Documents draw probe roadmap
Accounting chief thought to be next
Oct. 2, 2002, 11:42PM
By MICHAEL HEDGES
Copyright 2002 Houston Chronicle Washington Bureau
WASHINGTON -- The charges filed against former Enron chief
financial officer Andrew Fastow on Wednesday signaled prosecutors'
interest in former top Enron executives, including chief accounting
officer Richard Causey.
The focus on Causey is likely aimed at persuading him to cooperate
against one of the Enron Task Force's main targets, Causey's ex-boss,
former CEO Jeff Skilling, sources said.
The documents also indicated the Justice Department is scrutinizing
the role of financial services giant Merrill Lynch in an Enron deal
dubbed a "sham transaction" by prosecutors.
The criminal complaint points to high-ranking Enron executives who,
along with Fastow, engaged in what the government called
"transactions that defrauded Enron, its shareholders ... and others."
Close observers of the Enron criminal investigation said the wording
used by prosecutors in documents signaled future targets of possible
criminal charges.
"It is very clear from the complaint that there were others within
Enron's inner circle who knew what was going on and were in
complicity," said Philip Hilder, attorney for Enron executive Sherron
Watkins.
"It would seem from the Fastow complaint that Causey is the obvious
next target," said Loren Fox, author of the book, Enron, the Rise and
Fall.
"He was one of the people who could have been an internal cop at
Enron, and he obviously failed miserably. The question is, was it
incompetence or something more?" Fox said.
And if Causey can be convinced that the government has a solid case
against him, he could cut a deal with prosecutors to help them
determine if Skilling committed wrongdoing, said analysts.
Causey's Washington attorney, Reid Weingarten, did not return calls
for comment Wednesday.
Hilder cautioned that prosecutors have not revealed other areas that
are part of their investigation.
"This is a multifaceted investigation," he said. "There are other facets
that deal with other people."
While Fastow is charged with stealing money from Enron investors to personally enrich
himself, the court documents make no similar allegations against Causey, former Enron
chairman Ken Lay, Skilling or the company's board.
But the criminal complaint lists by title -- not name -- former Enron executives, including
Causey, who prosecutors claim made "false representations" to the company's board of
directors that allowed Fastow's schemes to be approved.
Among those who prosecutors charged made false representations to the board was a former
Enron CEO. One source close to the case said that was a reference to Skilling, not Lay,
whom he replaced in that job in March 2001.
The charges also mention that Enron's former treasurer helped deceive investors and the
company's board of directors. Though not named, Ben Glisan was company treasurer during
the period described in court papers.
Fastow himself could be a critical witness against his superiors in the company, said experts
who reviewed the wording of the charges against him.
And the document itself may be designed to send a signal.
"The reason people are identified but not named may be to send a loud and clear message to
those Enron executives that this is the last opportunity to fashion a deal with the
government," Hilder said.
For the charges to stand, the Enron Task Force must get a Houston grand jury to indict
Fastow within 30 days. "You might see the persons masked in the complaint named when
the indictment is released," said Hilder.
Causey is linked in the documents to several key events that prosecutors have maintained
were part of the overall scheme to defraud Enron.
Among them is the Fastow-created entity called LJM, named after the first initials of his wife
and children.
Prosecutors charged in the documents that Fastow and other Enron officials used LJM to
skim millions of dollars from Enron. At the same time, the company used LJM to
manufacture earnings through "sham transactions" with Enron, and hid liabilities by moving
poorly performing assets onto LJM's books. That served to defraud Enron investors.
Fastow and Causey had "an undisclosed agreement" called a Global Galactic agreement,
under which Enron would secretly make good any LJM losses, prosecutors said in the court
filing.
Causey and other Enron executives not named "devised a scheme to manufacture a $41
million payment to LJM," prosecutors said.
That complicated deal was disclosed by an unnamed Enron informant and Michael Kopper, a
Fastow protege who pleaded guilty to fraud in August, prosecutors said. It was set up to
satisfy the arrangement with Fastow that LJM would not lose money, prosecutors alleged in
court documents.
Enron's board approved the LJM deal based on "false representations" about how the deal
would work made by Fastow, Causey and an Enron CEO, the complaint charged. That CEO
was identified by a source close to the case as Skilling.
Sherron Watkins mentioned rumors of a "handshake agreement" between Fastow and
Skilling on LJM in a memo she wrote to Lay in August 2001 warning of a growing
accounting crisis at the company.
And in transcripts of interviews conducted by attorneys investigating the partnerships on
behalf on Enron's board of directors, former executive Vince Kaminski raised concerns that
LJM was protected from losses.
He told the attorneys that after a meeting where Skilling urged him to drop all other projects
to work on approving the LJM deals he felt the end result would be "heads the partnership
wins; tails Enron loses."
The charging document also outlines what prosecutors described as an illegal deal between
Fastow and other Enron officials and a "financial institution" sources have identified as
Merrill Lynch.
That transaction involved Fastow and former treasurer Jeff McMahon, who pressured Merrill
Lynch to buy a $28 million interest in three electricity-generating barges parked off the
coast of Nigeria. That enabled Enron to record bogus earnings at the end of 1999.
Merrill Lynch ended up putting $7 million into the project and accepting an interest-free
loan from Enron for the remainder of the deal.
Prosecutors described that deal as a "sham transaction" that allowed Enron to misrepresent
the company's true financial condition, keeping stock prices artificially high.
Then, when Merrill Lynch could find no legitimate buyer for its interest in the Nigerian
barges, Fastow ordered Kopper to have LJM buy it, prosecutors said. That served to "park"
the losses from the deal with LJM, protecting Enron.
Merrill Lynch spokesman Bill Halldin said the company has been informed by the Justice
Department that it is not a criminal target of the Enron investigation.
Justice Department officials would not confirm that Wednesday.
Three Merrill Lynch employees who refused to cooperate with federal investigators have been
fired.
The company said in a statement Wednesday, "Merrill Lynch never knowingly assisted Enron
in falsifying its financial results. Had we known in 1999 what is known today about the
company, we would not have done business with them."
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