Andrew S. Fastow, Enron’s former chief financial officer, was charged yesterday with defrauding investors and employees through a scheme that enriched himself and led to the energy giant’s devastating fall.
In a criminal complaint, federal authorities accused Fastow of setting up a series of partnerships that he used to conceal about $1 billion in company debt and to divert an estimated $30 million to himself and others. He is the most senior official of the company charged so far by the Justice Department.
Fastow, 40, turned himself in to the FBI in Houston and was escorted away in handcuffs. He was charged with fraud, money laundering and conspiracy.
“Fastow and his co-conspirators systematically and thoroughly corrupted the business of one of the largest corporations in the world,” Larry Thompson, the deputy attorney general, said in Washington. With reported earnings of $139 billion in 2001, Enron ranked fifth on the Fortune 500.
According to the complaint, Fastow and Michael J. Kopper, another Enron executive who has pleaded guilty to fraud and conspiracy charges, devised a number of partnerships. Starting in 1997, the complaint says, the men used those partnerships to shuffle the company’s debts from one entity to another, thus keeping them off Enron’s books and out of public view.
Eventually, Fastow began using the partnerships to siphon millions out of Enron’s pockets and into his own, prosecutors charge. At one point, the complaint says, Fastow used Southampton, a partnership named after his lavish Houston subdivision, to steer $4.5 million into his family’s foundation.
In December, Enron filed what was then the largest corporate bankruptcy in U.S. history, involving $63.4 billion in assets. Shareholders and employees, many of whom had invested most or all of their retirement money in the company, suffered grievous losses. The company’s stock, which once traded at $90 a share, was worth pennies.
The complaint does not mention by name any Enron executives other than Fastow and Kopper, so it is unclear how knowledgeable the prosecutors think Enron’s board or its former chairman, Kenneth L. Lay, were of Fastow’s actions. When called before Congress, Lay refused to answer questions, invoking the Fifth Amendment.
Thompson would not say whether federal authorities would try to strike a deal with Fastow for information about Lay or other top executives.
Much of the complaint against Fastow, a Justice official said, is derived from information that Kopper provided under his plea agreement. Some other details were gleaned from confidential sources. Those sources included seven former Enron employees and officials, one current employee and three employees of an unnamed “leading financial institution” that was involved in the transactions.
Fastow faces up to 20 years in prison if convicted of money laundering, 10 years for securities fraud and five years each for wire fraud, mail fraud and conspiracy. Government officials are seeking to take control of more than $25 million of his assets, to help pay restitution to victims of the Enron collapse.
John Keker, an attorney for Fastow, said in Houston that his client merely acted at the direction of his superiors at Enron.
“Enron hired Andy to arrange off-balance-sheet financing,” Keker said. “Enron’s board of directors, its CEO and its chairman directed and praised his work. Accountants and lawyers reviewed and approved his work. He never believed he was committing any crime.”
The Securities and Exchange Commission filed a related civil action against Fastow yesterday, charging that he violated securities laws with fraudulent record-keeping and illegal transactions. The SEC said it would seek civil penalties and money he generated from illegal transactions.
“Our complaint alleges that Mr. Fastow bears substantial responsibility for the Enron debacle and for the ensuing damage to investors, employees and retirees,” said Linda Chatman Thomsen, the SEC’s deputy director of enforcement.
In addition to Kopper’s plea agreement, prosecutors have been methodically pursuing other key figures in the demise of Enron.
Within the past five months, Enron’s auditor, the Arthur Andersen company, was convicted of obstruction of justice, and David B. Duncan, the Andersen partner in charge of auditing Enron, pleaded guilty to the same charge involving the federal investigation into Enron.
And last month, a federal grand jury in Houston indicted three former British bankers on charges of using Southampton, one of Fastow’s partnerships, to divert millions of dollars from their bank.
Prosecutors struck a deal with Fastow yesterday in which he could post bail with $3 million in cash and $2 million in properties, such as his parents’ vacation home – properties that authorities said they do not believe were tainted by money from corporate fraud.
Federal authorities said they think Fastow was able to maintain the complex web of off-the-books partnerships by depending on friends and family to put the companies in their names and to give tax-free gifts back to Fastow and his family.
Many of the gifts were of $10,000, which, under federal law, is the highest transaction that need not be reported to the federal government. In other cases, Fastow funneled hundreds of thousands of dollars to himself through his wife’s name, authorities charged.
In at least one instance, the complaint says, Fastow made Kopper managing director of a company called CHEWCO, named after a Star Wars character, because Fastow could not serve as an officer of a company that was doing business with Enron without disclosing it on Enron’s books. Kopper then paid Fastow several hundred thousand dollars in kickbacks, the complaint says.
Fastow also arranged for Enron to give the companies “loans” and created secret arrangements whereby Enron would shield the companies from any losses, prosecutors said. Such arrangements meant that at least one other person at Enron would have had to sign off on such deals; Justice Department officials would not say whether such a person exists.
Thompson vowed yesterday that the federal task force looking into Enron’s fall would ferret out every detail.
“We’re going to get to the bottom of what happened at Enron,” he said, “and every single person who is engaged in criminal or any other inappropriate conduct will be brought to justice.”