When Andrew Fastow was indicted last October by a grand jury in Houston, it must have seemed a sure bet to prosecutors that the former Enron chief financial officer would soon roll over and begin to co-operate.
But despite a 78-count indictment, alleging among other things insider trading, money laundering and wire fraud, Mr Fastow has maintained his innocence.
On Thursday the Justice Department increased the pressure. The government unsealed a superceding indictment with 31 new counts against Mr Fastow, promising years of additional prison time. Prosecutors also called for a judge to freeze millions of dollars of his assets, including his Houston home and sports cars. Most egregiously, they arrested his wife, Lea.
“They’re taking out their big guns,” said Jacob Frenkel, a securities lawyer in Washington. “The prosecution is now putting forth its end-game strategy.”
The government also filed charges on Thursday against five more executives from Enron’s Broadband division. Essentially, they have been accused of making false statements about the group’s prospects to bolster more than $150m in Enron shares they were unloading.
But from a dramatic point of view, the more important case on Thursday conerned the Fastows. It has added a soap-opera twist to what was already one of the most significant white-collar crime cases in years. In essence, prosecutors are pressing Mr Fastow to fold in order to spare his wife.
The government’s accusations against Mrs Fastow are much the same as many of those against her husband. They claim she helped arrange one of Enron’s notorious off-balance sheet partnerships and stole the proceeds for herself rather than directing them back to the company. The indictment also claims that she failed to pay taxes on the proceeds.
Although the government frequently threatens to bring charges against a spouse to gain leverage in a prosecution, it is rare that they bring actual charges, defence lawyers said.
“This is more than just putting pressure on him,” said Warren Dennis, a partner at Proskauer Rose. “They must have evidence that she participated.”
Mrs Fastow, who has denied the charges, may prove an exception. For one thing, her husband’s case has become so high profile that the normal standards may no longer apply. Further, Mrs Fastow has an MBA degree and worked in Enron’s finance department during the mid-1990s hardly making her a stay-at-home mom who might plead ignorance.
The government’s case against Mrs Fastow centres on RADR, an off-balance sheet partnership Enron created in 1997 to move some wind-farm investments off its balance sheet. The shift in ownership was required so Enron could continue to meet government requirements to receive certain benefits for supporting alternative energy.
In May 1997, RADR purchased Enron’s interest in the assets for $17m. But Enron maintained a secret interest in the wind farms, according to the government. It put up nearly $16.5m of the purchase price through loans to RADR.
To meet accounting requirements that would allow RADR to be taken off Enron’s balance sheet, outside investors were required to put up the remaining $500,000. The government claims Mr and Mrs Fastow funded these investments.
To insulate themselves from suspicion, they passed $419,000 to Michael Kopper, a former deputy to Mr Fastow, who distributed the money to certain nominal owners. In essence, the government claims that Mr and Mrs Fastow were “renting” names.
Less than two months after the investment, the government claims that the Fastows then received more than $62,000 in profits back from Mr Kopper, who has already pleaded guilty, and the other nominal investors.
The Fastows hid these profits from the IRS by classifying them either as a loan to Mr Kopper, the government claims, or as a “gift” from him. To further avoid detection, they arranged for the money to be paid to them and their children in a series of smaller cheques.
Most lawyers say the avoidance cases should be fairly easy for the government to make. It remains unclear whether a conviction on those grounds would convince Mr Fastow to fold. Mr Frenkel said: “Whatever leverage prosecutors thought they had over Andrew Fastow before this clearly was not enough.”