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Fraud Led to the Top of Enron, Fastow Testifies Skilling and Lay Backed Off-the-Books Deals

Posted on: Wednesday, 8 March 2006, 12:00 CST

By Alexei Barrionuevo and Vikas Bajaj

Enron's former chief financial officer told a jury here Tuesday that his bosses and the company's board were aware of and signed off on two off-the-books partnerships that he proposed to help bolster the energy company's profits and hide losses from investors.

Andrew Fastow, the former finance executive, started his testimony in the criminal trial of Kenneth Lay and Jeffrey Skilling, the two former top executives at Enron, by outlining the partnerships, LJM1 and LJM2, that Fastow created. Lay and Skilling are accused of fraud and conspiracy stemming from the collapse of Enron in December 2001.

Under questioning from the prosecutor, John Hueston, Fastow said Enron's board and top two executives discussed the questionable nature of the partnerships, but ultimately approved them because they would help the company hide hundreds of millions of dollars in losses.

At one board meeting, a director wondered aloud about the "scrutiny and great problems" Enron could face if information about the partnerships became public, Fastow testified. At the same meeting, another director raised questions about the propriety of Fastow's personally profiting from LJM1; he was guaranteed $800,000 a year from the partnership regardless of how it performed. But Fastow asserted that Skilling came to his defense, saying, "Andy Fastow has put $1 million into the game. He should get profits because he has skin in the game." The board approved LJM1, which also raised $15 million from outside investors, in early 1999. Later that year, Fastow testified, Skilling encouraged him to create LJM2, for which he would eventually raise a total of $386 million. Fastow earned $8 million in fees from the second partnership and was entitled to 20 percent of its profit.

"Get me as much juice as you can," Fastow recalled Skilling saying.

"We were using the equity to juice Enron's earnings," Fastow added, "to report as much earnings as we wanted."

Fastow follows a parade of former Enron executives who have presented damaging testimony against the two former top executives, particularly Skilling, Enron's former chief operating officer and briefly its chief executive. The trial is the culmination of a four- year federal investigation into the failure of Enron and fraud at the company, and it is widely believed to be one of the most significant white-collar criminal prosecutions undertaken.

Skilling bobbed his head from side to side as Fastow spoke. Lay, Enron's founder and former chief executive, seemed to be looking off to the side.

Prosecutors projected on a screen previously undisclosed documents and listed the benefits of the off-balance-sheet partnerships to Enron: keeping projects off Enron's balance sheet for long periods of time and hastening certain transactions.

In one such transaction, Fastow testified, Skilling pressed him to use LJM1 to buy a troubled Brazilian power plant, Quiba. The deal helped Enron's international unit report a $20 million gain in earnings, which the company did not disclose came from a sale of assets.

Fastow said he considered the plant worthless, but bought it to curry favor with Skilling, who offered him a verbal guarantee that LJM1 would not lose money on the deal and Fastow would be duly rewarded. "I thought I was being a hero for Enron," Fastow said.

Fastow was recruited in 1990 by Skilling from Continental Bank in Chicago and became chief financial officer of Enron at the relatively young age of 37. *

Alexei Barrionuevo reported from Houston and Vikas Bajaj from New York.

Source: International Herald Tribune

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