Fastow Fingers the Banks

The former Enron CFO says the bankers helped him do it; settlement talks are likely to heat up

Andrew Fastow got six years in prison for his role in the Enron collapse. Now he might be getting some karmic relief. The former Enron CFO recently spent nine days being grilled by lawyers representing Enron shareholders, who are trying to prove that the energy trader's bankers played an active role in the company's fraudulent bookkeeping.

And while the testimony of a convicted felon like Fastow might not be considered credible enough to sway a jury, it could keep defendant banks from winning dismissals from the case. U.S. District Court Judge Melinda Harmon earlier this year dismissed Barclays (BCS) and Deutsche Bank (DB) saying there wasn't enough evidence that they directly participated in the fraud.

Lawyers for many of the banks involved in the case—including JP Morgan Chase (JPM) and Credit Suisse Group's (CS) Credit Suisse First Boston—could not be reached this week, and others declined comment. But one attorney close to the case said banks that can't win dismissal could be expected to settle with the plaintiffs, mostly pension and annuity funds, to avoid a jury trial.

"Good Things Could Happen"

According to partial transcripts of the depositions obtained by BusinessWeek, Fastow repeatedly pointed the finger at Enron's bankers, saying that they proactively helped him figure out ways to hide the company's debt and boost its funds flow, at least on paper, so the company could maintain its investment-grade rating and meet earnings targets.

Why the sudden interest in helping shareholders?

"I did a lot of harm in what I did, and this is one way that I believe I could help repair the harm that I've done is by meeting with people who want to meet with me and answering their questions and telling the truth about what happened at Enron," Fastow said. "The second reason I'm doing this is that I hope something—I—I had hopes that—that perhaps by doing the right thing, good things could happen for me as well by doing it."

Plaintiffs in the consolidated case, In re: Enron Corp. Securities Litigation, which is being tried in U.S. District Court for the Southern District of Texas before Judge Harmon, have a high bar to clear before they can hope to collect damages from the banks. A 1994 Supreme Court case says that it's not enough to show that professionals like bankers aided and abetted fraud. They have to be shown to be active participants.

In His Own Words

Plaintiffs' lawyers believe Fastow's testimony will have them sailing over that bar. What has them so optimistic? Here's a sampling:

"There were many people involved in these transactions other than management of Enron. Bankers, lawyers, accountants contributed in different ways," Fastow said. In fact, he often turned to the banks for help at the end of the quarter, when "reality within Enron was different than what it wanted to report."

"We were looking for banks who could help us solve this problem, meaning doing transactions that would, as we described internally, fill the gap between what was really happening inside Enron and what—the way we wanted Enron to appear to the outside world."

Banks that helped Enron "look healthier to the outside world than it looked internally"—so-called Tier One banks—were paid a premium "because they had these financial reporting effects."

"I viewed the [banks] as problem solvers. I viewed them as helping us, and at the time, I viewed them as bringing a great deal of value to Enron."

Banks sought to win Enron's Tier One rating. "They…understood that by being a Tier One bank, they'd typically get more lucrative business for their banks, and that tended to be borne out over time," Fastow said.

Seeking Solutions

One way to achieve Tier One status was to have the ability to do "mission-critical" deals in a matter of two or three weeks, such as at the end of a quarter, Fastow said. "It was part of the ongoing discussion with banks that, in fact, Enron was not generating the funds flow that it needed to maintain its ratings and that earnings wouldn't always appear in the quarter we wanted it to appear in. So we were looking for solutions from the bank in order to solve those problems."

"I would typically outline, as part of my regular dialogue with bankers, especially the senior and Tier One bankers, what Enron's problems were, what we needed banks to help us try to fix. And they brought solutions to the problems to me and my staff, and—and we did a lot of those deals."

"We were working with banks who could [do] transactions that would, as we described internally, fill the gap between what was really happening inside Enron and what—the way we wanted Enron to appear to the outside world. Tier One banks…were usually prepared to step up and lend hundreds of millions of dollars, if not a billion dollars, to Enron on short notice. …Secondarily, those banks were typically devising the structures and bringing them to Enron to help us solve these [earnings] problems."

Gave Assurances

Fastow assured banks that they didn't stand to lose money on the financing deals, where they typically had 3% in equity at risk.

"What I would typically say to bankers…is that it is not in Enron's interest to have the bankers lose any money on such a small dollar amount because I understood, as CFO of Enron, that if [the banks] lost money in those, they wouldn't do any more of those types of transactions… So to boil that down, what I meant to tell them was if we let you lose money on this little investment, my view is it might kill Enron."

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