Former Enron Chief Financial Officer Andrew S. Fastow surrendered to the FBI this morning in Houston, walking voluntarily into the bureau’s headquarters about 7 a.m. He faces charges of securities, wire and mail fraud, money laundering and conspiracy.
The charge says the government will require Fastow, 40, to forfeit any property that was derived from the alleged crime, but no specific property was mentioned in the charge.
The Securities and Exchange Commission also has filed fraud charges against Fastow for the same transactions.
The criminal charges center on a number of partnerships that had been previously identified as improper in the plea agreement of former Enron finance executive Michael Kopper last month, including the partnerships named Chewco, RADR and Southampton. Also mentioned is a Brazilian power plant project named Cuiba and a Nigerian power plant project.
The most revealing aspect of the charge is a claim that Fastow and Enron’s chief accounting officer, Rick Causey, had what is known as a “Global Galactic” agreement, which assured any losses Fastow’s LJM partnership incurred in its dealings with Enron would be made up later, according to the filing.
This agreement had long been alluded to by others, and was mentioned in an Aug. 2001 memo from Enron executive Sherron Watkins to then chairman Ken Lay, but was believed to be a deal between Skilling and Fastow.
The charges say Fastow “willingly engaged in these transaction in order to achieve accounting goals and to circumvent regulatory requirements,” both those required in corporate accounting and covered by personal income tax laws.
In the deals Fastow and his family members, including his wife and son, received money. For example, as part of the Chewco investments, Fastow had some of the funds that were considered his management fees sent to his wife’s Chase account via 6 checks for a total of $64,000. In later 1998 Kopper did two transfers of funds to accounts in FAstow’s son’s name for $10,000 each.
Since any amount above $10,000 has to be reported to the IRS, Fastow told Kopper that “if ever asked, they could explain the checks from Kopper by saying that he and Fastow were close friends and the checks were gifts,” according to the charges.
The documents also indicate that Enron’s chief executive officer, chief accounting officer, treasurer and others made false representations to the company’s board of directors in many of the transactions. The executives were not named, but the CEO was first Ken Lay and later Jeff Skilling during the time of the transactions. the CAO was Rick Causey and the treasurer was Ben Glisan.
The board was also not informed that LJM was merely a means for “parking” Enron assets, not selling the outright, according to documents. Nor was it informed that Fastow would personally profit from the transactions. Even when the board confronted Fastow and asked whether any current or former Enron employees other than Fastow or Kopper received payment through the deals, the document says Fastow told the board members “no,” despite having authorized several million dollars in payments to various Enron employees.
The Cuiba project was an over-budget power plant in Brazil that Enron had a 65 percent ownership in. According to the documents Enron did not want to consolidate the $120 million debt of the project on its books, but no buyer could be found. Fastow proposed LJM buy a 13 percent interest in the project, which would have technically taken the project off the company’s books and let it report $65 million in income during the third and fourth quarters of 1999.
What made the deal inappropriate, however, was a verbal buy-back agreement between Fastow and Enron that said Enron would buy the stake in Cuiba back so LJM would not lose money. This was not disclosed to the board of directors or to investors. Nor was the fact that there were serious operational problems at the facility, including permitting problems for the pipeline to supply the plant with natural gas or cracks in the power turbine rotors.
Despite these problems Enron eventually bought back LJM’s stake in Cuiba in Aug. 2001.
The charges also claim that Fastow knowingly allowed Enron to enter into a deal with LJM to hedge shares Enron held in a technology company, Avici, that was not to Enron’s advantage. Fastow used the unwritten deal with the CAO to ensure LJM didn’t lose any money in the hedge.
Among the confidential sources used by investigators in putting together the charge were:
â€¢ a former employee of a Fastow-controlled partnership named LJM;
â€¢ a former Enron executive;
â€¢ two relatives of Fastow’s wife;
â€¢ a former Enron employee who worked on a transaction that involved Merrill Lynch and power generation barges in Nigeria;
â€¢ a current finance executive involved in the Merrill Lynch-Nigeria deal;
â€¢ former employees who worked on an Enron project called Cuiba; and others.
Fastow arrived this morning in a dark, late-model Volvo, accompanied by his attorney, John Keker. Fastow was dressed in a charcoal gray suit and red tie.
At 7:45 a.m., he was transferred to the federal courthouse downtown, where he entered the building through a back entrance. He was wearing handcuffs with his hands behind his back.
Fastow was taken to the 10th-floor U.S. Marshall’s office where paperwork is being filed. He will then be taken before Magistrate Marcia Crone at 11 a.m. in the same building. If Crone agrees with a deal reached between Fastow’s attorney and government prosecutors, he would be free later today on $5 million bail.
“We are not requesting he be held,” Enron Task Force director Leslie Caldwell told a news conference.
“We have an agreement in principle with his attorney, that’s subject to the court’s approval, that he could be released on a bond of $5 million that will be fully secured by four parcels of real estate and $3 million in cash.”
The precise wording of the charges against Fastow could provide valuable clues as to whether prosecutors appear poised to pursue his superior, Skilling, experts said.
“I’d expect we will get a much clearer sense of how the government intends to build a case against Skilling if that is their intention when we see the Fastow charges,” one attorney said.
While Fastow has repeatedly refused to address Enron, his advisers have maintained his actions were approved by superiors within the company, including Skilling.
Skilling, in congressional testimony and through his lawyers who addressed the issues earlier this year, has said he had no knowledge of any illegal schemes inside the company.
For example, Skilling has said he did not know the details of partnerships called LJM2 set up by Fastow and approved by Enron’s board in 1999.
Skilling has also denied detailed knowledge of Enron-related entities that were the basis for charges against Kopper and are expected to figure in the charges against Fastow.
When Skilling testified before a skeptical Congress early this year, he said, “Enron was an enormous company. Could I have known everything going on everywhere in the company?”
Skilling’s attorney, Bruce Hiler, did not return calls for comment Tuesday.
Justice Department officials in Houston and Washington also have refused to discuss the case, but Justice’s charge revealed today claims the Nigerian deal was fraudulent.
Fastow reaped an estimated $30 million from the partnerships, though some have calculated his potential take as much greater.
One source said the charges filed against him will include an assessment by the Internal Revenue Service that he had failed to pay taxes on money raked out of Enron-related entities.
In Kopper’s guilty plea to two fraud charges, he said that he funneled money from the partnerships back to Fastow and Fastow’s family.
A federal judge has frozen more than $23 million in accounts held by Fastow, his wife, Lea, his brother Peter, a family foundation and others linked to him through Enron. That came after prosecutors filed court papers alleging that the money was the ill-gotten proceeds of fraudulent schemes involving Kopper and Fastow.
The government is also seeking to seize Fastow’s new Houston mansion built in River Oaks for an estimated $2.6 million.
The government charged Fastow in a criminal complaint, rather than an indictment by the Houston federal grand jury investigating Enron.
A criminal complaint gives prosecutors some flexibility in the case, sources said, allowing prosecutors to show a defendant how much information they have so he can decide whether negotiating a plea is better than fighting in court. Also, a criminal complaint can be used to demonstrate to third parties including potential witnesses and targets that prosecutors are in a strong position, persuading those people to cooperate.
A defendant’s court appearance starts a 30-day period in which the government must indict or drop the charges. The government has 20 days in which it must, if the defendant demands, show the magistrate some of the evidence that will show probable cause that Fastow committed the offenses.