, it was definitely interesting, although perhaps more so reading it than sitting through it. Almost lost amidst the Task Force’s blather is that all of the charges against Lay in this case relate to the period after which he replaced Skilling as Enron’s CEO in mid-August 2001. Lay denied Fastow and Glisanís testimony that they were telling him as early as mid-August, 2001 that Enron had serious financial problems, and Lay’s testimony is buttressed by numerous documents and an early October board presentation in which Glisan and Fastow reported that Enronís liquidity position was strong.

Lay’s testimony was particularly riveting regarding the accelerating crisis in Enron’s credit and equity markets after the series of Wall Street Journal articles beginning on October 17, 2001 that revealed Fastow’s shenanigans with certain SPE’s to the markets.

Enron’s fate was literally sealed within three weeks, maybe even less time, and Lay’s testimony provides fascinating insight into the conflicting issues and pressures that he was confronting on a daily basis as unsettled markets were quickly souring on the company.

Lay is clearly a proud man who desperately wants to tell his side of the story, and it is quite a story.

Born and raised in a family with little money, Lay worked his way through college and graduate school, landed his first job with Houston-based Humble Oil (the predecessor to ExxonMobil), and then served his country admirably as a Naval officer and Deputy Undersecretary of Interior for Energy for six years during the Vietnam War.

After his governmental service, Lay rose quickly through the executive ranks of a couple of gas pipeline companies before assuming the chairman and CEO position of the company that eventually became Enron in 1985.

From that perch, Lay accumulated a personal net worth of about $350 million as of 2000 as he oversaw the growth of Enron into one of the largest publicly-owned companies in the U.S., and then saw that net worth evaporate over the past four-plus years since Enron’s collapse into bankruptcy.

But as difficult as that fall must have been, Lay does not appear to be the type of man who is bothered all that much by the loss of wealth, and certainly not nearly as much as he is aggravated by the Task Force and media’s ravaging of his reputation over the past five years.

According to media reports, Lay and Secrest struggled somewhat during the early stages of Lay’s direct examination, and my sense is that their struggles were attributable largely to Lay’s frustration with not being able to explain to the jurors directly — without the limiting framework of a trial — the utter contradiction between his life story and the nature of the criminal charges against him.

Lay will remain on the stand through at least Monday of next week, and probably into a part of Tuesday. Several character witnesses for the defendants will follow Lay, and the Skilling team still has an impressive group of expert witnesses prepared to testify regarding the Task Force’s allegations that Enron’s business practices were outside the ordinary and customary standards of similarly-situated U.S. public companies.

Thus, my sense is that the defense probably has at least two more weeks of testimony, and the Task Force will present another week’s worth of rebuttal testimony. My best guess at this point is that the close of evidence will take place around mid-May as the corporate criminal case of the decade turns toward what will likely be a very entertaining home stretch.