The architect of Enron’s financial schemes is due back on the stand in Houston Wednesday for the second of several expected days of testimony.
Former Chief Financial Officer Andrew Fastow spent Tuesday, day one, testifying against his old boss, former CEO Jeffrey Skilling. He said Skilling loved the deals that helped lead to Enron’s collapse, once telling him, “Get me as much of that juice as you can.” But he added that his boss didn’t want to know “the footnotes” of the arrangements. The partnerships allowed the energy trading company to inflate profits and hide losses.
Fastow fought back tears as he talked about his wife, who’s already done a year in prison for a tax crime. He hasn’t yet testified about the other former executive on trial for fraud and conspiracy, Enron founder Kenneth Lay.
Fastow is testifying as part of a plea deal that will limit him to ten years in prison. Before Congress, he invoked the Fifth Amendment. He made no public statements. In court, he spoke few words other than his pleas — first not guilty, then a flip to guilty.
In the four years since the implosion of Enron, Fastow has remained as quiet as prosecutors say he was vital to the accounting scandal that brought down the energy titan.
That changed Tuesday, when Fastow took the witness stand to testify against former bosses Kenneth Lay and Jeffrey Skilling at their federal fraud trial.
Silver-haired and articulate, Fastow explained to jurors a series of side deals and partnerships he struck to help the company keep its losses under wraps and boost its income.
“We were doing this to inflate our earnings, and I don’t think we wanted to show people what we were doing,” he testified.
He said the partnerships were blessed by Skilling, who was chief operating officer when the vehicles were first formed in 1999 and who Fastow said once told him regarding them: “Get me as much of that juice as you can.”
Fastow, 44, has already agreed to serve up to 10 years in prison after pleading guilty to two counts of conspiracy. The government can still prosecute him on 96 other charges if they are unsatisfied with his cooperation against his ex-bosses.
On the witness stand, Fastow was contrite, and confident when he spoke. He broke down complex financial arrangements and energy arcana into plain English for jurors.
But he struggled with tears and rubbed his eyes in anguish when the questions turned to his family.
Lea Fastow, a former assistant treasurer at Enron, served a one-year prison term for signing a tax return that failed to declare her husband’s illegal kickbacks as income.
Fighting to compose himself, Fastow told jurors Tuesday that he had misled his wife by telling her the kickbacks, a series of checks made out to him, her and their two young sons, were actually gifts. Lea Fastow endorsed and deposited them.
“I did this,” he said. “I led her to believe that.”
He also grew emotional when, under questioning from federal prosecutor John Hueston, he acknowledged committing crimes in order to manipulate Enron earnings and enrich himself.
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.”
The partnerships that Fastow said Skilling approved — LJM1 and LJM2 — were named with initials of his wife and sons, Jeffrey and Matthew, though Fastow did not share that detail with jurors.
He said the vehicles gave Enron a buyer of risky investments or poor assets so the company could record income and wipe debt off its books.
Fastow told jurors LJM1, set up in 1999, helped Enron head off potential future losses from its investment in a small Internet startup firm. But LJM1 couldn’t do many other deals because it only had $15 million in investment capital, so Fastow talked to Skilling later that year about setting up LJM2 with at least $200 million.
“He said, ‘Get me as much of that juice as you can,”’ Fastow recalled. Skilling said the same thing in 2000 about a possible LJM3, though the third version never materialized, Fastow said.
Fastow said Skilling once enthused about the partnerships: “I love LJM. I want to do all the deals with LJM I can. I just don’t want the footnotes.”
He said he took that to mean Skilling had a disdain for detailed disclosure of the partnerships to the public. At the time, equity and credit analysts, banks and the media were putting the company under heavier scrutiny.
He also said the LJMs were legal and were used to conduct many legal deals. “Certain things I did as general partner of LJM were illegal,” Fastow said.
Fastow’s entrance caused heads to turn inside the packed ninth-floor courtroom in Houston. His testimony has been the most highly anticipated moment to date in the trial of Enron founder Lay and Skilling, who face fraud, conspiracy and other charges.
His cross-examination was expected to make for good theater as well. Lawyers for Lay and Skilling have portrayed him as one of the few true criminals an Enron, where they maintain there was no massive fraud.
The partnerships were lucrative for Fastow. He was guaranteed a $500,000 annual fee when the first one was set up in 1999 and promised 2 percent of invested capital in both vehicles. Fastow said he raised almost $400 million for LJM2.
Fastow said such partnerships commonly give the general partner 2 percent of the invested capital — and the additional half a million dollars per year was an extra boost.
Enron’s board, which included Skilling and Lay, approved his pay, Fastow said. The ex-CFO said Skilling told the board that Fastow had invested $1 million of his own, and “He should get profits because he’s got skin in the game.”
The ex-CFO also testified that directors waived Enron’s code of conduct, which barred officers from participating in ventures that posed a conflict of interest, so that he could run the partnerships.
Fastow described several deals in which LJM2 saved Enron from losses.
He said Skilling urged him to have one of the partnerships buy a minority stake in a troubled Brazilian power plant owned by Enron to help meet earnings targets. Fastow balked.
“I told him it was a piece of (expletive), and no one would buy it,” Fastow recalled. He said he relented in part because he stood to make money personally on the deal and Skilling assured him he would lose no money.
He said he believed Skilling’s verbal assurance, which wasn’t written anywhere.