Enron Corp. chief executive Kenneth Lay was aware of the company’s withering finances in late 2001 even as he gave glowing reports to employees and the media, the admitted architect of schemes that helped sink the company testified Wednesday.
Andrew Fastow, the former Enron chief financial officer, provided the most direct link yet between Lay and fraud at Enron just before facing a blistering attack from a lawyer for ex-chief executive Jeffrey Skilling, who is on trial with Lay.
Fastow said he gave Lay a rundown of huge looming write-offs, a massive accounting error that would force a $1.2 billion writedown in shareholder equity and deterioration of fragile financial structures that Enron used to mask losses.
Still, Lay insisted publicly in late 2001 that the company was fundamentally sound. Months later, it collapsed into bankruptcy proceedings.
In an interview with BusinessWeek on Aug. 24, 2001, days after taking the CEO reins from Skilling, 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.”
Fastow testified that four days earlier, Lay and other top executives attended a meeting and heard about a “hole in the earnings” — projections that Enron would fall far short of Wall Street expectations for the quarter.
Asked by a federal prosecutor about the Lay interview, Fastow said: “I think most of the statements in there are false.”
The testimony stands in stark contrast to Lay’s claim that he believed Enron was healthy right to the end.
Fastow said he also met with Lay in September 2001 to discuss detailed questions raised by The Wall Street Journal about Enron’s off-balance-sheet deals and money Fastow was making off financial partnerships with Enron.
He said Lay decided to issue a brief statement backing the partnerships rather than answer the questions.
Fastow said he suggested major restructuring for Enron, including a possible merger, before Lay said in a September 2001 online chat with employees that the company was sound and had a strong balance sheet.
The ex-CFO said he and Lay met with Goldman Sachs & Co. executives to discuss options, though nothing came of it. Fastow said he chose Goldman because it wasn’t among Enron’s lenders, who would have blanched had they known Enron’s true condition.
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, the company sought bankruptcy protection.
But for much of the day in court, Fastow faced a tough cross-examination from Daniel Petrocelli, the head lawyer for Skilling, who was chief operating officer for Enron in the late 1990s and CEO for six months in 2001.
The cross-examination provided some of the most tense and dramatic moments so far in the federal trial of the former chief executives.
Petrocelli focused on the willingness of the former chief financial officer to watch his wife, Lea, serve a year in prison rather than come clean with federal investigators about kickbacks he received from Enron in 1997, and Fastow’s admission that his own children were indirectly caught up in his crimes.
“So you sacrificed your wife to protect your own self-interests, correct?” Petrocelli asked, in a tone of disbelief.
“I did not go in and plead guilty before that point in time, that’s correct,” Fastow replied.
Lea Fastow served a year in prison for submitting a tax return that failed to classify as income the kickbacks intended for Fastow — some of which were sent in the form of checks to his two young sons.
“To do those things you must be consumed with an insatiable greed. Is that fair to say?” Petrocelli asked.
“I believe I was extremely greedy and that I lost my moral compass and I’ve done terrible things that I very much regret,” answered Fastow, who has pleaded guilty to two conspiracy counts and agreed to serve up to 10 years in federal prison.
The defense lawyer sought to undermine testimony in which Fastow said Skilling gave his blessing to financial partnerships designed to hide losses at Enron and meet investors’ earnings expectations.
The kickbacks Fastow received that roped his wife into the Enron scandal were separate from the partnerships. Under questioning from Petrocelli, Fastow said Skilling and Lay received no money from the kickback schemes.
Fastow’s testimony was highly anticipated. He has kept quiet in the four years since Enron imploded, declining to make public statements and pleading the Fifth Amendment before Congress.
And on Wednesday, the cross-examination lived up to the high drama court observers had expected. When Petrocelli told Fastow his answers sounded well-rehearsed, Fastow said: “With all due respect, your questions sound very rehearsed to me.”
The defense lawyer shot back: “We’re talking about the fact that your wife because of your conduct spent one year doing hard time. And you think that’s funny?”
“No, sir, it is not funny at all,” Fastow said.
At one point, the exchange grew so antagonistic that U.S. District Judge Sim Lake stepped in and ordered the two men not to interrupt each other.
Fastow, 44, has already agreed to a 10-year prison term, with the chance to shave just 18 months off for good behavior. The government can still prosecute him on 96 criminal charges if they are unhappy with his testimony against Lay and Skilling.
Petrocelli seized on Fastow’s cooperation agreement with the federal Enron Task Force, saying turning on Skilling was his “one way out” of a life in prison. Fastow adamantly disagreed.
“I decided it was in the best interests of my family to instead plead guilty, to take responsibility for my actions and to try to make the rest of my life as productive as I can and as good as I can for my family,” Fastow said.
Petrocelli described as “booty” the fees that Fastow and former Enron official Michael Kopper pocketed from the partnerships. The lawyer said these totaled about $120 million.
But Fastow noted that by misrepresenting the financial state of the company, many people in Enron’s senior management benefited financially. “I’ve come to grips with that myself. That is stealing,” he said.
Petrocelli suggested Fastow knew his name would be forever etched in history books as an Enron criminal — and that he was desperate to make sure Skilling’s name appeared there too. Fastow forcefully replied that was irrelevant to him.
“You know what I’d like written on that page? That I had the character to recognize and admit what I’ve done wrong, to take responsibility for what I’ve done wrong,” Fastow said. “I can’t undo the past.”
Skilling, who was CEO for six months until resigning in August 2001, faces 31 counts of fraud, conspiracy, insider trading and lying to auditors. Lay, who resumed his role as CEO after Skilling’s abrupt departure, faces seven counts of fraud and conspiracy.