Prosecutors pursuing those responsible for the collapse of Enron Corp. could file fraud charges against the company’s former chief financial officer, Andrew S. Fastow, as early as next week, according to people close to the case.
The Justice Department’s Enron task force has telegraphed a possible case against Fastow in recent court documents, freezing more than $20 million in his accounts as tainted proceeds from illegal activity. Michael J. Kopper, Fastow’s right-hand man at Enron, last month pleaded guilty to wire fraud and said he and Fastow siphoned off millions of dollars from Enron.
Such charges would turn prosecutors’ attention toward whether they can build a criminal case against higher-ranking Enron officials, namely Fastow’s mentor, former chief executive Jeffrey K. Skilling, and former chairman Kenneth L. Lay. Both men have denied wrongdoing.
Fastow worked closely with Skilling in the complicated financial deals that eventually led to Enron’s downfall. But it is unclear whether Fastow will agree to cooperate with the investigation and exactly what he can tell prosecutors about Skilling. A spokesman for Fastow declined to comment. Skilling’s attorney did not return calls.
Former Enron employees and others who have been interviewed in recent weeks by the Enron task force and the Securities and Exchange Commission said that investigators appear intent on trying to show that the former executives knew, or should have known, that Enron was increasingly dependent on sham asset sales and inflated financial deals that Fastow arranged to meet the company’s ambitious earnings targets.
The Enron probe has become increasingly active. Investigators are examining a range of Enron operations, including its failed Internet broadband venture and instances when managers allegedly lied to or misled their accountants, according to people close to the case.
“I think they’re looking at everything that Enron did. They are certainly looking at broadband issues,” said Houston lawyer Jacks C. Nickens, who represents former top executives in Enron’s Internet unit.
One grand jury in Houston has been hearing evidence for months. A second grand jury in San Francisco, working in tandem with the task force, is probing Enron’s alleged manipulation of electricity sales during California’s energy crisis in 2000-2001.
So far, state investigators have found no smoking-gun documents linking Skilling or Lay to illegal activity, sources said. That would make it far more important for the government to secure the cooperation of key insiders such as Fastow, according to experts on white-collar crime.
Prosecutors have filed criminal charges against top officials at Adelphia Communications Corp. and WorldCom Inc. in other financial scandals this summer. In WorldCom, internal e-mails and key figures’ interviews with auditors helped investigators make a case in just weeks. Adelphia itself disclosed alleged improprieties involving its founding family, the Rigases, in reports to the SEC.
One San Francisco case shows how the Enron prosecutors might proceed. Two former presidents at HBO & Co., a medical technology firm, are under indictment for fraud in connection with an alleged scheme to inflate the company’s revenue. The company engaged in sham transactions, hid expenses and used reserve funds to pad its books, all with the knowledge of its leaders, according to the indictment and civil charges filed by the SEC.
The lead prosecutor in that case, Leslie Caldwell, secured the cooperation of finance officials who agreed to testify against the corporate leaders. Caldwell now heads the Enron task force.
As investigators search for evidence against Skilling and Lay, they appear to be encircling top managers who ran key business units.
One focus is Enron’s heavily promoted attempt to jump into the Internet market in 1999, with a partnership with Blockbuster to sell first-run movies on demand over the Web and with a trading operation selling capacity on fiber-optic circuits.
Some former Enron managers have told federal investigators that both broadband ventures were failing by the end of 2000, yet Lay, Skilling and other top company executives continued to boast of the business’s bright future until March 2001, when the Blockbuster partnership was abandoned.
Skilling told Wall Street analysts in January 2001 that the high-risk broadband ventures would be worth $46 a share to Enron stockholders, more than Enron’s entire business was valued by the market in 1999. But former Enron employees have told investigators, sources said, that company analysts had produced a far lower calculation of broadband’s prospects.
Legal experts said it is difficult to prosecute corporate chieftains on the basis of financial projections they make, no matter how optimistic they are.
“A prosecutor has to convince 12 people the CEO had criminal intent to defraud the marketplace,” said David Irwin, a Baltimore defense lawyer and former prosecutor. “These guys aren’t going to come out and say they did it.”
Enron witnesses have told investigators that top executives used unsupported forecasts for the movies-on-demand business in creating a complex financial deal called Braveheart late in 2000. Effectively, Enron sold part of the deal’s projected profits to outside investors, including the Canadian Imperial Bank of Commerce. Enron then reported more than $100 million in profit on its books for the October 2000-March 2001 period — though the business had few paying customers before it folded.
Former Enron workers say that SEC investigators have spent months looking into transactions at Enron Energy Services, a division that struck long-term contracts to supply energy to large commercial customers. Enron exaggerated potential profits from these contracts, according to some former employees, timing the deals to help meet quarterly profit goals.
The relationship between Skilling and Lay and Enron’s outside auditors at Arthur Andersen LLP is also of interest to prosecutors, sources say. Concealing data from auditors is a crime under securities law, said Jacob Frenkel, a former prosecutor in Washington.
David B. Duncan, who oversaw the Enron account for the now-defunct accounting firm, has testified that his audit team was misled for years by Enron about an off-balance-sheet partnership called Chewco. Enron violated accounting rules in creating the partnership, which concealed millions of dollars in company debt.
“I was certain that certain people weren’t shooting straight with us,” Duncan told the jury at Andersen’s criminal trial in May. Duncan pleaded guilty to obstructing justice earlier this year in connection with the destruction of Enron audit papers.