The Justice Department escalated its prosecution of Enron executives yesterday, accusing former leaders of the company’s failed Internet broadband division of exaggerating its prospects to Wall Street analysts to push up the company’s stock, booking $111 million in fraudulent earnings and enriching themselves in the process.
Eight former Enron executives were indicted yesterday, including Lea Fastow, wife of the company’s already-indicted chief financial officer, Andrew Fastow. She was charged with money laundering and filing false tax returns, and was taken into the courthouse in Houston in handcuffs.
The actions continue the Justice Department’s methodical efforts in investigating the collapse of Enron, considered the signature case of corporate wrongdoing exposed by the bursting of the stock-market bubble.
Initial federal charges against Andrew Fastow and others centered on secret financial deals that they allegedly used to steal from the company and its shareholders. The broadband indictment raises the ante, contending that one of Enron’s crucial new business ventures in 2000 and 2001 had been a “sham from its inception” and that the executives charged, along with unnamed “others,” made repeated false statements to improve its prospects.
The grand jury charged Kenneth Rice and Joseph Hirko, both former chief executives of the broadband unit, and Kevin Hannon, its former chief operating officer, with securities fraud. Also charged were former broadband vice presidents Scott Yeager and Rex Shelby. The government contends that the five men sold more than $185 million in Enron stock while hyping the prospects of the broadband division.
Prosecutors are moving to seize about $36 million in property and bank accounts from the defendants they charged yesterday. They want Rice, for example, to forfeit a platinum, sapphire and diamond necklace with 16 diamonds and 226 sapphires with a matching bracelet; two Ferrari race cars and a Shelby vehicle.
Enron invested more than $1 billion in the Internet venture, and former Enron chief executive Jeffrey Skilling and founder and former chairman Kenneth Lay called broadband Enron’s next big hit. Skilling predicted to Wall Street analysts at a January 2001 investment conference that the broadband unit’s growth would eventually prompt a 50 percent increase in Enron’s stock price.
It is not clear whether the government will try to hold Skilling and Lay accountable for the alleged wrongdoing in the broadband division. Andrew Weissmann, deputy director of the Enron task force, said outside the courthouse in Houston yesterday, “There were many people at Enron and other institutions who were responsible for reducing the seventh-largest corporation in America to rubble.” The investigation is continuing, he added, with the task force “diligently sifting through that rubble, piece by piece, scheme by scheme, lie by lie.”
“Rice was right under Skilling,” said Houston attorney and former prosecutor Philip Hilder, who represented Enron whistleblower Sherron Watkins and other former Enron employees. Skilling “would appear to be the next stop if in fact the evidence is there.”
No charges have been brought against Skilling or Lay. Lawyers for both men have said they are innocent of any wrongdoing, and Skilling testified before Congress that the broadband venture succumbed to the industrywide demise of dot-com ventures.
The broadband operation, begun in 1999, included construction of a high-speed “intelligent” fiber-optic network and trading operations to swap access to Internet lines, along with a highly touted venture with Blockbuster to deliver first-run movies via the Internet. Wall Street’s excitement about Enron’s broadband effort helped push its stock to record highs in late 2000.
The Securities and Exchange Commission, in a companion action yesterday, alleged that Rice and associates deliberately create false, exaggerated estimates of the broadband business’s expected profits. Rice knew in December 2000 that Enron had not met its commitments to Blockbuster and that the deal was likely to fail in March 2001, the SEC said. But that prospect was kept from the analysts, the regulators said. The movie venture was called off that March and the broadband unit collapsed in the summer of 2001.
Enron, however, claimed a fraudulent $111 million profit from the movie venture in late 2000 and early 2001 by giving outside investors the right to the venture’s future earnings in ways that violated accounting rules, prosecutors said. Without these profits, Enron would have missed its earnings target for 2000 by more than $50 million, the indictments said.
Linda Thomsen, the SEC’s deputy director of enforcement, said yesterday: “These defendants played important roles in perpetuating the fairytale that Enron was capable of spinning straw or more appropriately, fiber into gold.”
Rice’s attorney, William Dolan III, said his client did not break the law. “Citizens are presumed to be innocent despite all of the circus atmosphere,” Dolan said. Hannon’s attorneys said in a statement that their client is innocent, as did Yeager’s attorney, who called his client a “victim” in the case, Bloomberg News reported.
In its year-long investigation, the Justice Department has charged 18 people with crimes linked to Enron. Its stock soared in the late 1990s, only to crumble late in 2001 following disclosure of Andrew Fastow’s secretive partnership deals and admissions of accounting misstatements. The company filed for bankruptcy protection Dec. 2, 2001.
Andrew Fastow was charged with fraud, conspiracy and money laundering last Oct. 31. Yesterday’s new indictment against him adds allegations that he benefited illegally from insider stock sales and conspired with his wife and others to receive illegal payments from several off-balance sheet partnerships he created.
The Fastows were also charged yesterday with tax evasion. Prosecutors alleged that the Fastows received $62,850 in profits from a concealed loan in 1997 in an improper partnership designed to increase Enron’s energy earnings. The Fastows allegedly tried to hide their loan by describing the income from it as a gift on their tax returns.
The government also contends that the Fastows received $67,224 in “kickbacks” from a concealed investment in another Enron-backed partnership named Chewco. This income was not reported on their federal tax returns, prosecutors said.
“Lea Fastow is innocent,” said her lawyer, Nanci Clarence, outside the federal courthouse in Houston. “Mrs. Fastow has done nothing wrong, and she had nothing to do with the fall of Enron. Mrs. Fastow is being charged in order to put pressure on her husband of 18 years, Andy Fastow. These tactics are unfair and unjust. These charges have no merit.”
Former prosecutors said it is aggressive, but not uncommon, for the government to pursue criminal charges against spouses or family members of people who engineered corporate frauds. “It’s no secret the government would love Andrew Fastow to flip and give evidence against higher ups at Enron,” said Alan Vinegrad, a former U.S. Attorney in Brooklyn and now a partner at Covington & Burling. “Indicting Fastow’s wife is a way to turn up the heat on Fastow to cooperate.”
For the government to strike a deal, Fastow “would have to have evidence … that would give them a prosecutable case against Ken Lay and Jeff Skilling,” he said.