Heiress In Handcuffs
The River Oaks Country Club in Houston sits like a plantation mansion amid a vast expanse of magnolias, dogwood, azaleas, and golf greens. Yet the club barely stands out among the equally massive estates -- the mock Taras, Pickfairs, Monticellos, and Bridesheads -- that populate the city's most prestigious neighborhood. One of these trophy properties, a three-story Gothic Revival with a small fountain in front, is where Lea Weingarten grew up.
She lived among the city's social royalty: Neighbors included art patron Dominique DeMenil, ex-Governor John Connally, and the descendants of wildcatters, ranchers, and financiers who had founded Rice University, Humble Oil, and most of the city's other major institutions. In Houston, Lea's family stood alongside these legends. The main pavilion at the Jewish Community Center of Houston was named after her grandfather, a Polish immigrant named Joseph Weingarten who built big grocery store and real estate empires in the Southwest.
There wasn't much farther up Houston's social ladder to go. And yet, as an adult, Lea W. Fastow, now 41, climbed higher. She and her ambitious husband, Andrew S. Fastow, also 41, took jobs at booming Enron Corp. (ENRNQ ) in 1990. He rocketed to the post of chief financial officer in less than eight years. She quit in 1997, after the first of her two sons was born, and proceeded to become a nationally prominent art patron -- leading Enron's art committee and enlisting hot talents to design custom projects for the company's headquarters. Jeff Koons, for instance, proposed an outdoor sculpture made of tulips -- because they were the first things ever traded on a stock market. In a vision statement e-mailed to top executives in 2000, Lea declared, "the Enron Corp. Art Collection will [reflect] Enron's corporate culture of thinking outside the lines, creating the new convention."
FIRST TO BE TRIED
None of her high-concept projects ever came to be. That's too bad, because a big mound of stratospherically priced tulips would have been a perfect monument to Enron. And, in hindsight, a sculpture evoking the world's first speculative mania would have been a pretty good symbol of Lea Fastow's crash, too. On May 1, federal agents handcuffed her and charged the Houston heiress with helping Andrew orchestrate one of the most notorious white-collar crimes in history. She's accused of wire fraud, money laundering, and filing false income-tax returns.
According to the government, the socialite belonged to a small group of loyalists who executed the complex schemes devised by Andrew Fastow to inflate Enron's performance and enrich themselves. She is accused, essentially, of serving as a stand-in for her husband -- wiring money, cashing checks, and handling financial housekeeping matters that the Enron CFO didn't want his fingerprints on. Lea's story, pieced together for the first time by BusinessWeek from internal corporate documents, government investigations, and more than two dozen interviews with friends and co-workers, is unique. No heiress has ever been charged with such complex financial fraud. She and Andy, who earned more than $60 million from 1997 to 2000, are the only husband-and-wife team implicated in the current round of corporate scandals.
At the moment, Lea is front and center in the Enron Task Force investigation. She is the first former executive scheduled to go to trial, on Feb. 11. Lea has also been involved in plea bargain negotiations with the Justice Dept., according to the Houston Chronicle and other sources. She could potentially help pry open the frustrating case. Nearly two years after the company collapsed, the task force has indicted only one person who worked on the lavish 50th floor of the Enron Tower: Andrew Fastow. No criminal charges have been filed against Chairman Kenneth L. Lay, President Jeffrey K. Skilling, Chief Accounting Officer Richard A. Causey, Chief Risk Officer Rick Buy, or General Counsel Jim Derrick.
At a time of seemingly unrelenting corporate scandal, the slow pace of the Enron prosecution is causing many Americans to question whether the law reaches into the executive suite. "Skilling and Lay are iconic," says University of Texas law professor Henry T.C. Hu. "Whether they go to jail will send a terribly important message to the public, and more importantly, to managers."
Lea could potentially provide the government's first foothold on the 50th floor. The prosecutors' strategy in going after her first, most experts agree, is to pressure her husband to accept a plea bargain to minimize any punishment of the mother of his children. As part of any deal, he would be forced to testify against former Chairman Kenneth L. Lay and President Jeffrey K. Skilling. Andrew Fastow is, after all, the perfect witness to tell jurors what the top leaders knew about his own off-the-books partnerships. If Justice's gambit works, the task force could flip Andy without even having to take him to trial.
