During a videotaped meeting at Merrill Lynch’s corporate high-rise in New York in 1999, Enron’s then-chief financial officer Andrew Fastow seemed to be at the peak of his powers. The wavy-haired executive smiled and gestured warmly as he drummed up investment interest in his new Enron-related partnership called LJM2.
”Let me simply say I can price (deals) better than anyone else, since I will have better information than anyone else,” Fastow said, drawing chuckles from the bankers. ”Do I know everything that’s going on? Yes.”
His pitch worked. During the economic boom of the late 1990s, everyone wanted a piece of Enron, the white-hot energy-trading firm and seventh-largest corporation in the nation. Merrill Lynch signed on to market LJM2, and the Wall Street firm cajoled investors to commit $400 million to the partnership.
But in a foreshadowing of bad news to come, cracks in Fastow’s smooth facade could be seen during the marketing meeting. Impatient, he drummed the table and interrupted speakers. He lisped noticeably. And while answering a question on the pay of Enron managers who ran LJM2, Fastow nervously scratched his underarm.
Now, three years later, Fastow — who embodied much of the highflying, money-chasing Enron culture — is engulfed in legal woes and faces a possible criminal indictment.
His complex partnerships have crumbled amid allegations that they were used to hide $1 billion in Enron losses and enrich Fastow by $30 million to $45 million. He and other Enron figures are the targets of investigations by the Justice Department, the Securities and Exchange Commission and others.
His key lieutenant, Michael Kopper, is helping prosecutors and recently said he funneled millions of dollars in kickbacks to Fastow. A federal magistrate in Houston has frozen the Fastow family’s assets as prosecutors try to seize $24 million in assets of Enron-related figures.
The next chapter in Fastow’s saga is about to unfold. With the Bush administration and the Justice Department cracking down on corporate fraud, Fastow must cut a plea deal with prosecutors or endure indictment and a long, high-profile trial.
Justice Department officials won’t talk about ongoing investigations, but a lawyer close to the case says indictments against Fastow and others might come this fall.
Fastow and his San Francisco attorney, John Keker, a special prosecutor during the Iran-Contra scandal, have not spoken publicly since the Enron debacle broke last fall. Fastow took the Fifth Amendment before congressional investigators, and he declined to cooperate fully with the Enron board’s investigation.
Even with Fastow’s silence, the evidence disclosed so far, from Enron’s investigation, congressional hearings, lawsuits and Justice Department court papers is very damaging to him, say legal and energy-industry experts.
”The path leads right to Fastow’s door,” says Robert McCullough, head of energy-consulting firm McCullough Research and an expert witness in financial-fraud cases. ”His behavior was reckless and flat-out foolish.”
The son of a buyer for a drugstore chain, Fastow was born 40 years ago in Washington and was reared in Providence, N.J. The popular Fastow played the trumpet in the New Providence High School Pioneers marching band and was active in student government.
”He was a born politician and wheeler-dealer,” says Dwight Boud, a former high-school teacher of Fastow. ”When he was unhappy with his grades, he would sit down with you, man-to-man, and try to work something out.”
In the early 1980s, Fastow studied economics and Chinese culture at Tufts University, then got an MBA from Northwestern University, where he met his wife, Lea Weingarten, the daughter of a rich Houston real-estate developer.
During a training program with Continental Illinois Bank in Chicago, Fastow struck others as an intense and aggressive guy who wouldn’t take no for an answer during discussions. He was too busy to go out with other students, a former classmate recalls.
After a few years of working at Continental Illinois, the ambitious Fastow in 1990 joined Enron, a gas-and-pipeline company that was evolving into a sleek trader of energy contracts in the so-called New Economy.
Culture of risk
Fastow was leaping into a macho Enron culture that encouraged high-risk dealmaking and free spending, say former Enron executives and managers.
Enron hired thousands of elite MBA students and rewarded top performers with bonuses up to $200,000 or $300,000. Hard-drinking dealmakers spent thousands of dollars on clients at ritzy restaurants, cigar bars and strip clubs in Houston and abroad. Executives threw lavish corporate parties, bringing in Cirque du Soleil performers and a circus elephant.
Fastow kept a lower profile than more flamboyant executives. But he enjoyed the trappings of Enron’s rising stars. He roared into the company parking lot in a Porsche 911, and he bought a Mercedes-Benz E320 Wagon and an 18-foot pleasure boat for his family.
Fastow and other top Enron executives were a looming presence at many semipublic performance reviews held in conference rooms twice a year. The reviews, in which rival managers doled out a limited amount of bonus money for their teams, were so brutal and competitive that Enron employees called them ”rank-and-yank” or the ”Star Chamber” reviews.
