Andrew Fastow, the financial wizard whose manipulations were crucial in perpetrating one of the largest corporate frauds in history, pleaded guilty to federal conspiracy charges Wednesday and agreed to tell prosecutors everything he knows about everyone else involved in the collapse of Enron Corp.
“For the first time, the [Justice Department’s] Enron task force now has a seat on the 50th floor of Enron,” said Leslie Caldwell, the federal prosecutor heading the investigation, referring to the company’s once-lavish executive suites.
“Whatever Andrew Fastow knows about what went on on the 50th floor . . . the Enron task force will now know as well,” Caldwell told reporters Wednesday outside the federal courthouse in Houston.
Only two executives ranked higher than Fastow, who was the energy giant’s chief financial officer. They are Kenneth Lay, the former chairman and CEO, and Jeffrey Skilling, the former president and chief operating officer. Skilling also briefly served as CEO before abruptly quitting in August 2001–just weeks before Enron imploded.
Under his deal with prosecutors, Fastow, 42, will serve 10 years in prison and repay more than $29 million stolen from the company and its shareholders. He pleaded guilty to two wide-ranging conspiracy charges contained in the 98-count criminal indictment he faced. The remaining charges will be dropped only after prosecutors are certain his cooperation was full and honest.
Wife enters guilty plea too
Fastow’s deal hinged on a separate plea agreement entered two hours later by his wife, Lea, also 42. She pleaded guilty to a single charge–filing a false tax return–and consented to a plea agreement calling for her to serve 5 months in prison and 5 in home confinement. The Fastows wanted to make sure one parent was home to raise their two young sons, according to Mike DeGeurin, Lea Fastow’s attorney.
Andrew Fastow is to be sentenced April 19. His wife is to be sentenced April 7.
U.S. District Judge David Hittner refused to dismiss the remaining five felony charges against Lea Fastow until he decides whether to accept her plea and the recommended sentencing. If he imposes a lengthier sentence, she could withdraw her guilty plea and face trial on six felony counts.
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Andrew Fastow admitted to personally crafting the financial vehicles that were used to hide Enron debt, artificially inflate profits and buoy the company’s stock price, while also skimming profits for himself, his friends and family.
In a written statement accompanying his plea agreement, Fastow admitted that he “and other members of Enron’s senior management” team manipulated the books to “mislead investors and others about the true financial position of Enron.”
With somber portraits of a dozen federal judges staring down at him, and several dozen family members and friends at his back, Fastow stood still and silent as prosecutors detailed his crimes to U.S. District Judge Kenneth Hoyt.
When prosecutors finished, Hoyt addressed Fastow directly.
“Did you in fact engage in conspirators’ conduct?” the judge asked.
“Yes, your honor,” Fastow replied.
Fastow masterminded myriad off-the-books partnerships that appeared to be independent from Enron, but merely hid its debt and kept its profits artificially inflated.
Receiving line of supporters
After the brief court proceeding, Fastow, wearing a gray business suit and starched white shirt, worked a receiving line of family and supporters, greeting them with hugs and handshakes as if he were about to step into a corporate board meeting instead of having just agreed to step into prison.
From Houston to Washington, top Justice Department officials said the deal–and the stiff sentence–should send a message to others involved in Enron’s schemes and to corporate criminals nationwide.
“Anyone who was committing crimes at Enron with Andy Fastow should be concerned,” Caldwell said, adding that Fastow’s cooperation represents “a significant step forward in our investigation.”
James Comey, the nation’s deputy attorney general, said “every corrupt corporate executive better spend some time looking over their shoulder.”
He said prosecutors are climbing the corporate ladder “rung by rung.”
“We make these cases like we do mob cases and drug cases,” Comey said. “We pursue aggressively those lower down, and try to obtain their cooperation to move up and up and up.”
Comey, the No. 2 official at the Justice Department, has ultimate authority over the investigation because Atty. Gen. John Ashcroft has removed himself from the case. Enron and Lay were political powerhouses, both in Texas and around the nation. Lay was a close friend and top supporter of President Bush, the former Texas governor.
Although they weren’t disclosing specifics Wednesday, prosecutors already have an idea of which officials they can target with Fastow’s aid.
On Dec. 13, Fastow gave prosecutors an outline of what he knows and where he can lead them, according to court records.
Such a statement, known as a proffer, is a crucial part of a plea negotiation for a cooperating defendant.
Continental Bank background
Born in Washington, D.C., Fastow obtained an MBA at Northwestern University’s Kellogg School of Management. He learned the financial skills he brought to Enron while working at Chicago’s Continental Bank in the 1980s. During Enron’s dramatic rise, Fastow lived high, buying a Porsche, wooded acreage in Vermont and a multimillion-dollar mansion in Houston’s most exclusive neighborhood.
Fastow is portrayed in the government’s case as the man who engineered the financial and accounting techniques that allowed Enron’s stock to climb even as the company was secretly collapsing.
The key question for prosecutors is whether Lay, Skilling or others were directing Fastow’s efforts, or even knew about them.
Lay and Skilling led Enron during its steep climb, when it became the nation’s seventh largest public corporation–and during its spectacular fall, when, in December 2001, it turned into what was then the world’s largest bankruptcy case. It’s stock hit $90 a share before plummeting to mere pennies.
“Lay and Skilling were hands-on managers involved in the daily operation of Enron’s business,” according to the final report of Neal Batson, a court-appointed investigator in Enron’s bankruptcy case.
Batson wrote in his November 2003 report that the two had “intimate knowledge” of the company’s day-to-day business and “knew or should have known” that Fastow’s machinations were bogus.
Neither Lay or Skilling has been charged.
Skilling’s lawyer optimistic
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Bruce Hiler, who is Skilling’s lawyer, said the plea changes little.
“Bottom line, if the truth is told: There still will be no case against Jeff Skilling,” Hiller said.
“There are no surprises here. Nothing has occurred that affects Ken Lay’s position one way or another,” said Michael Ramsey, who is Lay’s lawyer.
“What appears to be going on here is an admission by Mr. Fastow that he took money from Enron, which naturally leads to the conclusion that you don’t tell upper management, you don’t tell the boss you are taking money out of the till,” Ramsey said.
Enron’s collapse spawned not only the largest U.S. bankruptcy at the time, but also thousands of job losses and ultimately led to the shuttering of its auditor, Chicago’s once-venerable Andersen accounting firm. It also undermined public confidence in the stock market.
Diana Peters, who said she was a former Enron employee, was in the courtroom when Andrew Fastow pleaded guilty. The former computer worker said Wednesday would have been her retirement day, but she instead lost her job and $75,000 in stock and pension benefits, when it collapsed two years ago. Enron’s collapse erased nearly 6,000 jobs and the retirement dreams of its employees. The corporation’s $68 billion in market value was destroyed in a matter of weeks.
“I feel justice has been served today, although it won’t bring back anything to the employees or shareholders,” Peters said.