But plea bargain deals are notoriously slippery. If Justice's effort to twist Andy's arm fails, it would raise serious questions about the Enron Task Force's ability to nab Skilling and Lay (who both say they are innocent of wrongdoing). Rather than telling jurors a simple story -- that Skilling and Lay approved Fastow's dubious deals -- government lawyers would have to focus on less heinous transactions that would probably be easier to defend in court. Prosecutors would be obligated to frame the evidence as part of a broad pattern of criminal misconduct at the company. On Oct. 30, Justice secured an insider-trading guilty plea from former Enron Energy Services CEO Dave Delainey on the basis of this type of company-wide conspiracy claim. But many white-collar crime experts question whether a similar tactic could nail Skilling and Lay. "It would be a very sweeping case where they would have to prove the illegal business practices of several groups," says Houston criminal defense attorney Philip Hilder, who represents several Enron vets. "They would have a much easier time with a pinpoint bombing."
The Fastows, who declined to speak with BusinessWeek, have both pleaded not guilty. In public statements, their lawyers have argued that Enron's directors, executives, lawyers, and accountants knew about and approved everything Andy and Lea did. Her attorneys have repeatedly complained in court about the unfairness of forcing her to go to trial before her husband -- who will be unable to testify on her behalf without jeopardizing his own case. "Mrs. Fastow is being charged in order to put pressure on her husband of 18 years, Andy Fastow," her lawyers said in a statement on the day she was indicted. "These tactics are unfair and unjust."
The prosecutors going after Lea are some of the toughest in the land. Enron Task Force leader Leslie Caldwell, deputy Andrew Weissman, and several other team members met at the U.S. Attorney's office in Brooklyn, N.Y. They have sent to prison the leaders of some of the most brutal heroin-trafficking rings in New York City history. One critic accuses them of bringing drug prosecution techniques to the world of white-collar crime. "These prosecutors cut their teeth on cases where the crimes were violent and horrific. Their primary tactic was squeezing people as hard as they possibly could," says one criminal defense attorney. "If the government has a strong case against Andy Fastow, it should win it in court, rather than threatening to orphan his children."
There's no doubt that prosecuting Lea is a hardball maneuver. But it's also true that she was no mere pampered housewife. Lea graduated from Northwestern University's Kellogg Graduate School of Management in 1987 and held an upper-middle-management post in Enron's treasurer's office from 1990 until 1997. During her tenure, BusinessWeek has learned, she managed a controversial tax shelter that was unsuccessfully attacked by the Internal Revenue Service. "Lea was perceived as being at least as talented as he was," says a former manager.
Many experts think Lea's lawyers are going to have a tough time keeping her out of jail. The first deal that she allegedly worked on, known as RADR, helped Enron hold on to millions of dollars in undeserved price-support subsidies for California wind farms -- costs that were ultimately passed on to the state's consumers. The second one, Chewco, enabled Enron to boost net income by more than $400 million and slash reported debt by some $2.5 billion. So far, three key players in the RADR and Chewco deals have pleaded guilty: Michael Kopper, Ben Glisan, and Larry Lawyer. What's more, U.S. District Judge David Hittner in Houston has ruled against Lea in key preliminary scheduling hearings. And Attorney General John Ashcroft has been pressuring prosecutors to strike much tougher deals with criminal defendants.
How a wealthy, intelligent, seemingly well-grounded woman got embroiled in such a mess still mystifies many people who know Lea Fastow. The only answer that most people can come up with is that loyalty blinded her to her spouse's dark side. Lea and Andy were, by most accounts, a very close couple. At a company notable for the number of philanderers among senior management, Andy stood out for lacking a wandering eye. "Lea adored Andy," says one art world contact. "I remember once we had a meeting at Enron and when we walked into his office, they both lit up to be with one another. She told me Andy was the golden boy at the company."
Like many seemingly successful couples, though, Lea and Andy are in some ways opposites. One former work acquaintance calls her "the yin to Andy's yang." A college friend calls them "a Mutt-and-Jeff couple." Where Andrew Fastow is ambitious and defensive and often has a scowl on his sharp angular face, Lea is sweet, understated, and has an easy smile. She's a hugger and a gift-giver -- always quick to send cards for weddings, birthdays, and anniversaries. "She was plump and sweet and everybody liked her," recalls celebrated Enron whistleblower Sherron Watkins, who worked for Andrew and went to holiday parties at their home. "If you didn't know she was a member of the Weingarten family, she'd never bring it up."
But few things about Lea Fastow are as clear as they seem -- including her family. While the Weingarten name may have been glamorous, her background was more tumultuous than many realized. Lea's father, Jack, and her mother, Miriam, a former Israeli beauty queen, divorced when Lea was 5. After a long, unpleasant legal battle, in which allegations of infidelity and abusiveness were raised, the parents split custody. At the tony Kinkaid School, Lea was a member of the drama club and appeared in the senior year production of Pippin. But she didn't hang out with the most popular clique at school and she didn't date a lot, according to one friend. "She wasn't a cheerleader. She wasn't on any sports teams. She wasn't the prettiest girl in class," says this high school acquaintance. "But she was the nicest."