”He set the pace for the Machiavellian culture at Enron,” says Michael Horning, a former Enron executive.
To keep Enron’s earnings and stock price as high as possible, Enron used accounting vehicles called ”special purpose entities.” Such entities are legally used by many companies to temporarily move debt off their balance sheets for accounting purposes.
In the late 1990s, Fastow pitched his partnership deals as a surefire way for debt-heavy Enron to raise millions of dollars from banks and other investors. Some Enron insiders were immediately skeptical. Fastow has been described in media reports as a ”financial whiz.” But former Enron employees says Fastow and his team were derided for their arrogance, sloppy analysis and ignorance of the investment markets. Fastow was better suited to be a sales manager, people joked.
At one point, Fastow argued that Enron could use its stock to hedge against losses in his partnership deals, an idea scorned by Enron’s own investment experts. In a typical hedging contract, a third unrelated party takes on the investment risk for a company.
After one slick presentation on the LJM partnerships by Fastow’s team three years ago, Enron managers and analysts stared at each other in confusion. It sounded too good to be true, they thought. There was no investment risk for Enron, only gain. The partnerships were ripped as a ”black hole” or ”house of cards” doomed to collapse.
To skeptical Enron executives and managers, Fastow’s finance group appeared to be independent and unaccountable, working outside the system of controls in place for other offices. Enron’s board worried about rogue traders but never thought their chief financial officer might be the problem, one former executive said.
Few publicly challenged Fastow and his troops, fearing reprisal. But from 1999 to Enron’s fall in late 2001, several worried Enron executives raised red flags.
One was research head Vincent Kaminski, who ran an all-star team of mathematicians and economists trained in investment-related ”gaming” theory pioneered by Nobel laureate John Nash, the subject of A Beautiful Mind.
Three years ago, Kaminski told his boss the partnership deals were ”so stupid that only Andrew Fastow could have come up with it,” according to legal papers.
Other concerned Enron employees began talking with Sherron Watkins, the former Enron executive who warned former chairman Kenneth Lay in a memo last year that Enron would ”implode in a wave of accounting scandals.”
But the warnings to top Enron executives, including former CEO Jeffrey Skilling, were ignored, according to legal papers.
In August 2001, Fastow defended the LJM partnerships in an interview with attorneys for Vinson & Elkins, Enron’s law firm in Houston that looked into allegations about the partnerships.
Fastow said that Enron’s board had approved the LJM entity. He also said there was adequate oversight, including the board’s audit committee, to guard against conflicts between LJM and Enron.
”Fastow viewed the LJM-Enron relationship as good for LJM and great for Enron,” reads a Vinson & Elkins memorandum. ”He pointed out that LJM had, however, lost money on some of the transactions with Enron.”
Legal heat intensifies
Now Fastow’s partnerships are dead, and his old allies are abandoning him. In a plea deal last month with prosecutors, Kopper pleaded guilty to fraud and money laundering, while agreeing to help the Justice Department in Enron-related investigations.
Other former Enron figures who played a role in the questionable partnerships are believed to be seeking plea deals with prosecutors, legal experts say.
”It’s bad news for anyone involved in the partnership deals,” says former prosecutor Philip Hilder, now a Houston attorney.
Fastow has few options, legal watchers say. Given the public and political outcry against corporate fraud, the Justice Department is unlikely to strike a plea deal with Fastow unless he can help prosecutors build strong cases against Lay and Skilling.
Legal findings clearly show that Fastow ran the partnerships and received kickbacks on partnership deals, attorneys say.
”It obliterates any defense that this was all an innocent mistake, or that he relied on the opinions of accountants,” says former prosecutor Stephen Meagher, now at the law firm Phillips & Cohen.
Fastow’s wife, Lea, an MBA who worked briefly in Enron’s finance office, also has been implicated in the suspected partnership schemes. Andrew and Lea Fastow received $17 million in illegally gained money from the partnership deals, according to court papers filed by the Justice Department in Kopper’s plea deal.
Since being ousted from Enron last October, Andrew Fastow has sought to lead a relatively normal life. He’s been building a $3 million home in the chic River Oaks section of Houston that he may sell when it’s done. He coaches his son’s Little League baseball team. And the Fastows remain active at their temple and in art circles.
But the specter of an indictment has recently cast a pall over the Fastows. They’re keeping more to themselves, says a Houston friend who requested anonymity. And their frequent weekend visits to their beach house in Galveston, Texas, have nearly stopped.
Says San Francisco attorney James Finberg: ”I can’t imagine him not doing jail time.”