Feds Charge Fastow; Bail $5 Million
Complaint Alleges 5 CrimesOct 3, 2002
Andrew Fastow, the alleged architect of the complex financing that helped bankrupt Enron Corp., was charged Wednesday with fraud and money laundering.
After being led into the federal courthouse in handcuffs, the former chief financial officer was read the list of charges that he defrauded Enron shareholders by hiding debt and inflating profits and enriching himself at the company's expense. If convicted, he could face scores of years in jail and millions of dollars in fines.
Fastow was released on a $5 million bond early in the afternoon, after at least an hour in a holding cell waiting for his wife and parents to come to the courthouse and sign the complicated bond documents.
John Keker, one of Fastow's attorneys, told reporters afterward that his client did not believe he had broken the law and that he was always dedicated to Enron's success.
"Enron hired Andy to arrange off-balance-sheet financing," Keker said, noting the company's board of directors, chief executive officer and chairman had supervised his work -- and praised it.
"Over the past year a number of former colleagues of Andrew Fastow have whispered false rumors, denied their responsibility for various things and at times have outright lied. The place that we are going to confront that gossip and those lies is in a courtroom, not in the press."
Prosecutors struck an equally tough posture, freezing $14 million in Fastow family bank accounts and forcing him to put up all of his real estate, including his parents' home, as equity for the bond.
"The Enron shareholders and American public have the right to see justice done in this case, and today we took a giant step forward toward reaching that goal," said federal prosecutor Andrew Weissmann. "We are not finished with the Enron investigation."
The criminal complaint outlined five crimes, and Fastow could face multiple counts under each one. Of those crimes, there is a 20-year prison term for each count of money laundering, 10 years for securities fraud, five years for mail fraud, five years for wire fraud and five years for conspiracy to commit fraud.
In a separate filing, the Securities and Exchange Commission sought to seize Fastow's allegedly ill-gotten gains and to bar him from ever serving in a public company. The SEC, which is working closely with the Justice Department in the case, also filed fraud charges.
Fastow's day began before sunrise Wednesday when he turned himself in at the FBI office in north central Houston shortly after 7 a.m. Wearing a dark gray suit and red tie, he was escorted in by Keker and co-counsel David Gerger of Houston.
FBI agents drove him to the Bob Casey Federal Building in downtown Houston shortly before 8 a.m., then escorted him to the U.S. marshal's office on the 10th floor, where he was formally charged.
The criminal charges center on several partnerships that had either been previously identified as improper in the August plea agreement of former Enron finance executive Michael Kopper or were revealed to be of interest to prosecutors through various sources.
They included partnerships named Chewco, RADR and Southampton, as well as a Brazilian power plant project named Cuiba and a Nigerian power plant project that Enron did with the help of investment bank Merrill Lynch & Co.
The most revealing aspect of the charge is a claim that Fastow and Enron's chief accounting officer had what was known as a "Global Galactic" agreement that assured any losses Fastow's LJM partnership incurred in deals with Enron would be made up later, according to the filing.
The accounting officer's name was not mentioned, but Richard Causey had that role at the company at the time. The agreement had long been alluded to by others and was mentioned in an August 2001 memo from Enron executive Sherron Watkins to then-chairman Ken Lay.
Fastow's countenance was ashen and stoic during an 11 a.m. hearing before U.S. Magistrate Judge Marcia Crone in which prosecutors outlined the bond agreement.
As surety, Fastow posted $3 million from a Fidelity Investment account and deeds to his home in Southampton, worth about $700,000; the deed to a nearly finished mansion in River Oaks, on the market for $4.3 million; the deed to a Galveston summer home, worth $288,000; the deed to his parents' home in Southampton, worth $790,000; and the deed to a cabin on 68 acres in Vermont, worth about $300,000.
His parents' home was apparently included because it was mentioned in an agreement in which Fastow turned over control of LJM to Kopper. Kopper paid Fastow $15.5 million and transferred the home, which Kopper owned, to Fastow. Fastow then gave the home to his parents, who moved here from New Jersey in late 2001.
The two sides had agreed that Fastow would be released after signing the documents, but Crone refused to go along until they were signed by the other parties whose names were on the bond -- namely his parents and wife. Defense attorneys immediately summoned the three to the courthouse.
Unlike Fastow, his wife, Lea, and his parents -- Carl, 68, a retired buyer for a drugstore chain, and Joan, 65 -- had to run a gantlet of reporters who shouted questions as they made their way into the courthouse.
Lea Fastow, a member of Houston's prominent Weingarten family, appeared stressed. Waiting for the hearing to begin, she and her husband's parents sat at a lawyer's table, saying nothing to each other and avoiding reporters' eyes.
The charges allege that Fastow reaped millions of dollars in profits from the various schemes, enriching himself, his family, friends, colleagues and a family foundation. He is also charged with taking kickbacks, disguised as gifts from Kopper.
As part of the Chewco investments, for example, Fastow had some of the funds that were supposed to have been his management fees sent to his wife's Chase account via six checks totaling $64,000. In late 1998, Kopper made two fund transfers to accounts in Fastow's son's name for $10,000 each.
Since any amount above $10,000 has to be reported to the IRS, Fastow told Kopper that "if ever asked, they could explain the checks from Kopper by saying that he and Fastow were close friends and the checks were gifts," according to the charges.
The documents also indicate that Enron's chief executive officer, chief accounting officer, treasurer and others made false representations to the company's board of directors in many of the transactions. Though not named, the CEO was initially Lay and later Skilling when the transactions were performed. The chief accounting officer was Causey and the treasurer was Ben Glisan.
The board was also not informed that LJM was merely a means for "parking" Enron assets, instead of not selling them outright, according to documents. Nor was the board informed that Fastow would personally profit from the transactions.
Even when the board asked Fastow directly whether the deals made payments to any current or former Enron employees other than him or Kopper, the documents say, Fastow replied "no," despite having authorized several million dollars in payments to various Enron employees.
In the case of Cuiba, an over-budget power plant in Brazil in which Enron had a 65 percent ownership, Fastow is alleged to have had LJM buy an interest with a secret guarantee that the partnership would not lose money on the deal.
Enron later bought back LJM's interest in Cuiba, but Fastow allegedly failed to tell the company of serious operational problems, including permitting problems for the pipeline to supply the plant with natural gas or cracks in the power turbine rotors.
The charges also claim that Fastow knowingly allowed Enron to enter into a deal with LJM to hedge shares Enron held in a technology company, Avici, that was not to Enron's advantage. The deal, one of the well-documented Raptor transactions, allegedly relied on an unwritten deal with the chief accounting officer to ensure LJM didn't lose any money.
The government has moved to seize more than $37 million in the Enron case, including about $12 million from Kopper.
Kopper was a key witness against Fastow, according to the court documents, but there were others, including former Enron employees and employees of a finance company who worked on a deal with Enron.
Prosecutors predicted the case would continue for months, and that hundreds of additional witnesses would be interviewed. The number of counts eventually filed against Fastow when he is indicted within the next month has not been finalized, officials said.
That could be determined by a deal with Fastow between now and the 30 days in which prosecutors must file an indictment, said sources close to the case. But it was not clear if Fastow's legal team would negotiate instead of taking the case to trial.