sec.gov
SEC CHARGES FASTOW, FORMER ENRON CFO, WITH FRAUD
Seeks disgorgement of all ill-gotten gains, including compensation, civil
money penalties, a permanent bar from acting as a director or officer of a
publicly held company, and injunction from future violations of federal
securities laws
The Commission filed a civil enforcement action today against Andrew S.
Fastow, the former chief financial officer of Enron Corp., alleging
violations of the anti-fraud, periodic reporting, books and records, and
internal controls provisions of the federal securities laws. The
Commission is seeking disgorgement of all ill-gotten gains, including
all compensation received subsequent to the commencement of the alleged
fraud, civil money penalties, a permanent bar from acting as a director
or officer of a publicly held company, and an injunction from future
violations of the federal securities laws. The Commission brought this
action in coordination with the Justice Department's Enron Task Force,
which filed a related criminal complaint against Fastow.
"Mr. Fastow's actions, along with the actions of others at Enron and
elsewhere, have undermined investor confidence in our markets and our
system of financial reporting," said SEC Enforcement Division Director
Stephen M. Cutler. "Our lawsuit today is a message to all who think that
they can get away with defrauding investors. No matter how
sophisticated or complex their schemes might be, we will figure it out,
we will pursue them, and we will make them answer for their wrongdoing."
Added Deputy Director Linda Chatman Thomsen, "Mr. Fastow bears
substantial responsibility for the Enron debacle and for the damage it
has caused. However, our investigation does not end here. We, together
with the Justice Department's Enron Task Force, will continue
investigating until all have been brought to justice."
The complaint allegations stem from Fastow's conduct relating to six
transactions. Three of the transactions, RADR, Chewco, and Southampton,
were the subject of the Commission's earlier settled action against
Michael Kopper. Those transactions were part of an alleged scheme to
hide Fastow's and Kopper's interest in and control of certain entities
in order to keep those entities off Enron's balance sheet. This was
done, according to the complaint, for self-enrichment and to mislead
analysts, rating agencies, and others about Enron's true financial
condition. As to Fastow's role in RADR, Chewco, and Southampton, the
complaint alleges that Fastow secretly nominated certain of the owners
of these entities, funded certain of their investments through
undisclosed loans, collected undisclosed fees, and demanded and received
under-the-table payments, including payments to himself and his family
members disguised as yearly $10,000 non-taxable gifts.
Two of the remaining three transactions, the Nigerian barges and the
Cuiaba transactions, are alleged to have been sham sales - best
described as secret asset-parking arrangements. In one of these sales,
a sale of an interest in certain Nigerian barges to a financial
institution, Fastow is alleged to have personally promised that the
financial institution would be taken out of its so-called investment and
later arranged for an entity he controlled to buy the financial
institution's interest at a pre-arranged rate of return on a pre-
arranged time table.
In the second sale, Enron entered into a transaction with an off-balance-
sheet entity controlled by Fastow to sell an interest in a severely
troubled power plant in Cuiaba, Brazil, in order to avoid consolidation
of project debt and recognize earnings. In connection with this
transaction, Fastow allegedly entered into an unwritten side agreement
with Enron requiring Enron to buy back the interest it just sold to
Fastow at a guaranteed profit.
The last set of allegations included in the complaint relate to an
alleged instance of backdating documents to avoid diminution in Enron's
investment in the stock of a technology company. Specifically,
according to the complaint, in September 2000, Fastow and others created
documents that purported to lock in the value of Enron's investment in
that company back in August of 2000, when that company's stock was
trading at its all-time high price.
Throughout the period of his alleged fraudulent conduct, Fastow sold
millions of dollars worth of Enron securities.
Specifically, the Commission's complaint further alleges as follows:
* RADR: In early 1997, Enron needed to divest itself of certain
electricity-generating windmill farms to maintain certain financial benefits
under applicable energy regulations. A sale to independent third-party
investors would have entailed relinquishing control over these windmill
farms, an eventuality Enron wanted to avoid. To maintain control of these
assets, Fastow selected certain individuals to act as nominee investors in
the entities (collectively referred to as "RADR") that purchased the
windmill farms. To provide the funds for the purchase, Fastow made a secret
personal loan to Kopper, who in turn made loans to the nominee investors.
