Former CEO linked to Enron losses
By Jef Feeley and Thom Weidlich
Bloomberg News Service
By Jef Feeley and Thom Weidlich
HOUSTON — Enron Corp.'s former Chief Financial Officer Andrew Fastow testified yesterday that his boss, Jeffrey Skilling, told him to use off-the-books partnerships to "give me all the juice you can" on earnings.
Fastow's remarks, in response to prosecutors' questions, were the first government attempt to show Skilling, the former chief executive officer, and former Chairman Kenneth Lay, were participants in an accounting fraud that drove Enron into bankruptcy. Fastow, who pleaded guilty to the fraud, said he interpreted Skilling's comment to mean he should "juice the earnings so we could report the numbers we wanted to report."
"We were using this to inflate our earnings," Fastow, 44, testified at the criminal trial of Skilling and Lay. "I don't think we wanted to show people what we were doing."
Fastow said Enron's board approved his creation of two LJM partnerships, named after his wife and children, and that his participation in them had to be approved by Lay, 63, and Skilling, 52, under the company's code of conduct. The partnerships allowed Enron to do quick transactions and hide billions in Enron debt, Fastow said before the trial.
"The whole purpose of the partnership was to make Enron's numbers look the way they wanted them to look," Fastow testified about one of the entities. "Skilling made it clear that he wanted someone to run this partnership that would work with Enron in the future in a cooperative way."
Fastow, who faces 10 years in prison, said an Enron director who was considering the required board approval of a partnership asked about the risks the entity posed to Houston-based Enron. Fastow said he told the board the biggest problem was the "Wall Street Journal risk." If the media learned he was running a partnership doing transactions with the company, "it would look terrible and bring Enron under a lot of scrutiny," Fastow said.
The first LJM partnership was used in 1999 to buy an Enron unit's minority interest in a power plant in Cuiaba, Brazil, in 1999, Fastow said. This allowed Enron's South America unit to report a $20 million profit in the third quarter of that year, Fastow said.
Fastow said Skilling approached him in the third quarter of 1999 to have the LJM1 partnership buy the interest in the plant and guaranteed that Fastow wouldn't lose money. Fastow said he was reluctant to make the acquisition because no one else wanted to buy it.
"He said don't worry about it," Fastow testified. Skilling said "he would guarantee I wouldn't lose money on the deal and LJM would eventually get its money back," the former CFO said. Enron honored Skilling's guarantee by buying back the plant interest in 2000, Fastow said.
Such sham sales helped Enron officials manipulate earnings, said Jacob Frenkel, a former senior counsel for the U.S. Securities and Exchange Commission. The Cuiaba sale was a sham because the risk of losses was removed, Frenkel said. Enron's failure to disclose those details harmed investors, he said.
"Not disclosing material facts about the transaction, such as guarantees against loss, could constitute a crime," said Frenkel, now in private practice in Maryland.
Investors were harmed because they made "buying and selling decisions about Enron's stock" on the basis of erroneous information about the company's LJM-related deals, said former federal prosecutor Robert Mintz, now a lawyer with McCarter & English in Newark, N.J.
Fastow testified that he was trying to help the company in setting up the partnerships. He said he considered himself a "hero" for using them to boost earnings.
He cried when co-lead prosecutor John C. Hueston asked about his wife's guilty plea to a tax charge. Lea Fastow, Enron's former assistant treasurer, served a year in prison on tax-evasion charges stemming from money the couple received from her husband's Southampton partnership. Fastow said he lied to his wife about where the partnership money came from. Lea Fastow signed a tax return that incorrectly listed the money as coming from gifts from friends.
"I told her that these checks could be treated as gifts and that's why the tax return could be prepared that way," he said.
Fastow was the most-anticipated witness among the 16 former Enron executives who pleaded guilty in connection with the company's collapse. Prosecutors contend Lay and Skilling orchestrated a wide-ranging fraud that led to Houston-based Enron's collapse. They face at least 25 years in prison.