Enron Corp. chief executive Kenneth Lay knew of serious financial problems at the company in 2001, days before he gave an interview claiming Enron was in its best shape ever, Enron’s former chief financial officer testified Wednesday.
Andrew Fastow told jurors about a meeting on Aug. 20, 2001, in which Lay and other top executives heard about a “hole in the earnings” — projections that Enron would fall far short of Wall Street expectations for the quarter.
Days later, in an interview with BusinessWeek, Lay said Enron had no accounting problems and declared, “The company is probably in the strongest and best shape that it has ever been in.”
Asked by a federal prosecutor about the Lay interview, Fastow said: “I think most of the statements in there are false.”
Enron had a wide range of problems at the time, including huge upcoming write-offs, accounting errors and the deterioration of financial structures Enron was using to mask weak assets, Fastow said.
The former CFO was testifying for a second day in the trial of Lay and former Enron CEO Jeffrey Skilling, who face fraud, conspiracy and other charges in the spectacular collapse of Enron.
On Tuesday, Fastow told jurors about partnerships he said he set up with Skilling’s blessing to manipulate earnings — prompting his boss to ask that Fastow “get me as much of that juice as you can” — to buy Enron assets that had lost significant value and wipe millions in debt from the books.
“I thought the foundation was crumbling and we were doing everything we could to prop it up as long as we could,” Fastow said. “We were in pretty bad shape.”
In mid-October 2001, Enron disclosed hundreds of millions of dollars in third-quarter losses and slashed shareholder equity by $1.2 billion. Six weeks later, Enron dissolved into bankruptcy protection.
Fastow’s much-anticipated courtroom confrontation with Lay and Skilling provided some of the most dramatic insider testimony so far. He has yet to be cross-examined.
The often vilified Fastow appeared contrite. He fought back tears as he told jurors that his wife, Lea, pleaded guilty to a tax crime and finished a yearlong prison term in July for signing a tax return that didn’t include illegal income from schemes unrelated to the partnerships.
Fastow pleaded guilty to two counts of conspiracy in January 2004 at her urging, more than a year after he was originally indicted on a total of 98 charges.
He said Tuesday he misled his wife when he told her the kickbacks were gifts. Fastow stared at the floor as the checks of those ill-gotten gains, written to his wife and sons as well as himself, were displayed for jurors on a massive screen.
“I did this,” he said, tearful and fighting to compose himself. “I led her to believe that.”
Fastow, who agreed as part of his plea deal to serve 10 years in prison, is key to the government’s quest to prove Lay and Skilling lied to conceal a wobbly business.
He also is central to the defense. Lawyers for Lay and Skilling say there was no overarching fraud at Enron, and that the only crimes at the company involved Fastow and two of his former lieutenants stealing money.
When talking about his admitted frauds at the company rather than his home, Fastow spoke with confidence, appearing almost professorial. The quick temper he displayed at Enron didn’t emerge under questioning from prosecutor John Hueston.
At the time Fastow said Skilling approved the partnerships — LJM1 and LJM2 — Skilling was Enron’s chief operating officer and Lay was CEO and chairman. Skilling succeeded Lay as CEO for six months until resigning in August 2001.
Fastow said the LJM partnerships bought Enron’s risky investments or poor assets to let the company record income and rid itself of debt. That other buyers wouldn’t touch them wasn’t a concern.
“We were doing this to inflate our earnings, and I don’t think we wanted to show people what we were doing,” Fastow said.
Fastow said the LJMs were legal and did many legal deals, but “certain things I did as general partner of LJM were illegal.”
LJM2 often came to Enron’s rescue when the energy company scrambled to make earnings targets with fast-track asset sales in the last days of quarters or years, Fastow said.
LJM1 was created in 1999 to head off potential losses from Enron’s investment in an Internet startup. It couldn’t finance other deals because it had only $15 million in potential losses, so Fastow said he talked to Skilling about LJM2 — a bigger vehicle with at least $200 million. LJM2 ultimately raised about twice that.
“He said, ‘Get me as much of that juice as you can,”’ Fastow recalled.
Fastow also said Skilling was concerned about how detailed the disclosures to investors about the partnerships would have to be.
“Because it would attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses,” Fastow testified.
LJM2 often “warehoused” Enron assets, or pretended to buy them with a guarantee that the energy company would buy them back at a premium, Fastow said. He memorialized a so-called “Global Galactic” list of those side deals with then-Chief Accounting Officer Richard Causey to keep track of them.
The partnerships were lucrative for Fastow. He was guaranteed a $500,000 annual fee and promised 2 percent of the invested capital in the partnerships.
During Fastow’s testimony, Lay and Skilling occasionally took notes but showed little reaction.
Fastow is among 16 ex-Enron executives who have pleaded guilty to crimes, but unlike most, he has agreed up front to his 10-year term. The government has the option to prosecute Fastow on 96 other criminal counts originally brought against him if they deem his cooperation unsatisfactory.
He originally pleaded not guilty but changed the plea, he said, because “I thought it was in the best interest of my family not to go to trial, to take responsibility for my actions and to try to move forward in my life.”