Fastow Charged With Fraud, Conspiracy in Enron
Case
By Washington Post Staff Writers
Thursday, October 3, 2002; Page
A01
Former Enron Corp.
executive Andrew S.
Fastow surrendered to the
FBI in Houston yesterday
to face charges that he
masterminded a complex
web of fraudulent deals
that drove the company
into bankruptcy while
improperly pocketing more
than $31 million.
Enron's onetime chief
financial officer joined the
recent parade of corporate
officials facing criminal
charges as he walked,
grim-faced and
handcuffed, into the
federal courthouse for a
bail hearing.
Yesterday's early-morning
drama marks a turning
point in the Justice
Department's
10-month-old probe into
Enron's collapse. Fastow is
the highest-ranking
official at the
energy-trading company to
be charged. And there
were references - though
not by name - in the
35-page list of allegations
to other top officials,
including former chief
executive Kenneth L. Lay.
The criminal complaint is
based on testimony from
former Fastow protege
Michael Kopper, who
pleaded guilty in August;
interviews with 11
unnamed informants; and
reams of subpoenaed
documents. It focuses on
Fastow's role in running
off-the-books partnerships
called LJM and said he
both defrauded the company and its investors and acted
with the knowledge of other senior executives to help
disguise the company's mounting financial problems.
The deals with LJM helped Enron manipulate its balance
sheet by moving poorly performing investments off the
books, manufacture earnings through sham sales, and
inflate the value of investments by backdating them, the
complaint said.
Outside the mobbed courthouse, Fastow's attorney, John
Keker, offered a glimpse into his defense strategy, saying
Enron executives, accountants and lawyers had approved
and even praised Fastow's financial wizardry.
"Andy Fastow was dedicated to the long-term success of
Enron," Keker said. "He never believed he was committing
any crime. For the last year, Andy Fastow's former
colleagues have denied their responsibility, whispered
false rumors, and outright lied to discredit him. We will
confront the gossip and lies in the courtroom, not the
press."
U.S. Magistrate Judge Marcia Crone released Fastow on a
$5 million bond, backed by his Houston and Galveston,
Tex., homes, his parents' house, a parcel of land in
Vermont and $3 million in cash under a deal Keker
worked out with prosecutors.
The 40-year-old Fastow could face as many as 20 years in
prison on a money-laundering charge, 10 years for
securities fraud, and five years each on wire, mail fraud
and conspiracy charges cited in the complaint.
Key to the LJM-Enron relationship, the government
charged, was a secret side agreement - known as the
"Global Galactic" agreement - that Fastow made with
Richard Causey, the chief accounting officer. The
unwritten understanding was that LJM would never lose
money on its dealings with the company. Off-the-books
partnerships such as LJM can violate accounting rules if
they do not carry risk for the parties involved.
The government complaint also described an Enron culture
in which executives developed a special vocabulary to
describe their activities. Unprofitable assets it wanted to
move off the books were "nuclear waste" and the
backdating of documents was referred to as the Enron
"time machine."
Prosecutors won court approval in August to freeze $23
million belonging to Fastow, relatives and friends after
Kopper agreed to cooperate. Yesterday they moved to
freeze $11 million more in allegedly tainted proceeds from
Fastow. Earlier they had asked for permission to take over
his new, 11,000-square-foot home in a wealthy Houston
neighborhood.
"Fastow and his co-conspirators systematically and
thoroughly corrupted the business of one of the largest
corporations in the world," said Deputy Attorney General
Larry D. Thompson at a Washington press conference.
He added: "Our strategy is straightforward and simple: We
aim to put the bad guys in prison and take away their
money."
Separately, the Securities and Exchange Commission
charged that Fastow broke securities laws in a civil
complaint it filed in tandem with yesterday's surrender.
SEC Deputy Enforcement Director Linda C. Thomsen said
the agency would seek to recover millions in salary,
bonuses and profits Fastow collected since the alleged
conspiracy started in 1997.
"Fastow bears substantial responsibility for the Enron
debacle and the ensuing damage to investors, employees,
and retirees," Thomsen said. "Apparently Mr. Fastow
thought he could get away with it. . . . He did not think the
SEC and Justice Department would figure it out. He was
wrong."
Keker told the judge his client will have "difficulty" getting
a job because he has to make so many court appearances.
