The U.S. widened its investigation into Enron Corp., adding 31 charges against ex-Chief Financial Officer Andrew Fastow and accusing his wife, former Enron Treasurer Ben Glisan and eight other former executives of taking part in a fraud that destroyed the company.
The 11 indictments represent an expansion of the government’s probe into one of the biggest corporate scandals in U.S. history, one that wiped out $68 billion in the energy trader’s market value. Left unclear are the roles of former Chief Executives Kenneth Lay and Jeffrey Skilling, who haven’t been charged.
“Today’s indictments are a significant milestone in our unabated efforts to expose and punish the vast array of criminal conduct related to the collapse of Enron,” said Deputy Attorney General Larry Thompson. The investigation continues, he told a news conference.
Among those charged are Fastow’s wife, Lea Weingarten Fastow, who also worked at Enron as it rose to become the seventh biggest company in the U.S. She is accused of fraud, taking part in a money laundering conspiracy and filing false tax returns.
New Fastow Charges
Her husband, who was indicted in October and has pleaded innocent, was again named in the latest indictments that accuse him of masterminding the accounting fraud that cost investors billions of dollars. Fastow, the highest-ranking Enron executive charged, was accused of 109 counts in the new indictment, up from 78 previous charges.
His lawyers have said he was acting on orders from Lay, Skilling and Enron’s board.
The charges against Lea Fastow are without merit, said her lawyers. They are “a transparent effort to put pressure” on Andrew Fastow, said one of them, Andrew Jefferson.
There are now 18 federal indictments in the Enron probe, the Justice Department said.
Defense lawyers say Lea Fastow’s indictment may serve as leverage in prosecutors’ efforts to get the former CFO’s cooperation.
“There are often times when the government will move against family members in order to put pressure on someone to plead guilty or cooperate,” said David Irwin, a white-collar criminal defense lawyer in Baltimore and a former federal prosecutor.
Also charged are Kenneth Rice and Joseph Hirko, two former chief executives of Enron Broadband Services; former Enron finance executive Dan Boyle, Kevin Hannon, Rex Shelby and Scott Yeager. Two others, Kevin Howard and Michael Krautz, were reindicted.
All the defendants except Shelby have surrendered. Shelby and prosecutors agreed that he would turn himself in next week.
The U.S. Securities and Exchange Commission also filed a lawsuit against Rice, Hirko and other former Broadband executives, accusing them of fraud and reaping more than $150 million in unlawful profits.
Hirko was dismissed from a civil complaint against the company earlier this week. U.S. District Judge Melinda Harmon said Hirko wasn’t head of the Broadband unit when the alleged fraud took place.
The suit, filed in federal court in Houston, said seven former executives engaged in a scheme to drive up Enron’s shares by using fraudulent accounting methods so they could sell stock for more than $154 million. The government is trying to confiscate more than $100 million of the profits.
Enron formed its broadband division in 1999 to tap the growing market for high-speed telecommunications. The company envisioned turning fiber-optic bandwidth into a commodity to be bought and sold like electricity and natural gas.
It spent $436 million in 2000 alone on 18,000 miles of fiber- optic cable that it planned to connect to transmission equipment and lease to users. Company executives predicted Enron would dominate a market they expected would grow to $500 billion by 2005 because of the explosion of the Internet.
Instead, Internet companies went out of business and those that remained had more fiber-optic network space than they needed.
Even so, as late as April 2001, former CEO Skilling told Bloomberg News in an interview that the broadband unit was worth $36 billion, or $40 a share, at a time when Enron’s stock traded at $70.
Even as market prices for bandwidth tumbled in 2000, Enron Broadband recorded gains on its income statement from equity investments in other companies, derivative instruments and sales of fiber-optic cable among Enron-affiliated partnerships. Gains from those sales accounted for 20 percent of the division’s pretax profit in 2001.
When Enron restated 4 1/2 years of earnings in November 2001, the extent of the financial distortions became clear. The broadband division’s $60 million year-end loss ballooned to $357 million by the third quarter of 2001, and restructuring a derivative investment resulted in negative revenue of $125 million, according to statements filed with the Securities and Exchange Commission.
“It’s hard to understand how millions of dollars could be attributed to Enron as income from Broadband when it never made a nickel and it in fact lost millions,” said Tom Ajamie, a Houston securities lawyer. That “classic pump-and-dump scam” may be easily understood by a jury, he said.
Enron sought bankruptcy protection from creditors in December 2001, wiping out 5,000 jobs and about $800 million in employees’ pension investments. The filing is the second largest in U.S. history behind WorldCom Inc. Enron’s collapse triggered a broad investigation of U.S. energy trading that contributed to an industry decline.
The Justice Department’s Enron task force moved to seize Andrew Fastow’s assets in August, after former executive Michael J. Kopper pleaded guilty to fraud and money-laundering and implicated Fastow.
The government said at the time that it wanted to seize $23 million from bank accounts held by Fastow, his brother and other Enron employees. The Securities and Exchange Commission has also said it would try to force Fastow to surrender his “ill-gotten gains,” including his salary.
Fastow was described by prosecutors as having enriched himself at the company’s expense through securities fraud, mail and wire fraud and money laundering. He faces decades behind bars if convicted, prosecutors said.
Federal prosecutors had said in February they were seeking a new indictment against Fastow.
In March, Enron said it will reorganize around three North American pipelines to help pay creditors owed more than $50 billion. The company owes bondholders more than $10 billion.
Enron’s 6 3/4 percent notes due in 2009 sell for about 18 cents on the dollar, according to Bloomberg data.
Houston-based Enron sought bankruptcy protection after restating $586 million in profits and revealing a network of off- book partnerships used to hide debt and inflate its reported financial performance.