UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17762 / October 2, 2002
Accounting and Auditing Enforcement Release No. 1640 / October 2, 2002
Securities and Exchange Commission v. Andrew S. Fastow, Civil Action No. H-02-3666 (K.Hoyt) (SDTX) (October 2, 2002)
SEC CHARGES ANDREW S. FASTOW, FORMER CHIEF FINANCIAL OFFICER OF ENRON, WITH FRAUD
The Securities and Exchange Commission filed a civil enforcement action today against Andrew S. Fastow, the former chief financial officer of Enron Corp., alleging violations of the anti-fraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws. The Commission is seeking disgorgement of all ill-gotten gains, including all compensation received subsequent to the commencement of the alleged fraud, civil money penalties, a permanent bar from acting as a director or officer of a publicly held company, and an injunction from future violations of the federal securities laws. The Commission brought this action in coordination with the Justice Department's Enron Task Force, which filed a related criminal complaint against Fastow.
The complaint allegations stem from Fastow's conduct relating to six transactions. Three of the transactions, RADR, Chewco, and Southampton, were the subject of the Commission's earlier settled action against Michael Kopper. Those transactions were part of an alleged scheme to hide Fastow's and Kopper's interest in and control of certain entities in order to keep those entities off Enron's balance sheet. This was done, according to the complaint, for self-enrichment and to mislead analysts, rating agencies, and others about Enron's true financial condition. As to Fastow's role in RADR, Chewco, and Southampton, the complaint alleges that Fastow secretly nominated certain of the owners of these entities, funded certain of their investments through undisclosed loans, collected undisclosed fees, and demanded and received under-the-table payments, including payments to himself and his family members disguised as yearly $10,000 non-taxable gifts.
Two of the remaining three transactions, the Nigerian barges and the Cuiaba transaction, are alleged to have been sham sales - best described as secret asset-parking arrangements. In one of these sales, a sale of an interest in certain Nigerian barges to a financial institution, Fastow is alleged to have personally promised that the financial institution would be taken out of its so-called investment and later arranged for an entity he controlled to buy the financial institution's interest at a pre-arranged rate of return on a pre-arranged time table.
In the second sale, Enron entered into a transaction with an off-balance-sheet entity controlled by Fastow to sell an interest in a severely troubled power plant in Cuiaba, Brazil, in order to avoid consolidation of project debt and recognize earnings. In connection with this transaction, Fastow allegedly entered into an unwritten side agreement with Enron requiring Enron to buy back the interest it just sold to Fastow at a guaranteed profit.
The last set of allegations included in the complaint relate to an alleged instance of backdating documents to avoid diminution in Enron's investment in the stock of a technology company. Specifically, according to the complaint, in September 2000, Fastow and others created documents that purported to lock in the value of Enron's investment in that company back in August of 2000, when that company's stock was trading at its all-time high price.
Throughout the period of his alleged fraudulent conduct, Fastow sold millions of dollars worth of Enron securities.
Specifically, the Commission's complaint further alleges as follows:
- RADR: In early 1997, Enron needed to divest itself of certain electricity-generating windmill farms to maintain certain financial benefits under applicable energy regulations. A sale to independent third-party investors would have entailed relinquishing control over these windmill farms, an eventuality Enron wanted to avoid. To maintain control of these assets, Fastow selected certain individuals to act as nominee investors in the entities (collectively referred to as "RADR") that purchased the windmill farms. To provide the funds for the purchase, Fastow made a secret personal loan to Kopper, who in turn made loans to the nominee investors. Between August 1997 and July 2000, these entities generated approximately $2.7 million in unlawful profits. In July 2000, Enron repurchased the facilities from the entities, generating an additional gain of approximately of $1.8 million. Between 1997 and 2000, Kopper made substantial payments to Fastow from these unlawful profits. One mechanism employed to funnel to Fastow money generated by this scheme was a "gifting" program whereby Kopper and Kopper's domestic partner made annual "gifts" of $10,000 to each member of Fastow's immediate family. Fastow chose the $10,000 amount to avoid IRS reporting rules.
