Risk & Compliance

Double-Header: Fastow Charged with Fraud, Pitt Urged to Resign

Former Enron CFO hit with 78-count indictment; charges stem from off-balance-sheet financings. Plus: SEC probing Pitt over Webster selection--some ...
Stephen TaubNovember 1, 2002

Federal prosecutors probing Enron Corp.’s collapse finally reeled in a big fish.

After weeks of media speculation, former Enron chief financial officer Andrew Fastow was indicted Thursday on 78 counts. The long list of charges includes fraud, money laundering, and conspiracy as part of an alleged scheme to artificially boost earnings and enrich himself.

The charges, however, added little to the criminal complaint filed earlier this month against Fastow.

The indictment, though, included the additional charge that he obstructed justice by trying to persuade one of his closest aides, Michael Kopper, to destroy computer records, according to published accounts.

Kopper pleaded guilty to two counts of conspiracy back in August.

“These charges are full of sound and fury, but the truth about Enron has yet to be told,” said Fastow’s lead attorney, John Keker. “When the truth is told to a jury of 12 honest Americans, Andy Fastow will be set free.”

That remains to be seen. If Keker is wrong—and Fastow is convicted—the ex-Enron CFO could end up spending a whole lot of time in prison. Each wire-fraud charge and conspiracy charge carries a maximum sentence of 5 years, while the various money-laundering charges carry maximum jail terms of 10 and 20 years.

Fastow is expected to be arraigned on November 6 before a federal magistrate judge in Houston.

The indictment, handed down in a Houston courtroom, alleges that Fastow launched a series of complex off-balance-sheet deals in early 1997 that defrauded Enron while enriching himself, his family, and associates.

The scheme was undertaken to make the company appear more attractive to Wall Street analysts, credit-rating agencies, and others by creating an “illusion of business skill and success on the part of Fastow and other senior Enron management,” according to a report in Reuters.

Yesterday’s indictment does not mark the end of the Department of Justice’s investigation into Fastow, however. Said deputy attorney general Larry Thompson: “We will use every appropriate measure to recover the ill-gotten gains of these corporate schemers. Justice demands it.”

Shareholders who have filed lawsuits against Enron and Fastow will no doubt be glad to hear that.

SEC Investigating SEC

The year of the corporate scandal took a bizarre twist yesterday.

It appears that the Securities and Exchange Commission is investigating its own chairman, Harvey Pitt.

The probe apparently stems from the selection of William Webster as head of the new Public Company Accounting Oversight Board (PCAOB). In an article in the New York Times on Thursday, the paper alleged that Pitt withheld the fact that Webster headed an auditing committee for US Technologies Inc. That company—or what’s left of it—is currently facing fraud charges.

According to the paper, Webster gave this information to Pitt and Robert K. Herdman, the agency’s chief accountant, shortly before Webster was selected to head the board. Reportedly Pitt didn’t pass the info on to the other SEC commissioners before the vote.

Webster said he was assured by Pitt that the staff of the commission had looked into the issue and that it would not pose a problem, according to theTimes story.

The SEC’s staff was informed of Webster’s work at US Technologies, and “the commission staff identified nothing of concern after reviewing the situation,” SEC spokeswoman Christi Harlan told Bloomberg. “The chairman [Pitt] sees no reason to revisit the action that the commission took last Friday.”

Harlan told wire services that the commission’s inspector general, Walter Stachnick, would conduct the investigation.

“It’s the normal route for internal inquiries,” she told Reuters. “This is simply a look at the process and it is not a review of Judge Webster.”

Some lawmakers were less than thrilled with “the process,” however. In response to the allegations leveled by theTimes, Sen. Jon Corzine of New Jersey and House Minority Leader Richard Gephardt called for Pitt to resign, according to Bloomberg.

“Pitt should resign because he lacks the credibility to do the job,” Sen. Paul Sarbanes of Maryland said at a press conference.

In fact, Sarbanes and several other members of Congress called on the General Accounting Office to look into the selection process.

Webster’s nomination and selection has generated a fair amount of controversy among legislators, regulators, and accountants. Webster, a former federal judge, does not have an accounting background. As the onetime director of the Central Intelligence Agency and the Federal Bureau of Investigation, however, he should be pretty good at conducting investigations. In the era of the accounting fraud, that expertise could come in handy.

According to theTimes, Webster headed a three-person audit committee at US Technologies, which was delisted from the Nasdaq Stock Market in 1996. The Webster-led audit committee voted in 2001 to fire BDO Seidman., US Technologies’s outside auditors, after the auditors raised concern about the company’s internal controls.

