Matthew Goldstein

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Fastow Charged With Mail Fraud, Money Laundering

Matthew Goldstein

The long arm of the law finally reached out today and grabbed one of Enron's former top executives, as Andrew Fastow, the energy company's former chief financial officer, was charged with several counts of securities fraud, mail fraud and money laundering.

A criminal complaint filed against Fastow alleges that the former Enron officer used a series of partnerships he controlled not only to help Enron carry out a deliberate strategy of inflating its profits, but to illegally enrich himself by skimming off profits from these deals.

Fastow is the highest-ranking former Enron executive to be charged in the investigation. The Enron scandal, which began unfolding just over a year ago, sparked a tidal wave of concern about corporate fraud and corporate accounting gimmicks.

The complaint filed by federal prosecutors, along with a civil complaint filed by the Securities and Exchange Commission, makes clear that Enron's strategy of selling ailing assets to the Fastow-controlled entities was intended to help the company "manipulate its balance sheet" and "manufacture sham earnings," according to the prosecutors.

The complaint doesn't identify any other Enron executives by name other than Michael Kopper, Fastow's former right-hand man, who pleaded guilty last month and is cooperating with prosecutors. But it does allude to a secret deal between Fastow and Richard Causey, Enron's former chief accounting officer. The deal, according to the criminal complaint, assured that Fastow's controversial LJM2 partnership would not lose money on any of its deals to buy some of Enron's ailing assets.

Prosecutors, in court papers, allege that "Enron's CAO [Causey] had an undisclosed agreement with Fastow" under which "LJM would not lose money in its dealing with Enron." The court papers say that "any Enron-LJM transaction that resulted in a loss to LJM would be made up later."

The LJM2 partnership, and a predecessor entity called LJM1, engaged in nearly 30 such transactions with Enron over a period from late 1999 thru October 2001.

The criminal complaint outlines a pattern of "secret agreements" between Fastow and others at Enron that would require Enron to buy back assets sold to LJM if another buyer could not be found. These agreements apparently were kept from Enron's board of directors.

In addition, it alleges that Fastow and Causey -- although he's not identified by name -- manipulated Enron's balance sheet in a complex transaction that involved back-dating of documents.

One of the charges stems from Fastow's role in orchestrating the sale of three Nigerian barges by Enron to Merrill Lynch (MER Quote). Those barges were eventually sold back by Merrill to LJM2. The SEC described the sale of the Nigerian barges, which inflated Enron's profit by $12 million in 1999 and generated a $700,000 profit for Merrill Lynch, as a "sham sale."

In the SEC complaint, Merrill isn't named, but earlier this year a Congressional panel held a hearing into Merrill's role in the barge sale and in lining up investors for the LJM2 partnership. Three Merrill investment bankers who allegedly played a role in the barge deal are no longer with the firm. Two of them were fired by Merrill for refusing to talk to federal investigators.

One of the fired bankers is Schuyler Tilney, whose wife, Beth, used to be a vice president for marketing at Enron. She is credited with coming up with the idea for the company's infamous crooked E logo. The other fired Merrill banker is Thomas Davis, a firm vice chairman, who had been the running to lead Merrill at one time. The third banker coming under scrutiny is Robert Furst, who left Merrill late last year. Both Furst and Tilney worked out of Merrill's Texas office.

Prosecutors typically have 30 days after filing a criminal complaint to either formally indict a person or dismiss the charges. It's during that 30-day window that prosecutors will often try to extract, if possible, a plea deal from a defendant.

Kopper, meanwhile, assisted Fastow in running both LJM partnerships. The LJM2 partnership, which at one time had $394 million in assets, attracted a Who's Who of Wall Street investors including Merrill, J.P. Morgan Chase(JPM Quote), Citigroup(C Quote)and Credit Suisse First Boston. Merrill was retained by Fastow to help lineup investors for LJM2.

At this time, it's not known whether the SEC and Justice Department intend to pursue charges against Merrill or its former bankers. Merrill has insisted that it did nothing wrong in it's dealings with Enron.

Merrill disputed the government's allegation, saying that its investment was "fully at risk" and that the firm "did not receive any guarantee that Enron or any other entity would purchase our investment."

The role of the Wall Street banks in helping to finance Enron's many deals has been controversial.

Indeed, the prosecutors' contention that Fastow and Enron officials had entered into secret agreements to guarantee a high rate of return to Enron could focus renewed attention on some of LJM2's 52 limited partners -- since many of them helped finance and arrange Enron's off-balance sheet deals. One of the lures Merrill and Fastow used to reel in investors, including the Wall Street firms, was a prediction that LJM2 would generate an annual return of 30% or greater on their investments.

The LJM2 partnership filed for bankruptcy last week, after reporting that it had $68 million in assets and $125 million in liabilities. Most of LJM2's investments became worthless when Enron filed for bankruptcy last December.

Fastow reportedly made $30 million in management fees from overseeing the operations of both LJM partnerships. Prosecutors and the SEC are seeking to recoup the "ill-gotten" gains they claim Fastow derived from his various schemes.

Also, three former NatWestminster bankers -- now a part of the Royal Bank of Scotland -- have been indicted for defrauding their former employer of some $9 million in a deal involving Kopper, Fastow and the LJM1 partnership. Both CSFB and NatWest were the original outside investors in LJM1.

Much of the criminal case against Fastow seems to build off the findings of report written earlier this by William Powers, dean of the University of Texas School of Law, who headed a special committe of Enron's board that investigated some of the company's off-balance sheet transactions.

Although the Powers report didn't conclude whether laws were broken at Enron, it found that of the company's off-balance sheet transactions flouted accepted accounting principals and in many instances served no rational economic purpose. The report was particularly critical of many the deals that Enron engaged in with Fastow's LJM partnerships.