Lea went to college at Tufts University in Boston. As a sophomore, she lived in the same dormitory, Miller Hall, as Andrew Fastow, a good-looking guy from New Jersey. The two started dating right away. A "very straight guy," Andy shunned drugs and alcohol and urged Lea to do likewise, recalls the Tufts friend. "They were very close," recalls this friend from the college years. "I don't remember them at any toga parties. I just remember them just being with one another."
Rarely do the professional lives of couples progress in such lockstep. Lea and Andy both attended Kellogg, both were in the management training program at Continental Bank of Chicago, and then both moved to Houston in 1990 to work at Enron. While Andy hooked up with Skilling in the company's nascent trading business, Lea took a job in the corporate treasurer's office. She raised working capital through private placements, preferred stock offerings, and other financings.
The Enron of that era was, by general consensus, honest. But signs of its later problems were starting to emerge. The rapidly growing energy giant burned through enormous sums of cash, borrowed heavily, hated to declare any type of loss, and was run by managers obsessed with holding up the stock price and the credit rating. These qualities created problems that landed squarely in the laps of Lea and other employees in the treasurer's office. This is not simply a matter of historical interest. Prosecutors are likely to use Lea's résumé as proof she comprehended Enron's underlying financial problems and therefore understood why the transactions broke the law -- a key to proving criminal intent.
One of Lea's earliest highest-profile deals was managing Enron's first offering of Monthly Income Preferred Securities, or MIPS -- a controversial tax shelter that Goldman, Sachs & Co. (GS ) started marketing in 1993. The perfect financial vehicle for Enron, MIPS were hybrid preferred stock that was reported as debt to the IRS -- meaning interest payments could be deducted from taxable income. But they were labeled equity to analysts and credit-rating agencies, which disapproved of excess leverage. To pull this alchemy off, the issuer had to create an offshore subsidiary in Turks & Caicos, then engage in a series of complex transactions.
With the 31-year-old Lea leading the way, Enron had the courage to make the second MIPS offering in history, a $200 million issue in November, 1993. It then followed with a similar $75 million deal, managed by Merrill Lynch & Co. (MER ) in April, 1994. "There were a lot of tax and accounting issues that she had to investigate to make sure that we got the proper treatment," says one former member of the treasurer's department. "She also made all the presentations to senior management and dealt with the lawyers and the investment bankers."
Unhappy with MIPS from the start, the U.S. Treasury Dept. tried to persuade Congress to ban them in 1994. Although such vehicles cost the country billions in tax receipts, lawmakers never acted. So the agency decided to try another tack. In 1998, the IRS disallowed nearly $24 million in tax deductions that Enron claimed from its MIPS -- making Lea's deal, in essence, a test case for the whole enterprise. After a massive Wall Street lobbying campaign, though, the agency backed down -- which many accounting experts say contributed in part to the distorted earnings mess of the late 1990s.
CROSSING THE LINE
As Lea's star rose at Enron, Andy's skyrocketed. In January, 1997, Skilling made Andy a senior vice-president. A few months later, Lea quit to take care of their first child, Jeffrey. They also have a younger son, Matthew. In the revisionist history of Enron that has emerged in recent months, the moment that Skilling, Fastow & Co. took the reins in 1997 is when aggressiveness appears to have crossed over into illegality.
The two deals in which Lea is accused of participating are among the first that investigators now say were on the wrong side of the line. The RADR transaction began in January, 1997, when Enron bought Zond Windsystems, which owned several wind farms near Bakersfield, Calif. The profitability of this investment depended on subsidies provided under the Public Utility Regulatory Policy Act of 1978, requiring utilities to buy energy at higher rates from alternative-power suppliers. But those benefits disappear if the wind farms are owned by a utility. And that was going to happen at Enron, which planned to buy Portland General Electric, an Oregon utility, in July.
To eliminate the conflict, the company could have sold either the wind farm or the utility. But Enron didn't want to sacrifice either. So it found a way to keep both, according to Justice. Using a technique that would soon become an important part of the Enron playbook, the company decided to sell its Zond stake to a pair of special-purpose entities (SPE) called RADR ZWS and RADR ZWS MM. While the RADRs were ostensibly independent, prosecutors say that they were, in fact, closely controlled by Enron.
Accounting rules allowed Enron to fund 97% of the SPEs as long as the other 3% came from outside investors. The sticky problem of finding outsiders who were legally separate from the company but willing to do its bidding was given to Andrew Fastow -- whose ability to manage Enron's thorniest issues had become the source of his power. His plan, Justice says, was to sell the 3% stake to Lea's father and some other Weingarten relatives in a venture to have been named Alpine Investors. But for reasons that aren't clear, this deal fell through.
