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Justice Arrests Top Enron Strategist

Oct 3, 2002 | The Washington Time The Justice Department yesterday arrested Andrew Fastow, the former Enron Corp. executive who masterminded the intricate financial deals that destroyed the energy giant and rocked financial markets.

In complaints that encompass dozens of fraud and conspiracy charges, the department and the Securities and Exchange Commission charged that Mr. Fastow engineered six deals to delude investors by making Enron's finances appear better and to reap $30 million in illegal profits for his family. If convicted, the 40-year-old millionaire faces a jail term of up to 140 years.

The government, in its toughest action yet to fund restitution for shareholders defrauded of billions of dollars, is seeking to disgorge not only the cash and other assets it says Mr. Fastow obtained illegally, but also his salary from 1997 to when he was fired as chief financial officer a year ago.

"Our strategy is straightforward. We aim to put the bad guys in prison and take away their money," said Deputy Attorney General Larry Thompson. "Fastow and his co-conspirators systematically and thoroughly corrupted the business of one of the largest corporations in the world."

Mr. Fastow surrendered to the FBI in Houston yesterday morning and was later released on a $5 million bond. Prosecutors said he is not cooperating with efforts to implicate top officials at Enron, including mentor and former Chief Executive Officer Jeffrey Skilling and founder and former Chief Executive Officer Kenneth L. Lay.

The unusually harsh complaint against Mr. Fastow suggests that prosecutors are trying to force cooperation from the central figure in the most celebrated and complex financial scandal in the past year before the case proceeds to trial, litigators said.

Mr. Fastow's attorney, John Keker, indicated his client would defend himself by stressing that he was following orders.

"Enron hired Andy to arrange off-balance-sheet financing. Enron's board of directors, its CEO, and its chairman, directed and praised his work," Mr. Keker said outside the U.S. District Courthouse in Houston. "He never believed he was committing any crime."

The complaint notes that the off-balance-sheet arrangements that became Mr. Fastow's trademark, dubbed "Friend of Enron" deals, were favored by the company's top management as a way to improve the company's balance sheets.

The biggest deals were carried out through the so-called "LJM" partnerships with authorization from the board of directors, although the complaint said Mr. Fastow and "the CEO" lied to the board to get that authorization.

But the complaint does not refer to Mr. Skilling or other top brass being otherwise closely involved in the schemes, which, it said, started in 1997 and continued until the company declared bankruptcy on Dec. 2.

Mr. Skilling and Mr. Lay have said they were not aware of the illegal techniques Mr. Fastow employed in the deals or the sizable profits he made. The board contends those profits were stolen secretly from the company.

The complaint is based partly on information the department obtained from Mr. Fastow's former right-hand man, Michael Kopper, who pleaded guilty to fraud and providing Mr. Fastow with kickbacks in August in exchange for lenient treatment.

The department also has obtained damning testimony from other Enron workers and two employees of a major investment bank involved in one of the suspect transactions, identified by congressional investigators as Merrill Lynch & Co.

"Mr. Fastow bears substantial responsibility for the Enron debacle and for the damage it has caused," said SEC Deputy Director Linda Chatman Thomsen, noting that Enron was the first in a series of scandals that devastated the stock market this year.

"Mr. Fastow thought he could get away with it maybe because his activities involved extremely complicated financial arrangements," she said. "He did not think the SEC and the Justice Department would figure it out. He was wrong."

According to the complaints, Mr. Fastow's schemes followed a pattern where he created supposedly independent partnerships to purchase money-losing assets from Enron and take them off the company's books, thus plumping up profits.

In the first deal, he created partnerships, dubbed "RADR," to take a wind power project off Enron's books so it could continue to receive favorable regulatory treatment.

Other mostly failing assets that Mr. Fastow secretly "parked" in the partnerships were dubbed "nuclear waste" by the deal makers, including Enron's troubled Cuiaba power project in Brazil, its Avici technology stock holdings, and a project involving barges that produce electricity off the coast of Nigeria.

In each case, the partnerships were made up of friends and employees of Enron who often purchased their share in the enterprises using loans provided by Mr. Fastow.

Those loans were repaid when he arranged for Enron to repurchase the assets under secret agreements designed to ensure that he and the partners made a profit even on transactions that lost money, the complaint says.

Merrill Lynch became involved in the Nigerian barge transaction as a personal favor to Mr. Fastow and to secure more underwriting fees from Enron, which was a $40-million-a-year client, the complaint says.

In a new twist in the Enron saga, the complaint says Mr. Fastow sometimes "backdated" the transactions to make them appear more valuable, employing what Enron employees jokingly referred to as the "Enron time machine."

Mr. Fastow also arranged to take kickbacks from Mr. Kopper, who managed many of the partnerships, in $10,000 increments so as to avoid reporting the transactions to the Internal Revenue Service.

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