Ex-Accounting Chief at Enron Is Indicted on 6 Felony Charges
nytimes.com
January 23, 2004
By KURT EICHENWALD
he former chief accounting officer of Enron was indicted yesterday on six felony charges that accuse him of participating in a multiyear effort to disguise the company's collapsing financial performance.
Criminal charges against the executive, Richard A. Causey, had been expected after a guilty plea last week by Andrew S. Fastow, the former chief financial officer. As part of his deal, people involved in the case said, Mr. Fastow has provided information against Mr. Causey that was used in support of some of the charges filed yesterday.
As described in the indictment and related charges by the Securities and Exchange Commission, financial projections at Enron were virtually guaranteed, with Mr. Causey, Mr. Fastow and others manipulating expenses, revenue, debt levels, cash flow and asset values all to reach desired results. That was accomplished, the charges said, through means including fraudulent valuations, misuse of off-the-books partnerships, improper corporate reorganizations and intentional mistreatment of accounting reserves.
Many of the accusations have been described in other cases, although one involving the misreporting of expenses in Enron's broadband division appears to be new.
With the charges, prosecutors are essentially contending that the entire financial operation of Enron was corrupt, with two of its central figures engaged in crimes years before the company's collapse. Both men had working relationships with two former chief executives, Jeffrey K. Skilling and Kenneth L. Lay. Neither Mr. Skilling nor Mr. Lay has been charged, but they are subjects of the continuing investigation.
The indictment against Mr. Causey is the first to stem almost exclusively from accusations of accounting fraud. Three other executives have already settled similar cases, with two agreeing to plead guilty to crimes. Mr. Causey is the first to signal a willingness to contest the charges in court.
"Rick Causey is a decent, honorable and innocent man," said Mark Hulkower, one of Mr. Causey's lawyers. "He has done nothing, absolutely nothing, wrong. We will vigorously contest these charges and we look forward to the day when Mr. Causey's vindicated in this courthouse."
The charges themselves are the next stage in a building-block approach by prosecutors. They began with a guilty plea with a lower-level finance executive, Michael J. Kopper, moved on to the indictment of Mr. Fastow, then reached a criminal settlement with the company treasurer, Ben F. Glisan Jr. Mr. Causey remained the sole former top-level executive involved exclusively in the accounting and financial realm who had not been charged.
"We are going to relentlessly pursue" Enron executives involved in illegal activities, Andrew Weismann, deputy director of the Justice Department's Enron task force, said of the prosecution strategy.
Still, the Causey case could be more challenging for the government in certain ways than was the possible case against Mr. Fastow, who constructed many of the off-the-books partnerships that played such a significant role in Enron's demise. Mr. Fastow engaged in secret transactions that resulted in millions of dollars flowing to him, at times involving money that rightfully belonged to Enron.
No such trail of cash exists in the case against Mr. Causey, as described in the charges. Instead, the charges suggest that Mr. Causey's motive came from his ability to profit from stock sales and related payments he received that were more valuable because of the false picture Enron portrayed to the marketplace.
Mr. Causey's expected defense is, at first blush, relatively simple, according to people involved in the case: whatever other accountants may think of the aggressive tactics he employed at Enron, Mr. Causey believed that he was within the bounds of generally accepted accounting principles, or GAAP. And indeed, the former partner at Arthur Andersen in charge of the Enron account, David B. Duncan, publicly testified in 2002 that beyond instances involving events not included in Mr. Causey's charges he still thought Enron's accounting was correct.
Mr. Duncan, who pleaded guilty to obstruction of justice after orchestrating the destruction of thousands of Enron documents, made his statement as a government witness.
To counter that, the government is expected to bring testimony that information was knowingly withheld from Arthur Andersen by Mr. Causey and others for the purpose of ensuring a particular outcome in their accounting judgments. And indeed, prosecutors and S.E.C. lawyers have already secured the cooperation of several executives who have agreed to testify that the accounting was knowingly incorrect. They include Mr. Fastow; David Delainey, the former head of an Enron division; Wes Colwell, the chief accountant with one of its divisions; and possibly Mr. Glisan, the former treasurer.
Technically, Mr. Causey could face up to 55 years in prison if convicted on all charges. But such calculations are often misleading because of the intricacies of the sentencing guidelines. Actual sentences tend to be much less than the maximum possibilities in white-collar cases involving first-time offenders.
According to the charges, the scheme to defraud lasted from at least 1999 through 2001 and involved multiple methods.
Using one of those methods, the charges said, in the fourth quarter of 2000 Mr. Causey and others fraudulently increased the value of an asset known as Mariner Energy by $100 million. Under Enron's accounting, that translated into profits, which were used to reach the company's projected earnings.
That same quarter, the charges say, Mr. Causey also worked to disguise huge profits that Enron had earned from energy trading in California during that state's power crisis, which would have signaled to the marketplace that the company was engaged in more speculative transactions than it had disclosed. That was accomplished, the charges said, by plowing huge sums into reserve accounts, which would then be available for use in later quarters.
The charges also say that Mr. Causey, in a conspiracy with Mr. Fastow, Mr. Glisan and others, used off-the-books entities to manipulate Enron's financial performance. Under the accounting rules at the time, such entities were required to have at least 3 percent of their capital from an independent investor to ensure that someone outside of the company involved stood at risk to lose money. That way, the logic goes, the independent investor will ensure that any deals between the company and the off-the-books entity are legitimate arms-length transactions.
But, according to the charges as well as the pleas by Mr. Fastow and Mr. Glisan, Enron found a way around that. It established an off-the-books entity called Talon, which was part of a quartet of vehicles known collectively as the Raptors. Talon and the other Raptors were treated as off-the-books, independent vehicles because more than 3 percent of their capital - in the form of $30 million for each vehicle - came from an investment partnership called LJM2, which was managed by Mr. Fastow.
Once the Raptors were established, they provided guarantees known as hedges that they would compensate Enron if certain assets held by the company lost value. Because of Enron's accounting, such a loss of value would have to be reported directly on its bottom line.
The charges say, however, that the Raptors were not a real hedge because LJM2 had no real money in them. Instead, they say, Mr. Causey and Mr. Fastow reached a secret agreement under which LJM2 would receive back its $30 million plus a profit of $11 million before Talon and the other Raptors engaged in any hedging. As a result, LJM2 had no true financial interest in the Raptors, allowing Enron to hedge assets that were almost guaranteed to cost the off-books entities money.
The charges say that there were other secret side agreements with LJM2, in which assets were supposedly sold to the investment partnership, resulting in profits to the company. But Mr. Causey and Mr. Fastow had secret agreements that LJM2 would be guaranteed against any losses, meaning that Enron still bore the risk of ownership. |
