Andrew Fastow, Enron’s chief financial officer

analysisAndrew S. Fastow was Enron’s Executive Vice President and Chief Financial Officer. A report of the U.S. Senate Permanent Subcommittee listed him, as Chief Financial Officer, among the senior officers whom Enron’s directors said they had trusted. Enron’s Form 8-K of November 8, 2001 stated that Fastow was also the managing member of the general partners of LJM Cayman, L.P. (LJM1) and LJM2 Co-Investment, L.P. (LJM2), private investment partnerships formed in 1999, from their inception through July 2001. Enron stated that it believed he had sold his interests in both partnerships to Michael J. Kopper, who had reported to him, as of July 31, 2001, and that Fastow was no longer working for Enron. On October 22, 2001 Enron announced that the SEC had asked it to provide information voluntarily about the LJM2 related-party transactions, and on October 24 it announced that Fastow would take a leave of absence and be replaced as Chief Financial Officer. ^{1 2 3}

analysisAccording to the third interim report of the court-appointed bankruptcy examiner Neal Batson (June 30, 2003), for much of the period investigated the Enron officers responsible for special purpose entity (SPE) transactions reported through two lines of authority. The treasury and finance groups reported to Fastow: the treasury function, headed by Jeff McMahon and, from early 2000, by Ben Glisan; the Corporate Finance Group; the Special Projects Group headed by Michael Kopper; and the business units’ head finance officers. The accounting and tax groups reported to Rick Causey, Executive Vice President and Chief Accounting Officer. The examiner also reported that the Fastow group, previously Enron Capital Markets, became Enron Global Finance in August 1999 and, while mainly charged with treasury and capital raising, had its own lawyers and accountants; by March 2000 its Office of the Chair consisted of Fastow, Glisan and Causey, the last as an ex officio or of counsel member. The examiner drew this description from Enron organization charts and testimony; it is not a court finding. ⁴

analysisEnron’s code of conduct barred full-time officers from sharing in the profits of an entity doing business with Enron unless this was disclosed in writing to the Chairman and CEO and he found that it did not harm the company. According to the Senate report, Kenneth Lay approved waiving this rule for Fastow’s LJM partnerships and asked the board to ratify his decision; at a May 7, 2002 hearing directors Herbert Winokur and Robert Jaedicke contended that the board had not waived the code but had “applied” it. The Senate subcommittee also reported, from a director’s notes and interviews, that in an October 23, 2001 telephone call with directors Charles LeMaistre and John Duncan Fastow acknowledged LJM compensation totalling $45 million, $23 million from LJM1 and $22 million from LJM2, but declined to give his investment returns; Enron’s November 2001 Form 8-K estimated the amount at in excess of $30 million. After the two directors reported the call to the board, Fastow was placed on leave, and on October 28 the board established a Special Committee of three directors who were not Enron employees to investigate the related-party transactions that were the subject of the SEC inquiry. ^{1 3}

analysisIn its report of February 1, 2002 the Special Investigative Committee of Enron’s board, known as the Powers Committee, concluded that Fastow, as Chief Financial Officer, was on both sides of the related-party transactions, which became a means of enriching himself and facilitating manipulation of Enron’s financial statements. It found that he put his own and the LJM partnerships’ interests ahead of Enron’s, sought to influence Enron employees negotiating with LJM, and did not disclose to the board Kopper’s role in Chewco or LJM2 or the partnerships’ profitability; it estimated that Fastow was enriched by at least $30 million. Fastow declined to be interviewed by the committee, entirely or on most issues. These are a board committee’s conclusions, not a court finding. Fastow later pleaded guilty, on January 14, 2004, to two counts of conspiracy to commit securities and wire fraud. ^{1 2}

analysisThe bankruptcy examiner Neal Batson concluded in his third interim report of June 30, 2003, as restated in his final report, that a fact-finder could find that senior Enron officers including Fastow, Rick Causey, Ben Glisan and Jeff McMahon breached their fiduciary duties by causing Enron to enter into SPE transactions designed to manipulate its financial statements, resulting in the dissemination of financial information these officers knew to be materially misleading. That is a conclusion that a fact-finder could so find, not a court judgment. Fastow, Causey, Glisan and McMahon exercised their Fifth Amendment rights and did not testify to the examiner, whose conclusions rest on documents and the testimony of others. ^{3 4}

