3 Ex-Bankers Charged in Enron Deal
In the first criminal charges stemming directly from Enron Corp.’s financial dealings, federal prosecutors Thursday accused three former employees of a British bank of secretly investing in an Enron partnership from which they earned more than $7 million in illicit profits.
In an affidavit filed in federal court in Houston, prosecutors charged three former investment bankers at Greenwich NatWest with wire fraud, alleging that theycheated their employer by recommending that it sell its stake in an Enron partnership controlled by then-Enron Chief Financial Officer Andrew S. Fastow for $1 million--knowing it was worth much more.
Shortly after, Fastow transferred ownership rights to that stake to the three men for $250,000. Weeks later, they sold their stake for $7.3 million, the government said.
Former prosecutors speculate that the government brought wire fraud charges against Gary S. Mulgrew, Giles R.H. Darby and David J. Bermingham as part of its larger probe of Fastow and other Enron executives, including former Chairman Kenneth L. Lay and former President Jeffrey K. Skilling.
“I’m sure that is going to be another segment in the continuing saga of trying to get Andy Fastow and prosecute him in the most effective way possible,” said Stephen L. Meagher, a former U.S. prosecutor who now practices with law firm Phillips & Cohen in San Francisco.
“Andy Fastow is going to be one of the crown jewels of the Enron prosecution,” Meagher said.
The affidavit contains transcripts of e-mails exchanged between the former British bankers, which shed new light on the internal workings of Enron’s murky off-the-books partnerships. Enron used these vehicles to conceal debt and liabilities, and Fastow and his associates used them to make millions of dollars for themselves, according to an Enron board investigation.
In a series of e-mails beginning Feb. 20, 2000, for example, Bermingham told Mulgrew he would be “the first to be delighted if he has found a way to lock it in and steal a large portion for himself,” according to the affidavit, which said it appears that Bermingham was referring to Fastow and a deal that would generate millions of dollars in profit.
Bermingham added: “We should be able to appeal to his greed,” again referring to Fastow, according to the government.
Fastow’s attorney declined to comment and attorneys for Bermingham, Darby and Mulgrew could not be reached.
The charges come less than two weeks after the government’s court victory over Arthur Andersen in which the accounting firm was convicted of obstruction of justice in connection with its Enron audit.
Experts predicted after the Andersen verdict that prosecutors would turn their full attention to pursuing Enron executives.
Outside observers believe that prosecutors are most interested in building criminal cases against Fastow, who--according to the Enron board investigation--masterminded many of Enron’s most suspect financial transactions.
In the wake of the Andersen conviction, Meagher said, making a deal with the government--as former Andersen auditor David B. Duncan did--might look attractive to potential defendants.
John J. Fahy, a former U.S. prosecutor, said such a charge is “an old prosecutor’s trick” designed to elicit cooperation not only from the defendants but also from Fastow and Michael Kopper, the Fastow aide who ran some of the partnerships.
“This is meant to send a message, especially to Kopper, but also to Fastow, that we [the prosecutors] know what’s going on, and if you’re smart you’ll have your lawyers come in and talk to us,” Fahy said.
Mulgrew headed NatWest’s structured finance group. Darby was an energy-industry banker and Bermingham reported to Darby and Mulgrew.
The financial dealings detailed in the complaint are centered on a controversial Enron partnership known as LJM Cayman. Controlled by Fastow, it is one of a handful of partnerships on which investigators have focused most intently in their probe of Enron’s historic bankruptcy filing.
Ostensibly, LJM Cayman was used to limit Enron’s risk in an Internet company, Rhythms NetConnections Inc., through a complex series of transactions involving Enron’s own shares.
But LJM Cayman has generated interest because it was one of the partnerships from which Fastow himself reaped significant profit.
LJM Cayman had two limited partners, Campsie Limited--established by NatWest--and ERNB, established by Credit Suisse First Boston. Both Campsie and ERNB were established in the Cayman Islands, and each invested $7.5 million.
According to the affidavit, the three men collaborated to take control of NatWest’s stake in Campsie, and apparently were able to capitalize on uncertainty created by a hostile takeover of NatWest’s parent company, National Westminster Bank of Britain by Royal Bank of Scotland.
The document lays out a scheme in which the three men allegedly worked in coordination with Fastow to gain ownership of an LJM subsidiary, known as Swap Sub. It claims the men concealed their effort from co-workers.
In an e-mail to Darby and Mulgrew, Bermingham wrote that he had told another employee that their boss was “in the loop” about their plan but the employee should keep quiet about the venture and “just act dumb, please.” In another instance, Darby told another NatWest employee to not attend a sensitive meeting at which the venture would be discussed. Darby told the employee not to worry because they were “going to get rich,” according to the affidavit.
The men significantly underplayed to their bosses the value of the Swap Sub stake. NatWest subsequently agreed to sell the stake to a Fastow-controlled entity for $1 million. An identical ownership position owned by another investment bank was sold for $10 million, according to the complaint.
Weeks after acquiring the stake for $250,000, the bankers sold their position for $7.3 million, the affidavit said.
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Hamilton reported from New York, Rivera Brooks from Los Angeles.
