Ex-Enron CFO ties bosses to scandal

Fastow says Skilling, Lay knew of partnerships

March 08, 2006|By LEON LAZAROFF | LEON LAZAROFF,CHICAGO TRIBUNE

Houston -- In emotional and exhaustive testimony, Andrew S. Fastow, Enron Corp.'s former finance chief, told a spellbound courtroom yesterday that Jeffrey K. Skilling, the energy company's one-time chief executive, was well aware he was hiding hundreds of millions of dollars in debt while inflating the value of various company businesses.

Fastow said he executed the transactions because he saw it as a chance to help the company meet Wall Street's expectations and to make millions of dollars apart from his salary as chief financial officer. As a large Enron shareholder, Fastow acknowledged that he stood to gain considerably if positive financial news raised the company's stock price.

"I thought I was being a hero for Enron," the government's key witness told the jury of eight women and four men. "What was good for them would be good for me. I would step in to rescue Enron and bail them out."

Skilling and his co-defendant Kenneth L. Lay, Enron's former chairman, are on trial for lying about the company's financial health, charged with pumping up the company's stock price in order to profit through the sale of company shares.

Though Fastow did not directly charge that Lay ordered him to manage the partnerships, he said that as chairman of the board, Lay approved the partnerships, was aware of their purpose and knew that he and his staff would make money from operating them. Lay's role in the company is expected to be at the center of today's testimony as Assistant U.S. Attorney John Hueston continues to question Fastow.

More than any other corporate scandal of recent years, Enron stands out, in part because the glowing, even gloating pronouncements of its executives in the late-1990s turned out to be in such stark contrast to the ethics of its business dealings, and ultimately, its financial health. Enron, once the country's seventh-largest company, declared bankruptcy in December 2001.

Appearing in court for the first time since pleading guilty in January 2004, Fastow, 44, used his court appearance to explain his role in the scandal that drove Enron to bankruptcy in 2001.

Equally, Fastow, looking thinner than he has in the past, appeared to see a chance to publicly apologize to his wife and two sons, who live in Houston. Fastow repeatedly broke down when talking about his wife, Lea, who pleaded guilty to a misdemeanor tax evasion charge related to his fraudulent dealings and served a year in prison and a halfway house. She was released in July.

"In short, I misled my wife," he said, struggling to speak as he fought back tears. "I convinced her that these checks we received were gifts even though I knew that was not true." Fastow pleaded guilty in 2004 to two criminal charges involving securities fraud and conspiracy to commit wire fraud and agreed to serve a 10-year prison sentence.

In the most graphic description so far in a trial entering its sixth week, Fastow told of creating numerous complex "off-balance-sheet" partnerships "to help Enron meet its income targets for the year. It allowed Enron to record the numbers the way it wanted to record them."

When funding for a partnership ran dry, Fastow testified that Skilling told him at least twice to "get me as much of that juice as you can." Fastow said he took those comments to mean he should create another similarly structured off-balance-sheet partnership.

Fastow took a lead role in structuring the partnerships after he was promoted to finance chief in 1998. A short time later, he set up a partnership called LJM, using the initials of his wife and children. Funded with $15 million, the so-called "special purpose vehicle" was used to guard against the likelihood that the share price of a start-up company for which Enron was a major stockholder, would go down.

But in collusion with bankers employed by National Westminster Bank, Fastow used the LJM partnership to sell some of Enron's stock in the start-up company in order to funnel $19 million into a secret account. That money was divided with the NatWest bankers, with Fastow's family taking $4.4 million.

LJM eventually gave birth to LJM2, and a flurry of partnerships used to mask losses in everything from a failing Brazilian power plant to a fleet of Nigerian barges housing electricity power plants parked off the African country. Both deals were executed in late 1999, part of a rush by Enron to make sure its business units met Wall Street's earnings forecasts.

In a late-1999 conversation with Skilling about the Nigerian barges, Fastow recounted that he initially opposed having LJM buy the barges.

But Skilling assured him that although LJM, with the help of Merrill Lynch & Co., would eventually buy the barges, Enron would buy them back.

"The culture of Enron, the way business was practiced, was to maximize the transaction to report earnings rather than to maximize the actual transaction of the business," he said.

By mid-2001, Enron's stock had begun to fall as the company was unable to sustain the double-digit growth that had propelled its share price to more than $80 in late 2000. With debt from the company's international division topping $5 billion, its water company reporting more than $1 billion in losses and its broadband trading unit in shambles, Fastow said, he knew the company was in deep trouble.

Skilling, he said, told him in the summer of 2001, "Andy, we've hit a brick wall. I don't know what to do." Skilling resigned suddenly in August.

Nonetheless, the government contends that throughout 2001, Skilling, and later Lay, told investors all was fine.

Leon Lazaroff writes for the Chicago Tribune.

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