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Fastow charged { October 3 2002 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A35434-2002Oct2.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A35434-2002Oct2.html
Fastow Charged With Fraud, Conspiracy in Enron Case
By Washington Post Staff Writers
Thursday, October 3, 2002; Page A01
Former Enron Corp. executive Andrew S. Fastow surrendered to the FBI in Houston yesterday to face charges that he masterminded a complex web of fraudulent deals that drove the company into bankruptcy while improperly pocketing more than $31 million.
Enron's onetime chief financial officer joined the recent parade of corporate officials facing criminal charges as he walked, grim-faced and handcuffed, into the federal courthouse for a bail hearing.
Yesterday's early-morning drama marks a turning point in the Justice Department's 10-month-old probe into Enron's collapse. Fastow is the highest-ranking official at the energy-trading company to be charged. And there were references -- though not by name -- in the 35-page list of allegations to other top officials, including former chief executive Kenneth L. Lay.
The criminal complaint is based on testimony from former Fastow protege Michael J. Kopper, who pleaded guilty in August; interviews with 11 unnamed informants; and reams of subpoenaed documents. It focuses on Fastow's role in running off-the-books partnerships called LJM and said he both defrauded the company and its investors and acted with the knowledge of other senior executives to help disguise the company's mounting financial problems.
The deals with LJM helped Enron manipulate its balance sheet by moving poorly performing investments off the books, manufacture earnings through sham sales, and inflate the value of investments by backdating them, the complaint said.
Outside the mobbed courthouse, Fastow's attorney, John Keker, offered a glimpse into his defense strategy, saying Enron executives, accountants and lawyers had approved and even praised Fastow's financial wizardry.
"Andy Fastow was dedicated to the long-term success of Enron," Keker said. "He never believed he was committing any crime. For the last year, Andy Fastow's former colleagues have denied their responsibility, whispered false rumors, and outright lied to discredit him. We will confront the gossip and lies in the courtroom, not the press."
U.S. Magistrate Judge Marcia Crone released Fastow on a $5 million bond, backed by his Houston and Galveston, Tex., homes, his parents' house, a parcel of land in Vermont and $3 million in cash under a deal Keker worked out with prosecutors.
The 40-year-old Fastow could face as many as 20 years in prison on a money-laundering charge, 10 years for securities fraud, and five years each on wire and mail fraud and conspiracy charges cited in the complaint.
Key to the LJM-Enron relationship, the government charged, was a secret side agreement -- known as the "Global Galactic" agreement -- that Fastow made with Richard A. Causey, the chief accounting officer. The unwritten understanding was that LJM would never lose money on its dealings with the company. Off-the-books partnerships such as LJM can violate accounting rules if they do not carry risk for the parties involved.
The government complaint also described an Enron culture in which executives developed a special vocabulary to describe their activities. Unprofitable assets it wanted to move off the books were "nuclear waste" and the backdating of documents was referred to as the Enron "time machine."
Prosecutors won court approval in August to freeze $23 million belonging to Fastow, relatives and friends after Kopper agreed to cooperate. Yesterday they moved to freeze $11 million more in allegedly tainted proceeds from Fastow. Earlier they had asked for permission to take over his new, 11,000-square-foot home in a wealthy Houston neighborhood.
"Fastow and his co-conspirators systematically and thoroughly corrupted the business of one of the largest corporations in the world," said Deputy Attorney General Larry D. Thompson at a Washington news conference.
He added: "Our strategy is straightforward and simple: We aim to put the bad guys in prison and take away their money."
Separately, the Securities and Exchange Commission charged that Fastow broke securities laws in a civil complaint it filed in tandem with yesterday's surrender. SEC Deputy Enforcement Director Linda C. Thomsen said the agency would seek to recover millions in salary, bonuses and profits Fastow collected since the alleged conspiracy started in 1997.
"Fastow bears substantial responsibility for the Enron debacle and the ensuing damage to investors, employees and retirees," Thomsen said. "Apparently Mr. Fastow thought he could get away with it. . . . He did not think the SEC and Justice Department would figure it out. He was wrong."
Keker told the judge his client will have "difficulty" getting a job because he has to make so many court appearances. "However," Keker said, "he has sufficient funds to get him through the case."
