Ex-Enron CFO Says He Helped Mask Losses
Tuesday March 7, 2006
By Erin Mcclam, AP National Writer
Ex-Enron CFO Takes Stand Against Former Bosses, Says He Helped Company Mask Millions in Losses
HOUSTON (AP) -- Former Enron Corp. finance chief Andrew Fastow testified Tuesday he ran financial partnerships designed to help the company mask as much as hundreds of millions of dollars in losses.
Fastow, 44, took the witness stand against his former bosses Kenneth Lay and Jeffrey Skilling, who are accused of fraud, conspiracy and other charges in the spectacular collapse of Enron in 2001.
He told jurors about a partnership, known as LJM1, set up in 1999 to help Enron "solve a problem" -- that it was facing future losses from its investment in a small startup firm.
"We were doing this to inflate our earnings, and I don't think we wanted to show people what we were doing," Fastow said.
Fastow described a conversation with Skilling in 1999 in which he said LJM1, the first partnership, would only be able to do limited transactions because it had raised only $15 million in investments.
Fastow said he told Skilling they would need to raise more money to continue making similar transactions -- an effort that would come to be known as LJM2.
"He said, `Get me as much of that juice as you can,'" Fastow recalled.
Prosecutors have said the partnership was designed to purchase underperforming assets from Enron so that the energy company could boost earnings and get debt off its balance sheet.
Fastow described Skilling as concerned about how much of the partnership could be disclosed to investors and analysts.
"Because it would attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses," Fastow testified.
The partnership posed no financial risk for Fastow, who was guaranteed a $500,000 annual fee when it was set up in 1999.
The ex-CFO testified his role in the partnerships violated Enron's code of conduct, which barred Enron officers from participating in ventures that posed a conflict of interest.
Fastow, who has already pleaded guilty and faces up to 10 years in prison on two counts of conspiracy, is a critical pillar of the government's quest to prove Lay and Skilling lied to Wall Street and to their own employees to conceal the crumbling finances that drove the company into bankruptcy.
The 44-year-old ex-CFO is central to the defense case as well: Lawyers for Lay and Skilling say there was no overarching fraud at Enron, and that it fell victim in part to Fastow's theft from the company.
The defense claims there was no massive fraud at Enron.
Fastow took the stand after lawyers finished questioning Kevin Hannon, a former executive in Enron's broadband unit.
Hannon had provided the trial's most dramatic moment so far. He quoted Skilling as saying "They're on to us" in a May 2001 meeting with top executives when a small analyst firm began to question Enron's finances.
But Hannon conceded Monday under cross-examination that it may have been no more than a sarcastic remark from Skilling, who was miffed at short-sellers betting that Enron stock would fall.
Skilling lawyer Mark Holscher also reminded Hannon of extensive testimony he gave to the Securities and Exchange Commission in 2002 that depicted a far rosier picture of the broadband unit's performance.
On the witness stand, Hannon admitted he had lied to the SEC.
"You lied under oath?" Lay lawyer Bruce Collins said.
"Yes," Hannon answered.
"That's perfect," said the defense lawyer.
The defense claims more than a dozen prosecution witnesses who have pleaded guilty in the Enron collapse -- including Hannon -- confessed to crimes they never committed, submitting to pressure from the federal Enron Task Force.
Federal prosecutors have the power to recommend reductions in those executives' sentences if they cooperate in court -- more than enough incentive, the defense claims, for them to tell the government what it wants to hear.
Fastow is unique in that he has already agreed to a prison term of 10 years. His only hope of serving less time will be to behave well in prison, possibly landing him a reduction of 18 months.
AP Business Writer Kristen Hays contributed to this report.
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