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Enron's Fastow is Remorseful and Nearly Poor

The nation has just celebrated its 237th birthday. And while the United States stands for many things, “forgiveness” is an indelible virtue that runs through America’s veins. With that, Enron’s former Chief Financial Officer Andy Fastow has spent five years in prison and after two years of freedom, he is publicly expressing remorse for his crimes against investors.

In a story in CNN.com, Fastow, 51, says that he caused “immeasurable damage” that he can never repair. The news channel covered a talk he just gave before an association of fraud examiners, who generally welcomed him. He said that all of his actions at Enron were approved by the higher-ups, and that variations of his conduct are occurring in today’s corporate world.

"I knew it was wrong," he told the crowd, as reported by CNN and its sister Fortune. "I knew that what I was doing was misleading. But I didn't think it was illegal. I thought: That's how the game is played. You have a complex set of rules, and the objective is to use the rules to your advantage. And that was the mistake I made ...

"I wake up every morning, and I take out my prison ID card, which I have with me here today,” he says, as CNN reports. “And it makes certain that I remember all the people. I remember that I harmed so many people in what I did. It encourages me to try to do the little things that I can to make amends for what I did ... I can't repay everyone. I can't give them jobs. I can't fix it. But I just have to try bit by bit to do that. Being here is hopefully a little contribution to that."

Here’s how it all unfolded 8-and-a-half years ago, as I reported it:

January 13, 2005 - Enron's long torturous history has ended. The stock no longer trades. All that is left is the payment of legal liabilities—and the trials of those accused of wrongdoing. While federal prosecutors have won convictions against some key players such as former CFO Andrew Fastow, the hardest fought battles are to occur by fall when former Chairman Ken Lay and former CEO Jeff Skilling go on trial

Ironically, Enron once symbolized the "New Economy" where knowledge and technology would combine to create opportunities across several sectors. And while the concept is still applicable, the way that Enron implemented it has been discredited. In other words, the company manipulated financials and lied to investors in an effort to show that it was alive and kicking. Now, the Houston-based entity is the sign for all that can go wrong with corporate America if hungry executives are left unchecked. 

The latest chapter in this tale of corruption-run-rampant is the payment that Enron directors have to pay out of their pockets: $13 million to settle a $168 million claim brought by its shareholders. Under the agreement, 18 of the firm's 29 former directors agreed to avoid a future court date in 2006 by paying the fines—all without admitting any wrongdoing. Altogether, the settlement, which must still win approval by the presiding judge, means that shareholders have recovered a total of $500 million. 

"Hopefully, this will send a message to corporate boardrooms of the importance of directors performing their legal duties," says lead lawyer for the shareholders William Lerach, who spoke to reporters after the settlement. The agreement follows another one made a few days earlier, in which WorldCom's directors will pay $18 million of their own money. 

Criminal Charges 

Criminally speaking, former CFO Fastow is the highest Enron official to have pled. He will spend 10 years in federal prison. Meantime, an indictment announced last year says that public statements made by Lay did not truthfully present Enron's financial position and cash flow, and omitted as well facts that were necessary for investors to properly evaluate the corporation. In a related move, the Securities and Exchange Commission seeks in a civil matter to recover more than $90 million from Lay. 

The government says that Lay enriched himself as a result of the combined "schemes" through salary, bonuses and grants of stock and stock options. Between 1998 and 2001, Lay received about $300 million from the sale of Enron stock options and restricted stock, netting a more than $217 million profit, the indictment says. He was also paid $19 million in salary and bonuses. Lay has said that he was the victim of employees that he had placed trust in—who duped him and others, which led him to continue to believe strongly in the company he founded in 1986. 

Skilling, who denies any wrongdoing, also says that he was duped by co-workers whom he trusted. He must defend against accusations that he misled investors, analysts and regulators—all while he was selling shares and pocketing tens of millions. He is charged with 42 counts that include insider trading and securities fraud -- deals that netted him $62.6 million from stock sold between April 2000 and September 2001. 

Collateral Damage 

Before its bankruptcy on Dec. 2, 2001, Enron was the seventh largest corporation in the country. Federal investigations discovered that it had tried to hide at least $1 billion in debt through a complex set of transactions. Subsequent profits were therefore questionable. So far, federal investigators are working on 30 cases tied to Enron, which have already resulted in 10 guilty pleas. Meantime a bankruptcy judge has said that creditors will get about a fifth of the roughly $63 million they are owed. 

For a while, the "scheme" seemed to work, says the indictment. It artificially lifted the share price of Enron as well as enabled the company to maintain its bond ratings. In early 1998, the stock traded at about $30 a share. By January 2001, even after a stock split, the price had climbed to more than $80 a share. 

The degree to which the scams disrupted the market will be debated for years. But the collateral damage from Enron's business mentality is enormous. This conduct can be linked to everything from a lack of investor confidence to the erosion of otherwise sound companies. 

Former employees say that while the company had codes of conduct, they were routinely sidestepped. In fact, the top leadership is accused by many of at least tacitly encouraging profit at all cost. Improper management was used to misdirect the innovation and energy that Enron sought from all workers, say insiders. That same creativity was employed instead to manipulate numbers and to sell a false public image. 

Responsibility for Enron's twisted fate starts at the top. The chairman held the keys while the executive committee came next. Then the managing directors and vice presidents followed. Pay scales were commensurate with the job level. Managing directors, for example, earned three times that of vice presidents. It's a structure that had been rife with conflicts because the desire to pocket millions in bonuses outweighed ethical standards. 

Enron scripted a code of conduct, it's just that it got in the way of making money. Many employees privately questioned, for example, Enron's method of booking transactions from commodity trades as revenue even though the money may not have been collected for years. Likewise, some were skeptical that the trading business accounted for 90 percent of company earnings despite the fact that the segment generated little cash flow. If any worker wanted to challenge the Enron way of doing business, he or she would be quickly rebuked, say insiders. The "fear of retribution" was real and acted as a deterrent to coming forward. 

"Enron's lobbyists were well-heeled but were blinded by the profit motive," says Rich Felak, a New York-based energy consultant. "It spelled trouble from the start." 

Because it's a document-intensive case, the government must rely on summaries, visual aides and timelines. Prosecutors must be able to show a listing of how much stock was sold and when it was sold. That information must then be digested by jurors, who will weigh whether the stock transactions corresponded with times at which Lay and Skilling might have known the company was about to collapse. 

Like other public companies, Enron was under pressure to maintain its investment grade credit ratings and to keep its share prices high. But unlike many other corporations, Enron is said to have managed its earnings rather than accurately reported them in an effort to appease analysts and shareholders. That sleight of hand was eventually revealed and the illusion vanished. Now, the task is to bring all the perpetrators to justice. 



EnergyBiz Insider has been awarded the Gold for Original Web Commentary presented by the American Society of Business Press Editors. The column is also the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has been honored as one of MIN’s Most Intriguing People in Media.

Twitter: @Ken_Silverstein

energybizinsider@energycentral.com


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