The Justice Department charged Enron’s former chief financial officer, Andrew Fastow, with securities fraud, mail fraud and money laundering in connection with several partnerships he controlled.
The Securities & Exchange Commission also filed a civil fraud complaint against Fastow. One of the charges stemmed from Fastow’s role in orchestrating the sale of three Nigerian barges by Enron to Merrill Lynch. Those barges were eventually sold back by Merrill to LJM2, the big off-balance partnership that Fastow had set up in 1999 to buy some of Enron’s failing assets and big debts.
The SEC described the sale of the Nigerian barges, which inflated Enron’s profit by $12 million in 1999 and generated a $700,000 profit for Merrill Lynch, as a “sham sale.” Fastow allegedly made a personal promise to Merrill that it would be able to resell the barges, and that’s where Fastow’s LJM2 partnership came into play.
Fastow is the highest-ranking former Enron executive to be charged in the investigation. The Enron scandal, which began unfolding just over a year ago, sparked a tidal wave of concern about corporate fraud and corporate accounting gimmicks.
Merrill isn’t named in the SEC complaint, but earlier this year a Congressional panel held a hearing into Merrill’s role in the barge sale and in lining up investors for the LJM2 partnership. Three Merrill investment bankers who allegedly played a role in the barge deal are no longer with the firm. Two of them were fired by Merrill for refusing to talk to federal investigators.
One of the fired bankers is Schuyler Tilney, whose wife, Beth, used to be a vice president for marketing at Enron. She is credited with coming up with the idea for the company’s infamous crooked E logo. The other fired Merrill banker is Thomas Davis, a firm vice chairman, who had been the running to lead Merrill at one time. The third banker coming under scrutiny is Robert Furst, who left Merrill late last year. Both Furst and Tilney worked out of Merrill’s Texas office.
The SEC complaint is likely to mirror the criminal charges being filed by the federal prosecutors, which will be unveiled later today.
Fastow surrendered to FBI agents Wednesday morning, in anticipation of charges related to his role in the company’s collapse. Last month, Michael Kopper, a former Enron executive and close confidant of Fastow’s, pleaded guilty to fraud charges. Kopper’s plea agreement all but named Fastow as an unindicted co-conspirator in a plot to defraud Enron shareholders. None of the charges against Kopper stemmed from his role in LJM2.
Prosecutors typically have 30 days after filing a criminal complaint to either formally indict a person or dismiss the charges. It’s during that 30-day window that prosecutors will often try to extract, if possible, a plea deal from a defendant.
The charges against Fastow, for the first time, seek to establish that the purpose of some of Enron’s off-balance sheet deals was to engage in a scheme to inflate the corporation’s profits and make it appear more profitable to investors. The SEC complaint shows that the LJM2 partnership and a predecessor entity called LJM1, both of which were set up by Fastow, had played a critical role in this strategy.
Kopper assisted Fastow in running both partnerships. The LJM2 partnership, which at one time had $394 million in assets, attracted a Who’s Who of Wall Street investors including Merrill, J.P. Morgan Chase, Citigroup and Credit Suisse First Boston. Merrill was retained by Fastow to help lineup investors for LJM2.
At this time, it’s not known whether the SEC and Justice Department intend to pursue charges against Merrill or its former bankers. Merrill has insisted that it did nothing wrong in it’s dealings with Enron.
The role of the Wall Street banks in helping to finance Enron’s many deals has been controversial.
Already three former NatWestminster bankers now a part of the Royal Bank of Scotland have been indicted for defrauding their former employer of some $9 million in a deal involving Kopper, Fastow and the LJM1 partnership. Both CSFB and NatWest were the original outside investors in LJM1.