VideoLast month Andrew Fastow agreed to accept a plea bargain that will land the former Enron CFO in jail for a decade, while his wife serves five months and the couple pay a fine of at least $20 million. The deals had fallen apart earlier in the month over a federal judge's refusal to guarantee Lea Fastow, who pleaded guilty to tax evasion, the five-month term. A compromise was later reached that could add five months of house arrest to her sentence.
Andrew Fastow's 10-year prison sentence is one of the longest ever handed out to a white-collar criminal. Junk-bond dealer Michael Milken was also sentenced to 10 years after pleading guilty to securities fraud in 1990, but in the end, he served only 2 years.
Times have changed. "Federal sentencing guidelines have gotten a lot stricter," says Michael DeMarco, a partner at the Boston office of law firm Kirkpatrick & Lockhart LLP. He says that 10 years is probably close to the minimum Fastow, 42, could have received under the guidelines. And he is likely to serve at least 90 percent of it, since reduced sentences are now a rarity.
Certainly, 10 years is not easy time, but other white-collar criminals have gotten nearly as much for lesser crimes. ImClone founder Samuel Waksal was sentenced to more than 7 years for insider trading. And in January 2002, former Leslie Fay Cos. CFO Paul Polishan received 9 years for devising the financial fraud that left the Pennsylvania clothing company bankrupt.
By these standards, Fastow's deal looks like a good one. After all, Leslie Fay shareholders lost only $460 million and Waksal pleaded guilty to illicit trading of a mere $5 million in ImClone stock. Fastow, in contrast, masterminded a fraud that caused an $89 billion market-cap loss, deprived thousands of employees of their retirement funds, led to the demise of a Big Five firm, and contributed significantly to a bear market that lasted three years.
The relatively low sentence—Fastow was facing 100 years by some estimates—could be an indication that he can provide solid evidence against former Enron kingpins Jeffrey Skilling and Kenneth Lay. DeMarco says that level of cooperation is a key determinant in setting the length of a federal sentence. He also says that prosecutors usually learn exactly what testimony the defendant can provide before they cut a deal. "They're not going to buy a pig in a poke," he says.
No doubt former WorldCom CFO Scott Sullivan and former Tyco International CFO Mark Swartz are watching the Fastow case closely. His deal is a good indication of what they can expect to get. In this way, Fastow is making one last market, the market for time served. And once again, Andy got himself a hell of a deal. —Joseph McCafferty
Last to First
When is a CFO not entirely thrilled to see the company's stock price go through the roof? When it suddenly means that he or she will be working weekends.
That's the fate of Scott Youngstrom, CFO of Compex Technologies Inc. After the New Brighton, Minn.-based maker of medical devices received the first clearance from the Food and Drug Administration to distribute an electronic abdominal-fitness belt, its stock price shot up. But the appreciation was bittersweet: it put the company's market cap over $75 million—the threshold that the Securities and Exchange Commission is using to determine the deadline for compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
The higher market cap ($100 million at the end of 2003) made Compex an accelerated filer, meaning the company would have to have audited documentation of its financial controls by its fiscal year-end of June 30, 2004. "Instead of being among the last to comply, we are now among the first," complains Youngstrom.
Worse, he says, it is still unclear what level of detail auditors will require and how much they will charge. Youngstrom does not relish the thought of being a guinea pig. "This is about to make my life miserable," he laments. —J.McC.
India Ink
The offshoring trend has taken another surprising turn. Having successfully outsourced to India such back-office functions as IT, investment banks are now sending some of their financial analysis and research overseas. In recent months, firms including J.P. Morgan and Morgan Stanley have quietly hired Indian firms or set up their own subsidiaries in India to handle basic financial modeling and comparable analysis.
Two main factors are driving this trend. First, it's cheaper. According to Dushyant Shahrawat, a senior analyst with Needham, Mass.-based TowerGroup, a financial-services industry research firm, the fully loaded cost of hiring an experienced junior analyst in India is between $20,000 and $25,000, compared with between $85,000 and $90,000 in New York. Such savings are especially attractive now that banks are no longer subsidizing sell-side research with investment-banking fees.
Second, banks hope that by freeing senior analysts to concentrate on analysis rather than running numbers, they will produce better—and more—research. "The bank always has to have the equity analyst sitting in New York, being able to talk to CEOs," says Joseph Sigelman, co-CEO of OfficeTiger, one of the Indian firms serving Wall Street. "But if we can take away some of the very structured, repetitive tasks, the number of companies the analyst can cover increases significantly."
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