Between August 1997 and July 2000, these entities generated approximately
$2.7 million in unlawful profits. In July 2000, Enron repurchased the
facilities from the entities, generating an additional gain of approximately
of $1.8 million. Between 1997 and 2000, Kopper made substantial payments to
Fastow from these unlawful profits. One mechanism employed to funnel to
Fastow money generated by this scheme was a "gifting" program whereby Kopper
and Kopper's domestic partner made annual "gifts" of $10,000 to each member
of Fastow's immediate family. Fastow chose the $10,000 amount to avoid IRS
reporting rules.
* Chewco: In 1997, Enron and the California Public Employees' Retirement
System (CalPERS) were joint venture partners in an off-balance-sheet
investment vehicle called Joint Energy Development Limited Partnership
(JEDI). When CalPERS wanted to cash out its investment in JEDI prior to
investing in a larger Enron venture, Fastow and others at Enron formed a
special purpose entity called Chewco to buy CalPERS' interest in JEDI
thereby allowing Enron to continue accounting for JEDI as an off-balance-
sheet entity. Initially, Fastow planned to serve as Chewco's general
partner and as an equity investor, but was advised that his involvement
would require disclosure by Enron. Fastow then selected Michael Kopper to
fill the Chewco general partner role. Fastow secretly controlled Chewco and
Kopper and, by virtue of that control, received a share of Chewco's profits
as kickbacks from Kopper. In addition, Fastow siphoned funds from Enron by
using his position as Enron's CFO to funnel funds to Chewco for his own
benefit. As a result of these various machinations, Chewco was improperly
kept off Enron's balance sheet because it did not have the third-party
equity at risk required by the applicable accounting rules. Improper
deconsolidation of Chewco caused material overstatement of Enron's reported
net income and a material understatement of its debt.
* Southampton: Fastow unlawfully enriched himself and others using
another off-balance-sheet partnership he controlled called LJM Cayman, L.P.
("LJM1"). In approximately February 2000, Fastow and others caused Enron to
buy out the partnership interests of LJM1's two limited partners, Credit
Suisse First Boston and National Westminster Bank (NatWest). In connection
with this transaction, Fastow and others told Enron that NatWest wanted $20
million for its interest in the partnership assets, but paid NatWest only $1
million of that sum and pocketed the rest. A purported charitable
foundation in the name of the Fastow's family received $4.5 million in
proceeds of this fraud.
* Nigerian Barges: In December 1999, Enron and a financial institution
entered into a sham "sale" transaction that enabled Enron to book
approximately $12 million in earnings in 1999. In the transaction, the
financial institution agreed to "buy" from Enron an interest in certain
power-producing barges in Nigeria based on an express oral promise from
Fastow that Enron would arrange to take the financial institution out of the
investment within six months. Enron also agreed to a specified profit for
the financial institution's "investment." The transaction closed at the end
of December 1999. Six months later, Fastow fulfilled his promise to take
the financial institution out of the deal. He arranged for a partnership he
controlled, LJM2 Co-Investment, L.P. ("LJM2") to purchase the financial
institution's interest on the previously-agreed terms.
* Raptor I/Avici: Enron and LJM2 engaged in complex transactions with an
entity called Raptor I. Raptor I was used to manipulate Enron's balance
sheet and income statement and to generate profits for LJM2 and Fastow at
Enron's expense. In September 2000, Fastow and others used Raptor I to
effectuate a fraudulent hedging transaction and thus avoid a decrease in the
value of Enron's investment in the stock of a public company called Avici
Systems Inc. Specifically, Fastow and others back-dated documents to make
it appear that Enron locked in the value of its investment in Avici in
August of 2000, when Avici's stock was trading at its all time high price.
* The Cuiaba Project: To avoid consolidation of debt related to a power-
plant project in Cuiaba, Brazil, and to recognize earnings, Enron entered
into a sham sale with LJM1. Fastow arranged for LJM1 to buy an interest in
the plant despite significant cost overruns, completion delays, and
operational problems, after Enron failed to secure an independent buyer.
However, in connection with this transaction, Fastow had entered into an
unwritten side agreement with Enron (which Enron later honored) requiring
Enron to buy back the interest it sold to LJM1 at a guaranteed profit
regardless of the risks associated with the project.
The Commission's investigation is continuing. For additional
information see Litigation Release No. 17692 (August 21, 2002). [SEC v.
Andrew S. Fastow, Civil Action No. H-02-3666, K.Hoyt, SDTX] (LR17762;
Press Rel. 2002-143) |
