Fastow: Enron's bosses knew of fraud

In 2000, when Enron was still in its heyday, Andrew Fastow estimated he had created $800 million in income for the company - an accomplishment that won him praise at his performance review.

Enron CEO Jeffrey Skilling told him he had a "creative" financial mind, "because I came up with things other companies would not have come up with," said Mr. Fastow from the witness stand this week in one of America's most closely watched trials involving corporate fraud.

In dramatic testimony, Fastow is proving to be the key figure - not only in the trial here of Enron's two corporate chiefs but also in the chain of events that led to the Sarbanes-Oxley Act of 2002, the most sweeping accounting reform in decades. As a chief financial officer whose fraudulent deals were at the heart of one of corporate America's biggest collapses, Fastow has unwittingly helped strengthen the role of America's CFOs as guardians against corruption.

"Initially a lot of CFOs felt tarnished by Andy Fastow and other CFOs who committed fraud," says Julia Homer, editor in chief of CFO Magazine. "But to their surprise, Sarbanes-Oxley had the paradoxical effect of increasing their stature within companies."

At the trial itself, Fastow is the central figure for both the prosecution and the defense. In a deal with prosecutors, Fastow agreed to testify in exchange for a reduced sentence. He pleaded guilty in 2004 to two counts of fraud and agreed to 10 years in prison and a $24 million fine.

Prosecutors hope his testimony this week will prove that his bosses, Mr. Skilling and Enron founder Kenneth Lay, knew about and actively promoted his fraudulent activities.

Defense attorneys for Skilling and Mr. Lay hope to show that Fastow was the mastermind behind all the criminal wrongdoing at Enron and that their clients are innocent.

Lay is charged with seven counts, including conspiracy and fraud; Skilling is charged with 31 counts, including conspiracy, fraud, and insider trading.

In his testimony, Fastow described the off-balance-sheet partnership he created in 1999 with the blessing of Lay, Skilling, and the board of directors. He named it LJM (the initials of his wife and two boys) and used it to hide company losses and inflate earnings.

The partnership essentially bought low-performing company assets and "warehoused" them until Enron bought them back - thus allowing the company to record the sale and camouflage its losses from Wall Street.

When he told Skilling that he was going to raise money for a second LJM, Fastow testified that Skilling said, "Get me as much of that juice as you can." The former CFO raised $386 million from investors for LJM2 and, at one point, Skilling asked him to buy a struggling power plant in Brazil, personally guaranteeing that he would not lose any money on the deal.

Fastow admitted that he was compelled by the huge rate of return he was making on the deals, resulting in some $45 million in profits for himself. Over and over, he described himself as opportunistic, but also a boon to the company.

The Brazilian deal "was good economically for me and I was helping Enron make its numbers," he said. "I thought I was being a hero for Enron."

On another occasion, Fastow testified that Skilling told him, "I love LJM. I want to do all the deals with LJM that I can. I just don't want the footnotes."

The footnotes were related-party disclosures Enron had to make at the bottom of each financial statement when it used LJM, and they had increasingly become a concern to analysts, investors, and banks. Fastow said the LJMs were legal and did many legal deals. "But things I did as [general] partner were illegal."

After Skilling's departure in August 2001, Fastow said he met with Lay to go over the growing problems at Enron. He said Lay was not surprised to hear of the problems and that he met with him again in September to discuss pointed questions by The Wall Street Journal about the LJM partnerships. Lay did not want to answer the questions because "that would just open a Pandora's box," he said, and they stuck to a statement backing the partnerships.

Fastow also said statements that the company was "fundamentally sound" made by Lay at both public and private meetings after Skilling's departure were lies and that Lay knew that.

In their cross-examiniation, defense attorneys are trying to get the ex-CFO to admit that there was no overarching fraud and that he and two of his former lieutenants were responsible for all the crimes.

Always central to a corporation's financial dealings, CFOs have become even more important in the wake of Sarbanes-Oxley.

"The act put a lot more pressure and attention on CFO roles," says Richard Saver, who teaches business organization law at the University of Houston.

Because they are now accountable for their company's financial statements, board members and top execs spend far more time with their CFOs, says Ms. Homer of CFO Magazine. Complying with the act has also meant more work for CFOs - especially those at smaller public companies, she adds.