"However," Keker said, "he has sufficient funds to get him
through the case."
Government lawyers insisted that Fastow's wife, Lea, and
his parents, Carl and Joan, come to the downtown
courthouse yesterday afternoon to co-sign the bond. He
and his wife turned over their passports to investigators
last month according to a Justice Department official.
Fastow's case must be presented to a grand jury within 30
days, unless his attorney agrees to an extension. The
father of two young sons, Fastow still could strike a deal
with prosecutors, agreeing to provide testimony against
others. He is not cooperating with law enforcement
officials, Assistant U.S. Attorney Andrew Weissmann told
reporters in Houston.
Justice Department officials said they have interviewed
scores of witnesses so far and have hundreds more to
question in the ongoing probe. The department's Enron
task force has sent signals in past criminal complaints
about the quality of its evidence in an effort to pressure
others to cooperate, legal experts said.
Besides Causey, yesterday's complaint mentioned by title
Enron's former treasurers Jeffrey McMahon and Ben
Glisan, and twice cited Enron's CEO, using dates when Lay
was the company's top executive. It said Enron's board
relied on "false representations" by Fastow, the CEO, chief
accounting office and treasurer when it approved his role
in LJM in 1999. [Story, Page E1.]
The complaint also mentions the "active cooperation"
Enron received from a "major financial institution" that
allegedly helped it book profits by temporarily buying
some Nigerian barges in one deal in late 1999.
Congressional testimony identified that company as Merrill
Lynch.
Yesterday's charges described the deal as a "sham
transaction" that allowed Enron to "manufacture" earnings.
At least one Enron employee later bragged about the deal
in an effort to win a bonus for 2000, court papers said.
A Merrill spokesman said its employees did nothing wrong
in its dealings with Enron.
In laying out the charges against Fastow in a sworn
statement by FBI agent Omer J. Meisel, the government
repeated many of the details about self-dealing that came
out when Kopper pleaded guilty to fraud.
But there were new details, too, since for the first time
investigators had an insider at the center of the alleged
conspiracy to guide them through a maze of transactions
from 1997 until last year.
Kopper, for instance, described a "gifting program" where
Fastow instructed him and another participant in one deal
to kick back money to him in the form of annual $10,000
"gifts" that don't have to be reported as income. In all,
Fastow and his wife and children received $125,000
through the program from 1997 to 2000, according to the
complaint.
The complaint described how, through a partnership called
Southampton, Kopper, Fastow and three British bankers
defrauded their employers by splitting $30 million from
one LJM-Enron deal.
Fastow's family foundation eventually reaped $4.5 million
and Kopper and his domestic partner took home $4.5
million more, according to court papers. Fastow also urged
his subordinates to kick back some of their profits from the
deals, the complaint said.
At other times, the complaint said, the Fastow's LJM deals
benefited Enron. In late 1999, for example, LJM agreed to
purchase the company's interest in a struggling Brazilian
energy project called Cuiaba. That helped Enron book $65
million in profit at a time it was struggling to meet
ambitious financial targets.
Documents on the deal initially included a written
guarantee that Enron would buy the money-loser back
from LJM. But the papers were later changed to remove
that language for fear that the outside accountants would
scuttle the deal, Kopper told prosecutors. Enron eventually
bought back the Cuiaba shares at a profit to LJM.
Fastow's appearance in a Houston courtroom yesterday
was just his third public sighting since he was forced to
leave Enron last October, when the company released
details of his connection to the secretive LJM partnerships.
Fastow invoked his Fifth Amendment right against
self-incrimination before Congress in February.
Enron's creditors won permission from a bankruptcy judge
earlier this week to sue Fastow, Kopper and seven other
former Enron officials for breach of fiduciary duty in
connection with the company's downward spiral. Such a
lawsuit could pit the creditors against law enforcement
officials in a fight over who will recover a limited pool of
funds. Criminal forfeiture claims generally trump those of
creditors in a bankruptcy, but the issue is far from settled,
experts said.
In recent weeks, former chief executives at Adelphia
Communications Corp., Tyco International and ImClone
Systems Inc. have been arrested and charged with fraud as
part of a broad government crackdown on white-collar
crime. FBI Director Robert Mueller vowed yesterday to
continue the effort to root out corporate fraud.
Special correspondent Steven Long in Houston contributed to
this report.
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