One of the most interesting aspects of the government’s indictment against former Enron Chairman and CEO Kenneth Lay is that it does not includes any insider trading charges. On the other hand, the SEC’s civil complaint against Mr. Lay includes insider trading charges. Why the difference?
This Business Week article does a good job of summarizing why the government elected not to bring the insider trading charges and why the SEC believes that it can make its insider trader case against Mr. Lay:

In 2001, Enron Corp. was quietly lurching from crisis to crisis. Whatever he did or didn’t know about Enron’s woes at the time, Kenneth L. Lay rarely missed an opportunity to talk up the oil-and-gas trading concern with analysts and Enron employees. The ex-chairman and CEO even urged workers to follow his lead and buy stock. From August through October, 2001, Lay bought $4 million worth of Enron shares — which he cites as proof that he had faith in the company.
But there’s a hitch. Privately, Lay was dumping far more stock than he publicly acquired, according to criminal and civil charges filed against him on July 8. In the same three months, he sold $26 million of Enron shares. Altogether in 2001 he unloaded Enron stock for $90 million. But because those shares were sold back to Enron, Lay did not have to disclose the sales until 2002, thanks to a loophole — since closed — in Securities & Exchange Commission rules.
The difference between Lay’s public statements and private actions is the foundation of the SEC’s civil charges — one of the more aggressive interpretations of insider-trading law in decades. Opening a new chapter in the SEC’s pursuit of alleged corporate crooks, the agency, in effect, is putting all CEOs on warning: They now face the risk of violating insider-trading laws when they trade company stock or borrow against it.

The article then goes on to explain how Mr. Lay cashed out of Enron stock while publicly appearing to support the company:

In 2001, according to the suit, he borrowed a total of $77.5 million from Enron, spread out over 20 transactions, and repaid the loans entirely with Enron shares. The repayments often came within a few days. Such stock sales vastly outweighed purchases. In seven transactions from August, 2001 — when he resumed the CEO job after Jeffrey K. Skilling’s surprise resignation — through October, 2001, he converted more than 918,000 shares into $26 million. “He was selling all the time,” says Duke University law professor James D. Cox. “And the number of shares he sold is staggering.”
Lay doesn’t see it that way. In public he has said that he sold because he needed the funds. He had pledged his shares as collateral for some $100 million in personal loans from three commercial banks. When the value of his Enron stock declined, his bankers made margin calls or demands that he increase his collateral. In his trial, Lay is expected to claim that, with few other assets he could easily sell to satisfy those demands, he was forced to borrow from Enron, repay the Enron loans with stock, and use the proceeds to pay off the banks.

And the foregoing is the crux of why the Justice Department passed on indicting Mr. Lay for illegal insider trading, while the SEC decided to take its shot on those causes of action in its civil complaint:

Justice would have had to show beyond a reasonable doubt that Lay possessed important information the market lacked and that he intentionally traded to take advantage of that information. The SEC’s burden of proof is lower. It need only show that the preponderance of evidence points to insider trading. The SEC complaint argues that Lay’s trades reveal an effort to pump up the shares, dump his stock, and skirt disclosure rules that might tip off investors.
Under then-SEC rules, sales of stock back to the company did not have to be reported until 45 days after the close of the calendar year in which the trades occurred. So when Lay urged Enron employees to buy on Sept. 26, 2001, he knew there would be no record of his sales. SEC filings showed only that he had bought that $4 million worth of stock.
The SEC case, however, is equally significant for the new liabilities it could create for other execs. Agency officials believe it’s relatively common for managers to try to have their cash and keep their shares, too, by borrowing against their stock. Doing so allows them to avoid sending bearish signals to investors while still monetizing their shares. The Lay case seems to show that the SEC views the practice as deceptive. “I think the SEC clearly is saying that you’re going to have to disclose if you’re borrowing against your stock because, in effect, that’s a sale,” says UCLA law professor Stephen M. Bainbridge.

The agency also is warning that execs may be setting themselves a trap if they use shares as collateral. Monetizing shares via loans could create a motive to pump up the stock and, as with Lay, subject execs to insider-trading charges if they later sell because of margin calls, . . .

UCLA law professor Stephen Bainbridge — who provides the consistently best analysis in the blogosphyere on issues pertaining to corporate law — notes in this post that the SEC is charting a new course in the Lay case that should give all corporate officers pause as they consider borrowing money with their company stock pleadged as collateral.