analysisThe SEC’s Enron enforcement index lists as its earliest Enron-related enforcement action a subpoena enforcement action filed against Fastow on December 13, 2001 (Litigation Release No. 17270). On October 2, 2002 the SEC sued Fastow for fraud (SEC v. Andrew S. Fastow, No. H-02-3666, S.D. Tex.), alleging antifraud, reporting, books-and-records and internal-controls violations in six transactions: RADR, Chewco and Southampton, which the SEC said hid his interest in and control of off-balance-sheet entities; sales of interests in Nigerian barges to Merrill Lynch, later bought out by LJM2, and in the Cuiaba power plant to LJM1, which it described as secret asset-parking arrangements; and Raptor I, including back-dated documents locking in the value of Enron’s Avici Systems investment. The DOJ Enron Task Force filed a related criminal complaint against Fastow the same day. The SEC’s allegations were not adjudicated: Fastow neither admitted nor denied them, and he settled the action on January 14, 2004. ^{1 2 3}

analysisThe SEC settled its civil fraud action against Fastow in coordination with the DOJ Enron Task Force. Without admitting or denying the allegations, Fastow agreed to be permanently enjoined from violating the antifraud, periodic reporting, books and records and internal control provisions and to be permanently barred from acting as an officer or director of a public company. In resolving the parallel civil and criminal proceedings he agreed to serve a ten-year sentence, to disgorge more than $23 million and to cooperate with the continuing investigation. ³

analysisThe Congressional Research Service chronology records a 78-count indictment of Fastow filed on October 30, 2002, including wire fraud, conspiracy, obstruction of justice and money laundering. In a staff report of December 11, 2002, the Senate Permanent Subcommittee on Investigations cites the indictment (Cr. No. H-02-0665, S.D. Tex.) as dated October 31, 2002 and quotes its allegations that Enron used LJM2 “to manufacture earnings through sham transactions” and had an “undisclosed agreement” with Fastow ensuring that LJM2 did “not lose money in its dealings with Enron.” Fastow pleaded not guilty to the 78-count indictment on November 6, 2002, according to the chronology. A superseding indictment of May 1, 2003 also named former treasurer Ben Glisan, who pleaded guilty on September 10, 2003, and another finance executive; a 2004 press report states that the charges against Fastow grew to 98 counts. An indictment is not proof of guilt. Fastow pleaded guilty to two conspiracy counts on January 14, 2004, and the DOJ stated that the remaining 96 charges from the May 2003 indictment would be dismissed if he cooperated fully and truthfully. ^{1 2 3 4 5}

analysisFastow entered his plea before Judge Kenneth Hoyt of the U.S. District Court in Houston. The two counts were conspiracy to commit securities and wire fraud (18 U.S.C. § 371), and he agreed to serve a ten-year prison sentence, cooperate fully and forfeit more than $29 million. He admitted conspiring with senior management to manipulate Enron’s reported results and to cause Enron to enter into improper transactions with the LJM entities he controlled. He also admitted self-dealing in the Southampton transaction, Enron’s $30 million buyout of LJM Swap Sub, LP, which he controlled, in violation of his duty of loyalty and honest services to shareholders. ⁵

analysisOn September 26, 2006 Judge Kenneth Hoyt sentenced Fastow to six years in prison on the two counts of conspiracy to commit securities and wire fraud. The DOJ’s sentencing release states that under his plea agreement he agreed to cooperate fully and to forfeit more than $20 million. A November 15, 2006 press report, citing a wire service, observed that Fastow had agreed to serve ten years in prison and that his term was reduced by four years, a reduction the report derived by comparing the agreed and imposed terms; it also noted that Richard Causey’s sentence of five and a half years, imposed that day, was six months shorter than Fastow’s. ^{6 7}

analysisThe sums Fastow agreed to give up are stated differently in different documents. The DOJ’s January 14, 2004 plea release put the forfeiture at more than $29 million, which the IRS Commissioner described as personal assets of the Fastows; the SEC’s release of the same day put his disgorgement at more than $23 million; a July 2004 press report said he had agreed to surrender $23.8 million in cash and property, including two vacation homes; and the DOJ’s September 26, 2006 sentencing release refers to a forfeiture of more than $20 million. These figures come from documents of different dates; the retained records do not reconcile them, and they should not be added together. ^{4 5 8 6}

analysisOn September 23, 2004 LJM2 sued Fastow and Kopper in the bankruptcy court, alleging misconduct and mismanagement of LJM2, including distributions and payments from the partnership, and asserting breach of fiduciary duty, fraud, conspiracy, defalcation, conversion and unjust enrichment. These are allegations, not findings; on April 19, 2005 the Judicial Panel on Multidistrict Litigation transferred the case to the Enron multidistrict litigation in the Southern District of Texas, and its outcome is not in the retained record. Fastow was also named as an individual defendant in the suit that Silvercreek Management Inc. and affiliated funds, which had invested in Enron notes in October 2001, brought on November 7, 2002. He had not responded to the complaint; the motion to dismiss that Judge J. Paul Oetken decided on March 31, 2017 was brought by Credit Suisse, Deutsche Bank, Merrill Lynch and Skilling. ^{1 2}