In a September 6 letter to the SEC, BDO cited the company’s “lack of an experienced CFO, deficiencies in recording material transactions,” and the failure to organize and retain documents, according to the article.

Report: SEC Probing Lucent’s Accounting

They’re very busy at the SEC these days.

Besides the probe into Pitt’s handling of the PCAOB fiasco, the commission is also investigating possible improper accounting at Lucent Technologies. This, according to an article in USA Today, citing government officials.

The SEC is reportedly looking into whether the telecom-equipment company used aggressive accounting in 1999 and 2000 to inflate sales numbers.

The SEC plans to send the company the dreaded “Wells notice” within a few days, said the paper, citing a government source familiar with the investigation. These notices advise that the SEC plans to recommend filing civil charges and give the recipients a chance to reply.

Generally, a Wells notice leads to a civil lawsuit.

About two years ago, Lucent restated $679 million in revenues after conducting its own internal review of its bookkeeping practices.

In February 2001, theWall Street Journal reported the SEC was formally investigating Lucent’s accounting practices. The agency wound up taking no action, however.

The company, though, is currently facing a lawsuit alleging Lucent executives booked hundreds of millions of dollars in bogus revenue by claiming nonexistent sales and so-called channel stuffing—that is, executives booked large sales and shipped product after reaching private agreements with distributors that they didn’t have to pay for any Lucent products they didn’t sell.

(Editor’s note: According to CFO PeerMetrix, Lucent’s cost structure continues to be way out of whack with costs at other network-equipment specialists. To see how Lucent stacks up in our cost-management ranking—or to compare your company against peers—click here.)

SEC Files Embezzlement Complaint Against Former Treasurer

And yet more from the SEC. Yesterday, the commission filed a complaint in U.S. District Court alleging Larry Ohms, the former treasurer of Dallas-based United States Lime & Minerals Inc., embezzled nearly $2.2 million from the company between January 1998 and December 2001.

The agency claims Ohms forged the signatures of other company officers on checks, and falsified the company’s check register to create the appearance that these checks were for the company’s legitimate business expenses.

The SEC also alleges that Ohms supervised U.S. Lime’s internal accounting controls and financial reporting, and used his position to escape detection by falsifying the company’s books and records, lying to its outside auditors, and preparing false financial statements that he then caused the company to file with the SEC.

The complaint charges Ohms with fraud, circumventing internal controls, falsifying books and records, and lying to auditors.

The SEC requested that he be barred from serving in the future as an officer or director of a public company, and ordered him to disgorge the full amount that he stole from U.S. Lime, with prejudgment interest.

Businesses Sitting on their Wallets

Recovery? What recovery?

U.S. businesses, the key to any sustained economic rebound, said they don’t plan to increase hiring during the next few months and have cut spending plans. Or at least that’s the takeaway from a quarterly survey conducted by the National Association for Business Economics.

More of the 108 companies that responded to the survey fired workers than hired them in the July—September quarter. In addition, more businesses expect to pare their payrolls in the next six months than expand them.

Businesses also cut capital spending for the sixth straight quarter, the longest stretch of declines in the survey’s 20-year history.

While more companies plan to boost spending in the next 12 months than cut it, those spending plans have been scaled back of late.

Short Takes

  • Aon Corp., whose earnings jumped 78 percent last quarter, said it plans to raise about $1 billion to meet debt and pension obligations in 2003. It said $500 million to $600 million would be in the form of equity-linked securities. The company also expects pension obligations to hurt future earnings.

The increase in pension expenses “is very large even for a company of Aon’s size,” Joanne Smith, an analyst at UBS Warburg LLC, told Reuters.

  • Freddie Mac issued $1 billion of 10-year global subordinate callable notes, priced to yield 5.28 percent, or 130 basis points over comparable U.S. Treasuries. The lead underwriters were Credit Suisse First Boston, Lehman Brothers Inc., and Salomon Smith Barney.
  • IBM is slashing prices on the new version of its database software for midsize companies, according to Reuters. The company’s entry-level DB2 Workgroup Server Unlimited Edition database, geared toward companies with fewer than 1,000 employees, will now go for $7,500 per processor, 46 percent lower than the price on the current version. That database is also called DB2 standard edition.

IBM also merged two high-end database products—DB2 Enterprise Edition and DB2 Extended Enterprise Edition—and simplified its pricing structure for the new, combined product, Reuters reported.

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