Ex-CFO Charged In Money Laundering, FraudOct 3, 2002 | Newsday Federal investigators unraveling Enron Corp. finances found energy barges in Nigeria, a California wind farm and a Brazilian power plant, and yesterday knitted the threads together to produce criminal charges against the company's financial mastermind, Andrew Fastow.
Fastow, Enron's chief financial officer for 3 1/2 years, was charged with money laundering, securities fraud and conspiracy, and was hauled off in handcuffs after surrendering to the FBI in Houston, where Enron has its headquarters. He was later released on $5-million bail, secured in part by the deeds to four houses in Texas and Vermont. The Securities and Exchange Commission filed a parallel complaint.
Enron was the first major U.S. company to collapse into bankruptcy during the current wave of corporate financial scandals, and Fastow is the first of its top officers to be formally charged with wrong- doing. His attorney said he is innocent.
Before resigning a year ago, Fastow constructed a financial house of cards at Enron, prosecutors said, using off-the- books investment firms to exaggerate the strength of Enron. In the process, he was hailed as the financial genius behind a one-time gas pipeline company that appeared to become the nation's seventh- largest company. Eventually, his family and friends siphoned off millions of dollars, prosecutors said, before Enron imploded into bankruptcy last December.
"Mr. Fastow bears substantial responsibility for the Enron debacle and for the ensuing damage to investors, employees and retirees," said Linda Thomsen, deputy director of the SEC's enforcement division in Washington.
Deputy Attorney General Larry Thompson said the investigation was continuing. "We aim to put the bad guys in prison and take away their money," he said.
Born in Washington, Fastow, 40, lived in Virginia, Long Island and New Jersey before taking an investment job at Chicago's Continental Bank. There, his reputation as a creative financier caught the eye of Enron's then-president, Jeffrey Skilling.
Fastow's attorney, John Keker, said in Houston that his client had followed 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. Accountants and lawyers reviewed and approved his work," Keker said. "He never believed he was committing any crime."
The charges against Fastow carry a maximum prison sentence of 20 years for money laundering, 10 years for securities fraud and five years for conspiracy.
Investigators are believed to have their eyes on Skilling, who advanced to become Enron's chief executive before resigning last year, and on the company's founder and former chairman, Kenneth Lay. Lay resigned earlier this year.
But the details of the criminal complaint against Fastow, coupled with interviews with prosecutors and securities law specialists, suggested yesterday that it may be difficult to prosecute Lay and Skilling.
In recent weeks, Fastow's attorneys had indicated a willingness to negotiate a possible guilty plea but the charges suggest that the talks stalemated.
Fastow's creativity allegedly enabled Enron to park money-losing investments in the off-balance-sheet investments called special purpose entities. That enhanced the corporate bottom line, increasingly important over the last decade as investors focused on short-term corporate profits.
In July 1999, Enron allowed Fastow to create entities named LJM1 and LJM2 (after the first initials of Fastow's wife and sons). While the Enron board was told of Fastow's involvement, Fastow and Skilling assured the directors that Fastow was merely monitoring the entities to protect Enron's interests.
Instead, the mechanisms enriched Fastow, his family and friends, prosecutors said. For example, one investment was named Southampton Place, after the neighborhood in Houston where Fastow lived. Fastow, his assistant, Michael Kopper, and three unnamed officers of National Westminster Bank allegedly agreed on a scheme to create several layers of ownership to mask Fastow's and the bankers' involvement. The agreement was essentially to buy $1-million worth of shares in a telecommunications company. Kopper and the Fastow Family Foundation each paid $25,000 for their shares in March 2000. Two months later, they split a $9-million payout.
Investigators highlighted two other Enron investments moved off the books and into LJM.
In 1999, Fastow tried to engineer the sale of Enron's $28-million interest in a project to moor energy producing barges off Nigeria. He promised that Enron would finance 75 percent of the deal, which in turn would allow Enron to declare $12 million in profit and $28 million in revenue, both important factors on the company's 1999 balance sheet.
Later the same year, Fastow engineered the sale of an Enron subsidiary's share in a power plant in Cuiaba, Brazil. The plant was $120 million over budget and a pipeline to it was incomplete, but Enron sold it to LJM, adding $65-million profit to the company's 1999 bottom line. Two years later, Enron repurchased it with a $2-million profit to LJM.
Enron created one entity with the California Public Employees Retirement System (Calpers) in 1993. When Calpers wanted to drop out of the project, Fastow and Kopper persuaded Barclays Bank and Chase Manhattan Bank to buy the $283-million share. Then, Enron privately guaranteed the funding.
Had it become public knowledge, the entity's investment, a northern California wind farm, would have been subject to state and federal energy regulations. But it remained secret, and it became one of Enron's most lucrative investments.