- Chewco: In 1997, Enron and the California Public Employees' Retirement System (CalPERS) were joint venture partners in an off-balance-sheet investment vehicle called Joint Energy Development Limited Partnership (JEDI). When CalPERS wanted to cash out its investment in JEDI prior to investing in a larger Enron venture, Fastow and others at Enron formed a special purpose entity called Chewco to buy CalPERS' interest in JEDI thereby allowing Enron to continue accounting for JEDI as an off-balance-sheet entity. Initially, Fastow planned to serve as Chewco's general partner and as an equity investor, but was advised that his involvement would require disclosure by Enron. Fastow then selected Michael Kopper to fill the Chewco general partner role. Fastow secretly controlled Chewco and Kopper and, by virtue of that control, received a share of Chewco's profits as kickbacks from Kopper. In addition, Fastow siphoned funds from Enron by using his position as Enron's CFO to funnel funds to Chewco for his own benefit. As a result of these various machinations, Chewco was improperly kept off Enron's balance sheet because it did not have the third-party equity at risk required by the applicable accounting rules. Improper deconsolidation of Chewco caused material overstatement of Enron's reported net income and a material understatement of its debt.
- Southampton: Fastow unlawfully enriched himself and others using another off-balance-sheet partnership he controlled called LJM Cayman, L.P. ("LJM1"). In approximately February 2000, Fastow and others caused Enron to buy out the partnership interests of LJM1's two limited partners, Credit Suisse First Boston and National Westminster Bank (NatWest). In connection with this transaction, Fastow and others told Enron that NatWest wanted $20 million for its interest in the partnership assets, but paid NatWest only $1 million of that sum and pocketed the rest. A purported charitable foundation in the name of the Fastow's family received $4.5 million in proceeds of this fraud.
- Nigerian Barges: In December 1999, Enron and a financial institution entered into a sham "sale" transaction that enabled Enron to book approximately $12 million in earnings in 1999. In the transaction, the financial institution agreed to "buy" from Enron an interest in certain power-producing barges in Nigeria based on an express oral promise from Fastow that Enron would arrange to take the financial institution out of the investment within six months. Enron also agreed to a specified profit for the financial institution's "investment." The transaction closed at the end of December 1999. Six months later, Fastow fulfilled his promise to take the financial institution out of the deal. He arranged for a partnership he controlled, LJM2 Co-Investment, L.P. ("LJM2") to purchase the financial institution's interest on the previously-agreed terms.
- Raptor I/Avici: Enron and LJM2 engaged in complex transactions with an entity called Raptor I. Raptor I was used to manipulate Enron's balance sheet and income statement and to generate profits for LJM2 and Fastow at Enron's expense. In September 2000, Fastow and others used Raptor I to effectuate a fraudulent hedging transaction and thus avoid a decrease in the value of Enron's investment in the stock of a public company called Avici Systems Inc. Specifically, Fastow and others back-dated documents to make it appear that Enron locked in the value of its investment in Avici in August of 2000, when Avici's stock was trading at its all time high price.
- The Cuiaba Project: To avoid consolidation of debt related to a power-plant project in Cuiaba, Brazil, and to recognize earnings, Enron entered into a sham sale with LJM1. Fastow arranged for LJM1 to buy an interest in the plant despite significant cost overruns, completion delays, and operational problems, after Enron failed to secure an independent buyer. However, in connection with this transaction, Fastow had entered into an unwritten side agreement with Enron (which Enron later honored) requiring Enron to buy back the interest it sold to LJM1 at a guaranteed profit regardless of the risks associated with the project.
The complaint alleges that by engaging in the above-described conduct, Fastow violated Section 17(a) of the Securities Act of 1933 ("Securities Act"); violated and aided and abetted the violation of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2; aiding and abetting the violation of Sections 13(a), and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13; and acted as a controlling person of Enron Corp. and certain of its executives and employees within the meaning of Section 20(a) of the Exchange Act, and by virtue of that control, violated and aided and abetted the violation of the above-enumerated Exchange Act provisions and rules.
The Commission's investigation is continuing. For additional information see Litigation Release No. 17692 (August 21, 2002).
SEC Complaint in this matter