Enron's Andrew Fastow Cheated and Stole Millions
"The United States District Court for the Southern District of Texas is now in session. Judge Sim Lake presiding. God bless these United States and this honourable court."
Week six, day two of the Enron trial began with the kind of revelation that, in any other case, would have been explosive. Under the cold, shadowless light of overhead fluorescents, in a dark, wood-panelled room resembling a dreary Protestant church, a former mid-level executive at what was one of the world's biggest energy companies admitted he knowingly duped shareholders, lied under oath to securities regulators, and intentionally misled FBI agents when asked about the financial performance of his unit.
The lawyers didn't even pause to acknowledge his answer. There was no murmur in the courtroom. Reporters barely bothered to jot it down. After a month and a half of testimony - not to mention thousands of newspaper articles, four major books, and an Oscar-nominated documentary about the Enron fraud - the fact that the company was populated with congenital liars is hardly news. And besides, this witness - Kevin Hannon, former lieutenant in a fledgling department - was just the opening act today.
This trial is about Jeffrey Skilling and Kenneth Lay, both former chief executives of the company, who stand accused of a combined 41 counts of securities fraud, wire fraud and conspiracy. And this day, the real show begins when federal prosecutor John Hueston stands and says the words the world has been waiting for since Enron collapsed into bankruptcy on Dec. 2, 2001. "The government calls Andy Fastow."
Andrew Stuart Fastow, the former chief financial officer of Enron Corp., is the self-described architect of the various scams that reduced the seventh-largest company in America to a smoking ruin. He has never spoken publicly about what happened, but in 2004 he struck a deal with prosecutors. He pleaded guilty to FRAUD, surrendered US$23 million in cash, and will soon begin a 10-year sentence in federal prison. And when he strides up the centre aisle, Enron's illusions begin to melt away, almost immediately.
He's short, no taller than five foot nine, and already completely grey at the age of 44. On the stand he looks like a schoolboy, and he has a slight speech impediment. Every time he makes an "s" sound he sends a high-pitched whistle bouncing off the walls, like the gopher in Winnie the Pooh. This is the genius who masterminded one of the biggest frauds in history?
If Fastow himself fails to live up to the image of a master criminal, so do his crimes. As he unspools his tale of sham deals, million-dollar payoffs and lies lies lies, it's the blandness of it all that really comes through. The downward spiral began with one little deal called LJM1, worth US$16 million, to preserve Enron's carefully manicured earnings. It worked like a charm: Fastow cleared more than a million bucks in cash and Enron got the profits it wanted. It worked so well, he immediately created LJM2 - more than 20 times bigger than the first - and on it went.
Prosecutors lead Fastow through deal after deal, with code names like Radar, Jedi, Greyhawk and Raptor, until jurors begin to fidget, then take on the 1,000-yard stare of people fighting to remain conscious. Fastow begins almost all of his explanations with the disclaimer that what he's about to say "is a little convoluted." It's said like an apology but really it's self-congratulation: "Prepare to behold my evil genius." Mostly, though, it isn't convoluted so much as boring, and delivered with all the emotion of an instruction manual on setting up your DVD player.
Only once does Fastow's dispassionate countenance crack: when prosecutors point out that his many lies ended up sending his wife, Lea, to prison for a year, for filing a false tax return. Fastow collected money from his co-conspirators in the Enron scam and deposited it in accounts belonging to his wife and their two young sons. He told his wife they were gifts, given out of friendship, and she prepared her tax returns accordingly. The whole scenario sounds preposterous: Look Lea, Michael Kopper sent Matthew something for his fourth birthday. It's a cheque for $10,000! Isn't that nice? Still, it was Andy's fraud. He could have exonerated his wife, told the court that he lied to her and saved her from prison. But that would have incriminated him, so he kept quiet, and she went to jail.
Questioned on this, Fastow's face turns suddenly red, he reaches up, pinches the bridge of his nose, wipes a tear from each eye and chokes out an answer. "In short, I misled my wife." Then, just as suddenly, he regains his composure. The emotion passes in less than 10 seconds. It's not insincere exactly, just remarkably controlled, efficient; crying as designed by Swiss management consultants.
The most telling details, though, are the unintentional ones. This high-powered business executive with the lightning-quick mind is really a guy with a surprising fixation on sci-fi blockbusters, who named his deals after characters from Star Wars and Jurassic Park; who recorded his scams on a ledger he dubbed the "Global Galactic List," apparently unaware of just how nerdy that sounds; and who managed to become CFO of a massive company, even though he now admits he doesn't really understand certain basic accounting concepts.
As prosecutors sketch out the details of deal after deal, well-dressed lawyers in the public gallery scribble notes on yellow legal pads for use in the dozens of pending civil lawsuits. In the hallways, young lawyers make perfunctory conversation. "Are you on one of the class actions?" "No, we're suing the investment banks, actually." In the afternoon, a well-dressed gentleman in the fourth row of the gallery falls asleep and begins to snore. Others nudge him awake. And minutes later he's out again, purring softly. But if those inside courtroom 9B are losing interest in what Fastow has to say, they are only catching up to the sentiments Houstonians have felt for some time now.