So new investors were lined up. One was Patty Melcher, a former financial analyst and a friend of Lea's. Another was Houston real estate broker Kathy Wetmore, who represented several Enron executives (including the Fastows in their purchase of an 8,700-square-foot mansion in River Oaks in 2000). The last investor was William Dodson, the domestic partner of Andrew Fastow's right-hand man, Michael Kopper. Along with a handful of others, this trio became known as the Friends of Enron, a group that could be counted on to buy 3% stakes on short notice. (Melcher, Wetmore, and Dodson declined to speak with BusinessWeek. They haven't been charged with any crime.)
The transaction between Enron and the Friends was suspicious, to say the least. Although Zond's CEO estimated that the wind farms were worth $30 million in April, 1997, it sold them for an effective final price of $12.5 million. At the same time, they gave Enron a repurchase option that was exercised in 2000 for $2 million, according to the Federal Energy Regulatory Commission. In a little-noticed report released in April, 2003, FERC concluded the evidence "implies that the RADR sale and repurchase option were not arm's-length deals."
Why would the Friends strike such an odd deal? Because they were being secretly subsidized by Enron -- making the whole transaction a charade, according to the Justice Dept. In one of her main acts of complicity in the deal, Lea in May allegedly wired $419,000 of the couple's joint savings to Michael Kopper, according to Justice. The two allegedly signed documents to make the deal look like a loan. Kopper then purportedly gave the money to Wetmore and Dodson. According to an FBI agent, "it was understood that the loan to them would be repaid from RADR proceeds, and that Kopper would control any other RADR funds they received." (Melcher apparently used her own money.)
The RADRs started making distributions of wind farm profits to the investors in July. By the end of August, the SPEs had paid out at least $498,068 to Wetmore and Dodson. They, in turn, forwarded the funds to Kopper -- and he repaid the Fastows all of their original investment plus $62,850 in interest. Over the next two-and-a-half years, the RADRs gushed money, and Lea and Andy collected $125,000 more "in the form of kickbacks," according to the FBI. "To disguise the nature of the payments, [Andrew] instructed Kopper to establish a 'gifting program' [to] Fastow family members." According to Justice, Lea endorsed several of these checks. What's more, she signed a joint tax return that didn't reveal the RADR payments.
The Chewco transaction played a much bigger role in the history of the Enron debacle. It is, in fact, the deal that forced auditor Arthur Andersen to make its initial restatement of the company's earnings -- an event that rapidly led to the energy giant's collapse. But it plays a smaller part in Lea's story. Chewco was set up in late 1997 to buy out the University of California's interest in an earlier Enron investment partnership. Like RADR, it was represented as an independent SPE but failed to meet the 3% threshold.
The government says Andy Fastow put Kopper in charge of Chewco, allowing him to collect more than $5 million in illicit income. In exchange, Fastow allegedly demanded kickbacks of $67,224, which were paid in the form of checks to Andy, Lea, and the children. According to an interview that former Enron manager Shirley Hudler gave to the company's court-appointed bankruptcy examiner, Lea also handled back-office functions for Chewco during 1998 and 1999 -- which mostly involved drawing money from one bank to pay off a loan from another. The Fastows "did not reveal their receipt of the $67,224 to their accountants who prepared their income tax returns, nor did they report the income," the government claimed in its indictment of Lea.
For now, Lea and Andy are trying to lead a quiet life. He helps to coach his kids' teams. She has enrolled in nursing school at the University of Houston. Both are involved in their sons' school, St. Johns. But there is no escaping Enron. Someone tried to set fire to the mansion they were building in River Oaks. Earlier this year they attended a parents event at St. John's. "Someone in my carpool who is a prince of a guy and who lost a gazillion dollars on Enron wanted to jump them," recalls one former Enron exec whose kids also go to the school. "I've got to believe that every day is that same thing for them."
One high-ranking former Enron executive who was friendly with Lea and Andy socially recalls being shocked at her indictment. Like many people in Houston, he views her as one of Andy's victims. "Andy would sort of seduce people," this source says. "Maybe he lulled Lea into some false sense of security. 'Hey, this is all up-front, the board approved it, it is the new paradigm, Skilling loves this, Wall Street loves this, I was CFO of the year.' A wife could become blind to it as well -- notwithstanding how bright she was." Such psychological speculation is nearly a compulsion among those who know and care for Lea Fastow. But whatever the answer is, prosecutors don't much care. They're just out to nab the villains who are behind the white-collar crime of the century.
By Mike France
With Julia Cosgrove and Susann Rutledge