HOUSTON – Former Enron Corp. Chief Financial Officer Andrew Fastow testified Tuesday he crafted and ran partnerships to help the company hide losses and inflate profits with the blessing of his boss, Jeffrey Skilling.
Fastow appeared contrite in his much-anticipated courtroom confrontation with Skilling and Enron founder Kenneth Lay, who are on trial for fraud and conspiracy stemming from Enron's spectacular 2001 collapse.
But he portrayed himself as a cog in a corrupt machine, with Skilling telling him, "Get me as much of that juice as you can," regarding the partnerships.
Fastow, 44, also fought back tears as he told jurors in a federal courtroom that his wife, Lea, pleaded guilty to a tax crime and finished a yearlong prison term last July for signing a tax return that didn't include illegal income from business deals unrelated to the partnerships.
He pleaded guilty to two counts of conspiracy in January 2004 at her urging, more than a year after he was originally indicted on charges of orchestrating schemes to manipulate Enron's books and enrich himself on the side. His plea was contingent upon the government striking a deal for his wife, who was initially indicted in May 2003.
He said Tuesday he misled his wife, and told her the kickbacks — a series of checks written to her, him and their two young sons — were gifts. She endorsed and deposited those checks. Fastow stared at the floor as the checks, with his wife and sons' names, were displayed for jurors Tuesday on a massive screen.
"I did this," he said, tearful and fighting to compose himself. "I led her to believe that."
The partnerships that he said Skilling approved — LJM1 and LJM2 — were named with initials of his wife and sons, Jeffrey and Matthew, though Fastow didn't share that detail with jurors.
Fastow, who agreed as part of his plea deal to serve 10 years in prison, is a key pillar of the government's quest to prove Lay and Skilling lied to Wall Street and to their own employees to conceal the crumbling finances that drove the company to seek bankruptcy protection in 2001.
The ex-CFO is central to the defense as well: Lawyers for Lay and Skilling say there was no overarching fraud at Enron, and that the only crimes at the company involved Fastow and two of his former lieutenants stealing money through his schemes.
When talking about his admitted frauds at the company rather than his home, Fastow spoke with confidence, appearing almost professorial. He was known at Enron to have a quick temper, but under questioning from prosecutor John Hueston, he showed no combativeness.
He said the LJM partnerships gave Enron a buyer of risky investments or poor assets so the company could record income and wipe debt off its books. Enron didn't mind that other buyers likely wouldn't touch them, he said.
"We were doing this to inflate our earnings, and I don't think we wanted to show people what we were doing," Fastow said.
He said the LJMs were legal and did many legal deals. "Certain things I did as general partner of LJM were illegal," Fastow said.
He told jurors LJM1, set up in 1999, helped Enron head off potential future losses from its investment in a small Internet startup firm. But it couldn't finance many other deals because it only had $15 million in investment capital, so Fastow talked to Skilling later that year about setting up LJM2 with at least $200 million.
"He said, `Get me as much of that juice as you can,'" Fastow recalled. Skilling said the same thing in 2000 about a possible LJM3, though the third version never materialized, Fastow said.
At the time, Skilling was chief operating officer of Enron. He succeeded Lay as chief executive for six months until resigning in August 2001, when Chairman Lay resumed that role.
LJM2's carefully coordinated deals often involved "warehousing" Enron assets, or pretending to buy them with a guarantee that the energy company would buy them back at a premium, Fastow said. The deals allowed Enron "to report the numbers it wanted to report," he said.
Fastow also said Skilling was concerned about how detailed disclosures to investors about the partnerships would have to be.
"Because it would attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses," Fastow testified.
The partnerships were lucrative for Fastow. He was guaranteed a $500,000 annual fee when the first one was set up in 1999 and was also promised 2 percent of the invested capital in the partnerships. Fastow said he raised almost $400 million for LJM2.
Fastow said such partnerships commonly give the general partner 2 percent of the invested capital — but the additional half a million dollars per year was an extra boost.
Enron's board, which included Skilling and Lay, approved the financial setup. Fastow said Skilling told the board that Fastow invested $1 million of his own, and "He should get profits because he's got skin in the game."
The ex-CFO also testified that directors approved his role in the partnerships and waived Enron's code of conduct, which barred officers from participating in ventures that posed a conflict of interest.
Fastow described several deals in which LJM2 saved Enron from losses.
He said Skilling urged him to have one of the partnerships buy a minority stake in a troubled Brazilian power plant owned by Enron to help meet earnings targets. Fastow balked.
"I told him it was a piece of (expletive), and no one would buy it," Fastow recalled. He said he relented in part because he stood to make money personally on the deal and Skilling assured him he would lose no money.
He said he believed Skilling's verbal assurance, which wasn't written anywhere.
"The way we were using LJM was to help Enron prop up its numbers. I knew Enron would not want to leave LJM out in the cold because Enron would want to do more deals," he said.
The LJMs weren't the only entities created to help Enron manipulate earnings, Fastow said. He discussed so-called Raptors, four fragile financial structures created in 2000 were backed by Enron stock and used to lock in the energy company's gains from asset values or investments and keep hundreds of millions of dollars in debt off the energy company's books.
"Raptor was hiding losses," he said.
During Fastow's testimony, Lay and Skilling occasionally took notes but showed little reaction.
Fastow is among 16 ex-Enron executives who have pleaded guilty to crimes. The defense claims such witnesses confessed to crimes they didn't commit under pressure from the Justice Department's Enron Task Force.
Federal prosecutors can recommend lenient punishments for such cooperators — more than enough incentive, the defense claims, for them to tell the government what it wants to hear.
Fastow is unique in that he agreed up front to serve a decade in prison. His only hope of serving less time will be to behave well in prison, possibly reducing his term by 18 months. But the government has the option to prosecute Fastow on 96 other criminal counts originally brought against him if they deem his cooperation unsatisfactory.
Fastow also acknowledged committing crimes in order to manipulate Enron earnings and enrich himself.
He originally pleaded not guilty but changed the plea, he said, because "I thought it was in the best interest of my family not to go to trial, to take responsibility for my actions and to try to move forward in my life."