In Houston's posh enclave of River Oaks, palatial homes are nestled behind towering oak trees, perfectly manicured lawns, and millions of blooming azaleas lining the twisting streets. This is the neighbourhood where Houston's establishment lives, and where the up-and-comers aspire to.
Ken Lay's stately home, behind a six-foot hedge and gated driveway, was just around the corner from the sprawling mansion Fastow was building on Del Monte Ave. Jeff Skilling's Mediterranean-inspired pile is only a pleasant stroll away. And when the Lays moved to a luxury condominium nearby a few years back, it was only steps from the modernist mansion belonging to Fastow's co-conspirator Michael Kopper.
Sandra Lord knows these houses and their stories like the back of her hand. "Houston is the fourth-biggest city in the United States and the smallest town I've ever lived in," she laughs. Lord recently decided to turn her encyclopedic knowledge of the city's history, architecture and social structure to use, by offering the Enron Tour - a five-hour trek past all the homes, offices and other points of interest that punctuated the scandal. But business has been slow. Out-of-town journalists seem to be the only ones who want the tour. She's been profiled in newspapers as far away as Norway, but all the publicity has yielded only two bookings. Lord says she's not all that surprised. After four years, Houstonians are sick and tired of hearing about Enron.
Looking around the city, it's not hard to see why. One of the great ironies of the fiasco is that Enron was, essentially, a natural gas pipeline company that collapsed on the eve of the biggest energy bull market in a generation. Houston is a rough money town, built on the wealth of vast Texas oil fields and gas from beneath the Gulf of Mexico. Enron may be gone but the city is booming. And that's a message city leaders are eager to get out.
Reporters in town to cover the trial arrived at the courthouse to find an information packet prepared by the Greater Houston Partnership, the local chamber of commerce, entitled "Enron in Perspective." It neatly summarizes the city's spectacular economic resurgence since the collapse. It points out that the company employed 6,300 people in the Houston area, almost all of whom lost their jobs. But between January 2005 and the first month of 2006, the local economy created 79,000 jobs. Enron was ranked as the seventh-biggest company in America just before it imploded, a ranking that now belongs to another Houston energy firm, ConocoPhillips. And with about 31 per cent of the nation's energy exploration jobs, the city remains the undisputed capital of Big Oil. "This is a city of commerce, and we know there will be successes and there will be failures," Jeff Moseley, CEO of the partnership, explains from his office, four blocks away from the federal courthouse. "I'm not sure we'll ever get over the heartbreak of Enron. But as far as the economy goes, we're well beyond it. It's in our rear-view mirror."
And as Houston speeds ahead, drunk and giddy on boom-town adrenalin, nobody is much inclined to look backward. Nobody, that is, except those thousands whose lives the Enron fiasco changed, forever.
To get to Charlie Prestwood's house you drive north out of Houston until the strip malls, fast-food joints and big-box shopping centres lining Interstate 45 give way to open plots of land, with billboards promising homes "from the 80s and up, with zero down." Turn off at the little city of Conroe, and keep heading north. Pass the tiny but proudly named Lone Star Executive Airport. Just when you start to feel like you're really in the country, you'll come to a huge hayfield on the right. Turn left, and inside the second little brick bungalow on your right you'll meet a living reminder of Enron's real human cost.
Charlie Prestwood went to work for Houston Natural Gas (the company that became Enron) in 1967, as a technician at an underground natural gas reservoir. He worked at that same facility for 33½ years, until he retired on Oct. 1, 2000. He had a US$729 monthly pension coming from Enron, about US$1,300 in social security benefits, and Enron stock worth US$1,310,707.22. Prestwood will always remember that figure, down to the penny, because a year after he retired, he lost it all.
The 67-year-old remembers that autumn, listening to Ken Lay reassuring analysts and reporters that the company was "as strong as it has ever been." In reality, Skilling had quit, and Fastow was briefing Lay on a long list of secret, multi-billion-dollar liabilities that were quickly bringing the company to its knees. "The company was crumbling," Fastow testified, but Lay was still publicly insisting that Enron was bulletproof. Thousands like Prestwood believed him, until it was too late.
"I tell you, I thought I had all my ducks in a row," Prestwood says in a heavy Texas twang. He looks out from beneath an NRA cap, while Junior, his geriatric chihuahua, whips himself into a snarling frenzy at his feet. "They told us to buy the stock. Ken Lay said everything was fine. But that sorry scallywag was dumping his own stock by the bucketful."