Government lawyers insisted that Fastow's wife, Lea, and his parents, Carl and Joan, come to the downtown courthouse yesterday afternoon to co-sign the bond. He and his wife turned over their passports to investigators last month, according to a Justice Department official.
Fastow's case must be presented to a grand jury within 30 days, unless his attorney agrees to an extension. The father of two young sons, Fastow still could strike a deal with prosecutors, agreeing to provide testimony against others. He is not cooperating with law enforcement officials, Assistant U.S. Attorney Andrew Weissmann told reporters in Houston.
Justice Department officials said they have interviewed scores of witnesses so far and have hundreds more to question in the ongoing probe. The department's Enron task force has sent signals in past criminal complaints about the quality of its evidence in an effort to pressure others to cooperate, legal experts said.
Besides Causey, yesterday's complaint mentioned by title Enron's former treasurers Jeffrey McMahon and Ben Glisan Jr., and twice cited Enron's CEO, using dates when Lay was the company's top executive. It said Enron's board relied on "false representations" by Fastow, the CEO, chief accounting office and treasurer when it approved his role in LJM in 1999. [Story, Page E1.]
The complaint also mentions the "active cooperation" Enron received from a "major financial institution" that allegedly helped it book profits by temporarily buying some Nigerian barges in one deal in late 1999. Congressional testimony identified that company as Merrill Lynch & Co.
Yesterday's charges described the deal as a "sham transaction" that allowed Enron to "manufacture" earnings. At least one Enron employee later bragged about the deal in an effort to win a bonus for 2000, court papers said.
A Merrill spokesman said its employees did nothing wrong in its dealings with Enron.
In laying out the charges against Fastow in a sworn statement by FBI agent Omer J. Meisel, the government repeated many of the details about self-dealing that came out when Kopper pleaded guilty to fraud.
But there were new details, too, since for the first time investigators had an insider at the center of the alleged conspiracy to guide them through a maze of transactions from 1997 until last year.
Kopper, for instance, described a "gifting program" where Fastow instructed him and another participant in one deal to kick back money to him in the form of annual $10,000 "gifts" that don't have to be reported as income. In all, Fastow and his wife and children received $125,000 through the program from 1997 to 2000, according to the complaint.
The complaint described how, through a partnership called Southampton, Kopper, Fastow and three British bankers defrauded their employers by splitting $30 million from one LJM-Enron deal.
Fastow's family foundation eventually reaped $4.5 million and Kopper and his domestic partner took home $4.5 million more, according to court papers. Fastow also urged his subordinates to kick back some of their profits from the deals, the complaint said.
At other times, the complaint said, the Fastow's LJM deals benefited Enron. In late 1999, for example, LJM agreed to purchase the company's interest in a struggling Brazilian energy project called Cuiaba. That helped Enron book $65 million in profit at a time it was struggling to meet ambitious financial targets.
Documents on the deal initially included a written guarantee that Enron would buy the money-loser back from LJM. But the papers were later changed to remove that language for fear that the outside accountants would scuttle the deal, Kopper told prosecutors. Enron eventually bought back the Cuiaba shares at a profit to LJM.
Fastow's appearance in a Houston courtroom yesterday was just his third public sighting since he was forced to leave Enron last October, when the company released details of his connection to the secretive LJM partnerships. Fastow invoked his Fifth Amendment right against self-incrimination before Congress in February.
Enron's creditors won permission from a bankruptcy judge earlier this week to sue Fastow, Kopper and seven other former Enron officials for breach of fiduciary duty in connection with the company's downward spiral. Such a lawsuit could pit the creditors against law enforcement officials in a fight over who will recover a limited pool of funds. Criminal forfeiture claims generally trump those of creditors in a bankruptcy, but the issue is far from settled, experts said.
In recent weeks, former chief executives at Adelphia Communications Corp., Tyco International and ImClone Systems Inc. have been arrested and charged with fraud as part of a broad government crackdown on white-collar crime. FBI Director Robert S. Mueller III vowed yesterday to continue the effort to root out corporate fraud.
Special correspondent Steven Long in Houston contributed to this report.
© 2002 The Washington Post Company
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