Fastow Tells of Deception at Enron
Financial whiz Andrew S. Fastow took the stand in the Enron Corp. trial Tuesday and for the first time publicly detailed how he helped inflate the company’s profit and hide losses, with the blessing of his then-boss Jeffrey K. Skilling.
In the most compelling testimony of the trial, now in its sixth week, Fastow told a packed federal courtroom that by mid-2001, while Enron was presenting itself as generally healthy, in reality “the foundation was crumbling and we were doing everything we could to prop it up.”
Off-the-books partnerships created and run by Fastow were the chief means of propping things up, the 44-year-old former chief financial officer testified. He said that Skilling, at the time Enron’s chief executive, encouraged him during one meeting to step up the activity.
“Get me as much of that juice as you can,” Skilling said, according to Fastow. Skilling was referring to the use of the partnerships “to juice the earnings of Enron and report the earnings we wanted,” said Fastow, who once calculated that his financial machinations added more than $1 billion to the bottom line in a little more than two years.
Prosecutors contend that keeping Wall Street in the dark about Enron’s true financial condition was crucial to supporting the company’s stock price, a major source of wealth for Skilling and his co-defendant, former Enron Chairman Kenneth L. Lay.
Skilling, 54, and Lay, 63, are on trial for conspiracy and fraud. They face decades in prison and millions of dollars in fines if convicted of all charges.
Enron, the Houston-based energy trading company that once was a regular on “most-admired companies” lists, slid into bankruptcy in December 2001, at a cost of thousands of jobs. Investors lost billions of dollars in the collapse of Enron stock; particularly hard hit were company employees, many of whom lost much of their life savings.
Fastow, whom Skilling hired in 1990 and mentored during his rise through the ranks at Enron, pleaded guilty in January 2004 to two conspiracy counts and agreed to a 10-year prison sentence. He struck his cooperation agreement with the government in part to limit the potential jail time faced by his wife, Lea.
On the stand, Fastow wiped away tears as he described involving his wife in a kickback scheme that landed her a year in prison for filing a false tax return. He spoke of receiving the kickbacks in the form of $10,000 checks made out to himself, his wife and his two young sons.
“I misled my wife,” Fastow said, brushing a hand across his face. “I led her to believe these checks were gifts out of friendship” from his partners.
Fastow wore a gray suit, white shirt and blue patterned tie. His hair has gone mostly gray in the two years since his indictment. He spoke in a clear voice, occasionally gesturing to the jury of eight women and four men.
Defense lawyers are itching to cross-examine Fastow, whom they have described as a crook, a serial liar and chief author of what they contend were the only crimes committed at Enron. Even legal experts sympathetic to the government believe that Fastow -- who has admitted to secretly looting Enron for millions of dollars over and above the stratospheric sums he was earning through the partnerships -- may be torn apart on cross-examination.
Co-lead prosecutor John C. Hueston, an Orange County-based assistant U.S. attorney before joining the federal Enron Task Force, said he planned to question Fastow for about two more hours this morning, after which the defense will begin a cross-examination that probably will continue into next week.
Although Fastow’s most damaging testimony involved Skilling, he also implicated Lay. After Skilling’s surprise resignation in mid-August 2001, Lay reclaimed the CEO’s post and, according to Fastow, attended meetings at which Fastow and other executives laid out details of Enron’s dire financial straits. Earlier witnesses have testified that Lay continued to tout the company’s rosy prospects even after learning of these problems.
Fastow described numerous meetings at which Enron directors signed off on deals involving the partnerships he created. The defense is sure to underline that point during cross-examination, as well as to note that squads of lawyers and accountants also approved the deals.
When the first partnership, dubbed LJM1 after the initials of Fastow’s wife and two sons, was created in 1999, the board approved a special waiver of a company conflict-of-interest policy to enable Fastow to serve as head of LJM while retaining his position as Enron’s chief financial officer.
When Enron’s board of directors discussed possible problems the arrangement could pose for the company, at the top of the list was what Fastow called “the Wall Street Journal risk” -- the danger that the news media would get wind of it and subject the company to harsh scrutiny.
“Whether it were right or wrong, it would look terrible,” Fastow testified.
For several hours Tuesday morning and afternoon, Hueston led Fastow through the details of complex deals involving the LJM partnerships and others with names such as Raptors, Radar and Chewco. In many cases, the partnerships would purchase -- or pretend to purchase -- an asset such as a power plant from Enron. The goal was to allow Enron to immediately book a profit on the sale or to protect Enron from future losses in cases where the value of the asset was falling.
In many cases, Fastow said, he made secret side agreements with Skilling to ensure that investors in the partnerships -- Fastow included -- would make money as long as Enron benefited from the deal. Under accounting rules, such no-loss side agreements would mean that the transactions weren’t true sales, so it was improper for Enron to book the profits, Fastow said.
In 2001, the pace of deals with the Fastow partnerships began to slow, and Fastow asked Skilling whether he had soured on the idea. According to Fastow, Skilling replied: “No, no, no -- I love LJM. I want to do all the deals I can. I just don’t want the footnotes.”
Fastow explained that investors and reporters were starting to scrutinize the footnotes to Enron’s financial statements, where the company was required to provide details of transactions with such “related parties” as the Fastow partnerships.
Fastow testified that he once drew up a tally sheet in which he estimated that his deals cumulatively had helped create $800 million in reported earnings and hid $500 million in losses. As his role in boosting Enron’s earnings became more prominent, he said, it caused resentment among some of his fellow executives because it called attention to their inability to “hit their numbers” without resorting to transactions with the Fastow partnerships.
Besides, he said, “I was obnoxious about it and rubbed their noses in it.”