They were very large buckets. In the three years leading up to the company's demise, Ken Lay cashed out US$184.5 million in stock. Jeff Skilling sold US$70.7 million. And Andy Fastow pulled in US$33.7 million. Add up all the stock sales by senior Enron executives over that period, and it comes to US$1.2 billion. Like thousands of other employees, Prestwood never sold a single share.
When he retired, Prestwood had been hoping to take his girlfriend, Helen, to see "some of the sights of this great country." But now he arranges all of his errands to coincide with his regular doctor's appointments because he can't afford the gas to make a lot of unnecessary trips to town. His health insurance costs US$320 a month, he pays US$390 on his mortgage. "I'm surviving, not really living," he says. "I'll run out of money long before I run out of bills, I can tell you that."
With little left to lose, Prestwood has dedicated himself to telling his story to whomever will listen. He's testified before Congress twice, and he vows to keep talking until he goes to his grave. "I just want justice to be served, I want those two [Skilling and Lay] to go to jail." And, of course, he wants his savings back.
Prestwood has signed on with one of the many long-shot class action lawsuits now grinding their way through the courts. Asked if he's resigned himself to the fact that his retirement savings are likely gone forever, he looks startled, as if the thought hadn't occurred to him, and stares out the window into the dark. "I sure hope I get some of it back. They haven't made any promises." He pauses and adds, "If I could get this house paid off, and a new car, that'd help a lot."
Week six, day three of the United States versus Kenneth Lay and Jeff Skilling begins with all the familiar steps of the ritual. The cameras follow the defendants from their offices across Smith Street to the door of the courthouse. Linda Lay, blond hair to the shoulders, always in a smart pantsuit of black slacks and colourful jacket (today fuchsia), holding hands with Ken. Rebecca Skilling walking alongside or just behind Jeff, long brown hair pulled back in a ponytail, wearing her customary black business suit, skirt just above the knee. In the courtroom, the two defendants chat amiably as usual.
But today is different. Today the trial moves to cross-examination, and the ritual shifts from confession to crucifixion. Skilling's lawyer, Daniel Petrocelli, a squat New Jersey native now based in Los Angeles, stands and with no prelude begins to mock Fastow's assertion that he believed he was being "a hero to Enron" by helping the company fudge its numbers and artificially meet its targets. The two begin to joust. The witness manages a couple of one-liners that make the gallery laugh, and he repeatedly returns to his message track: contrite, precise, careful to point out that he was one of many villains at Enron.
"Mr. Fastow, you know, your answers sound very rehearsed to me," Petrocelli says.
"With all due respect, Mr. Petrocelli, your questions sound rehearsed to me." This draws another laugh, and the lawyer leaps on it.
"You think this is funny, don't you?"
"No sir, I think this is dead serious."
"No, you think just because you can make those people laugh back there ... We're talking about the fact that your wife, because of your conduct, spent one year doing hard time. And you think it's funny."
"No sir, it is not funny at all."
And so it begins - a systematic, brick by brick dismantling of Andy Fastow's character, mining every sleazy aspect of the man's past. How he drew his family into the fraud by laundering money through bank accounts in their names; how he could have exonerated his wife but selfishly opted not to; how he flat out stole US$19 million from Enron, and then started a charitable foundation with the proceeds of his crime.
Then, onto the fraudulent deals themselves, the ones that the prosecution had gone through in such stultifying detail. Petrocelli goes through each one, and shows that Fastow was both architect and prime beneficiary, and portrays his client as an innocent bystander. On a whiteboard he writes down how much Fastow made on each, US$9 million here, US$12 million there. And concludes each by asking "and how much did Jeff Skilling get from that deal?" Every time, the same answer: "Zero."
Petrocelli, like all master litigators, doesn't question so much as he testifies himself, pausing only for Fastow to agree with his devastating assertions.
"Were you a hero when you stole from Enron, yes or no?"
"No, I was not."
"You must be consumed by an insatiable greed, is that fair to say?"
"I believe I was extremely greedy, I lost my moral compass, I've done terrible things that I very much regret."
Then, Petrocelli demands, "You want the jury to believe Mr. Skilling is as consumed by greed as you are?" And things turn.
"I'm saying when you artificially inflate earnings, when you improperly hide losses, so you can sell stock, or to make earnings targets so you can make high salaries and bonuses, that is stealing. I stole in other ways, and I stole that way. All I'm saying is, we stole. When people were making the decision whether to buy Enron stock, they were making that decision based on incorrect information. We, as senior management, benefited from that. We got our high salaries, our bonuses, and we sold our stock."
And there it is, the case against Skilling and Lay. Andy Fastow, as accomplished a liar as you're ever likely to see, manages to tell a truth so stark, so undeniable in light of all that's happened, that it momentarily reminds everyone of what the case is about: not Fastow's character, but the character of Enron and those who pulled its strings.
Just that once, and just for a moment, Petrocelli does not have a ready reply. Like a pro, he swiftly changes the subject.
Maclean's March 20, 2006