Enron: The Prosecution's Game Plan
By Wendy Zellner
The government's case against Enron Corp. took a giant step forward on Oct. 2 with a long-awaited criminal complaint filed in a Houston federal court against former CFO Andrew Fastow. The 40-year-old Fastow, who left Enron in October, 2001, was charged with securities fraud, wire fraud, mail fraud, money laundering, and conspiracy in connection with Enron's spectacular collapse. As Fastow and his wife were stripped of their passports to ensure that they won't flee the country, it was clear that he likely won't be the last top Enron executive to face criminal charges.
For the first time, prosecutors pointed to Enron's former chief accounting officer, Richard Causey (whom they referred to in the complaint only by his former position), as the one who had an "undisclosed agreement" with Fastow that the off-balance-sheet partnerships he managed would not lose money in any transactions with Enron. This so-called Global Galactic agreement meant Fastow's LJM partnerships faced no real risks in the deals and therefore would not have qualified for off-balance-sheet treatment under the accounting rules. Causey was supposed to be one of the executives reviewing the LJM transactions to ensure their fairness to Enron. His lawyers did not return calls seeking comment.
The 37-page complaint -- which must be followed within 30 days by an indictment of Fastow -- sheds little light on any new information that might implicate former CEOs Jeffrey Skilling and Ken Lay. But the complaint pointedly notes that the Enron board relied on "false representations," not just by Fastow but also by Enron's CEO, its chief accounting officer, and its treasurer in approving Fastow's role at LJM. Kenneth Lay was CEO in 1999, when LJM was approved, with Skilling taking that spot in February, 2001.
The complaint also suggests in a footnote that Lay might have known of the involvement of other Enron insiders in one of the questionable partnerships, unbeknownst to the board. Lay's spokeswoman did not return a call. "If the government is unable to move beyond Mr. Fastow, people are going to be asking questions.... The public is absolutely convinced that none of these crimes could have occurred without the complicity and knowledge of the CEOs," says former federal prosecutor Robert Mintz, now a white-collar criminal defense lawyer at McCarter & English.
Legal experts expect the complaint, along with charges filed simultaneously by the Securities & Exchange Commission, to ratchet up the pressure on more potential witnesses, including, perhaps, Fastow himself. An affidavit filed in the case by an FBI agent made note of at least 11 confidential sources, including former Enron employees and the employee of a "leading financial institution" who worked on the deals involved in the charges. "They clearly have a lot of informers in their quiver," says lawyer Thomas R. Ajamie, an expert in securities matters, who has been following the case.
NOT GOING ANYWHERE.
After being led into the Houston courthouse in handcuffs on Wednesday morning, a solemn Fastow stood with his head held high before Magistrate Marcia Crone. He acknowledged that he understood the charges and possible penalties.
Federal prosecutor Andrew Weissman said Fastow and his wife, Lea, had relinquished their passports about a month ago as part of a bond deal and that they can't travel anywhere except Texas and California. The government is also receiving the deeds to all of Fastow's property, as well as to the house owned by his parents that was used to secure their son's $5 million bond.
In a statement, Fastow's lawyer, John Keker, reiterated what has been Fastow's defense all along: that his dealings were approved by Enron's top executives and the board, and were reviewed by accountants and lawyers. Said Keller: "Andy Fastow was dedicated to the long-term success of Enron. He never believed he was committing any crime."
In its criminal complaint, however, the government painted a picture of massive fraud and self-enrichment by Fastow and his cronies. A key witness is Michael J. Kopper, a former finance executive at Enron and LJM, who pleaded guilty as part of a cooperation agreement in August to conspiracy to commit wire fraud and money laundering. While Kopper has previously stated that he paid kickbacks to Fastow and his family in some of the deals, the government complaints against Fastow provide damning new details of that arrangement.
To disguise the nature of the payments to Fastow in one off-balance-sheet entity, known as RADR, Fastow instructed Kopper to establish a "gifting program" whereby Kopper and his domestic partner would make annual "gifts" of $10,000 to individual Fastow family members, according to the complaint. That amount was chosen because IRS rules exclude from taxable income and don't require reporting of gifts of $10,000 or less made to any one person in one year. Records reflect that Kopper arranged gift payments totaling $125,000 to Fastow and his family from December, 1997, to February, 2000.
The Fastow case may also increase the pressure on Merrill Lynch, which has been accused of participating in Enron's phony asset sales in order to curry favor with a big investment-banking client. Merrill has denied any wrongdoing. Prosecutors say Merrill (identified in the criminal complaint only as "the Financial Institution") was pressured to take a $28 million interest in some Nigerian electricity-generating power barges so that Enron could book $12 million in earnings in late 1999 and keep the barges off its balance sheet. But Fastow had an undisclosed oral agreement with Merrill that Enron would take Merrill out of the deal in six months, according to Kopper and others.
A Merrill employee claimed that the firm did no due diligence on the transaction, either before entering the deal or afterward, according to the complaint. Fastow ultimately arranged for LJM to purchase Merrill's interest for a price that represented the rate of return originally promised.
While the Kopper case suggests that a small group of insiders victimized Enron itself, the charges against Fastow focus as well on how Enron used LJM and other off-balance-sheet entities to manipulate its balance sheet and manufacture earnings through sham transactions when Enron was having trouble making its financial goals. That wider focus on financial manipulation could ultimately lead investigators to Lay and Skilling.
"The challenge in all white-collar cases, particularly securities fraud, is proving criminal intent, and that's one of the reasons these cases against the senior executives take so long to build," says Jacob Frenkel, a former prosecutor and SEC enforcement attorney. This is one case where it looks like the government and the grand jury have done an enormous amount of homework -- and are willing to put in as much time and effort as it takes to prove intent.
Zellner is Dallas bureau chief for BusinessWeek. Kate Murphy in Houston contributed to this report.