Risk & Compliance

All in the Family

Report says Lea Fastow may be charged for role in Enron's off-balance-sheet deals. Plus: SEC formalizes Halliburton probe, GAO blames Herdman--not ...
Stephen TaubDecember 20, 2002

The wife of former Enron Corp. CFO Andrew Fastow may be charged in connection with her husband’s indictment, according to the Houston Chronicle.

A grand jury investigating Enron has also heard testimony in an attempt to determine Lea Fastow’s knowledge and control of the money Andrew Fastow illegally obtained, said the report.

The grand jury has also heard testimony from the adult children of former Enron chairman Ken Lay as part of an investigation into whether he might have sold stock illegally based on insider trading while at Enron, according to the paper. However, the children are reportedly not targets of the investigation.

The Chronicle stressed that Lay’s wife, Linda, has not been called before the grand jury and has not been told she is a target of the investigation.

Certainly Lea Fastow would have trouble arguing that she has no financial expertise. She comes from the Weingarten family, which formerly operated a chain of supermarkets. She also holds an MBA from Northwestern University, worked at a Chicago bank with her husband before they joined Enron in 1990, and left Enron as an assistant treasurer in 1997.

In fact, she was even involved in Enron’s complex financial deals. The charge against former finance executive Michael Kopper notes that Lea Fastow was paid $54,000 to serve as administrative assistant to Chewco, one of the three partnerships the government claimed were run to enrich Kopper, Fastow, and others, according to the paper.

What’s more, Lea Fastow’s name appears on a list of recipients of an October 1996 presentation by J.P. Morgan on finance structures designed to allow a company to take project development costs off its books, the paper wrote. These are precisely the types of transactions that led to Enron’s bankruptcy.

In fact, Lea Fastow’s name is on the family bank accounts targeted by investigators in the indictment against her husband, the report notes.

GAO: Pitt Didn’t Know about Webster’s Role

Controversial Internet company US Tech was in the news again yesterday.

C. Gregory Earls, the chief executive officer of US Technologies Inc., was charged in federal court of misappropriating about $13.8 million from investors. He was charged with one count of securities fraud, one count of mail fraud, and eight wire-fraud counts.

Until a few months ago, US Tech was a tiny prison-management company that morphed into a near-bankrupt Internet company.

However, US Tech attracted intense scrutiny because former FBI director William Webster, who was chairman of the company’s audit committee, was named chairman of the Securities and Exchange Commission’s new accounting oversight board.

While Webster was heading up US Tech’s audit committee, the company fired BDO Seidman LLP, an outside audit firm that criticized the company’s lack of financial controls. Last year US Tech was sued by shareholders for alleged fraud.

Webster’s selection to the accounting board ultimately wound up playing a big role in Harvey Pitt’s decision to resign as SEC chairman.

Pitt was criticized back then for failing to reveal Webster’s ties to US Technologies.

In a related story on Thursday, the General Accounting Office issued a report that blamed SEC chief accountant Robert Herdman for the Webster fiasco. Why? Because the GAO claims Herdman didn’t tell Pitt details about Webster’s role at US Tech or the fact that the outside auditor was fired.

Herdman, who was tapped to recruit the new accounting board members, learned of Webster’s US Tech connection on October 25, the morning of the oversight board vote. He resigned around the same time as Pitt did.

“We found no evidence that the SEC chairman knew anything before the Oct. 25 vote other than that Judge Webster had once been chairman of the audit committee of the board of directors of US Technologies, a company on the brink of failure,” the GAO report said.

The SEC, which brought the lawsuit against Earls, alleged that investors gave him money to purchase preferred stock and warrants from UST, according to the complaint.

Earls allegedly carried out the scheme through a limited liability company he created called USV Partners LLC. The complaint charged that he falsely told investors in USV Partners that the entity was created solely to purchase and hold UST stock and warrants, and that he would not take any management fees. According to the complaint, Earls lured more than 100 investors into giving him more than $20 million to purchase UST stock and warrants through USV Partners.

However, Earls apparently bought only a small portion of the stock he promised investors. He then allegedly misappropriated $13.8 million of their money by paying himself $4.7 million in management fees and $9.1 million that he falsely classified as “Legal and Accounting” expenses, according to the SEC.

In the court papers, he is accused of diverting the $13.8 million to an educational trust for his children, investors in other failed ventures, and his ex-wife, according to Bloomberg.

Buck Predicts 15 Percent Health-Care Hikes
Yet another survey predicts that employers’ health-care costs will continue to rise at a double-digit rate in 2003.

Costs for offering preferred provider organization (PPO) plans are expected to rise by 15 percent next year, point-of-service (POS) plans by 14.8 percent, and health maintenance organization (HMO) plans by 13.8 percent, according to a survey of nearly 100 health insurers, HMOs, and third-party administrators by Buck Consultants.

What’s more, the costs for providing prescription drug card programs are expected to climb at an even faster pace.

For example, the cost for pharmacy benefit managers plans is expected to increase by 15 percent, insurers plans by 20.3 percent, and combined plans by 16.4 percent, according to the survey. Amazingly, all of these figures are off a bit from last year’s survey.

“Some employers are seeing their final premium rates for health-care-related expenses increase at a clip of up to 10 percent greater than these trend factors suggest,” said Brian Stitzel, a Buck consulting actuary and survey co-author. “These employers had upward spikes in their 2002 claim costs, and health insurers are attempting to make up for the shortfall.”

Harvey Sobel, a Buck principal and consulting actuary, pointed out that a number of employers are taking steps to control their costs. They are self-funding benefits, consolidating vendors, and introducing consumer-driven health plans.

International Auditors Express Concerns

A number of representatives from Europe, Asia, and Latin America told the SEC during a meeting that proposed changes to the way auditors operate would not work with many foreign regulations and practices, according to ft.com, the Web site for the Financial Times.

The new rules, which are part of the Sarbanes-Oxley corporate-reform act passed in July, are expected to be finalized at the end of January.

Participants, who included representatives from the Big Four accounting firms and governments, discussed curbs on nonaudit services offered to audit clients as well as plans to rotate audit partners around clients more often to ensure independence, according to the FT. They said they wanted to follow principles proposed by the SEC rather than having rules prescribed that could conflict with the way auditors and lawyers outside the United States work.

“Rules written in the U.S. do not always travel very well,” John Grewe of the U.K. Department of Trade and Industry reportedly said. “They may be appropriate and relevant in the U.S., but by the time they reach another country they don’t work as well. The audit firms in other jurisdictions are already likely to be subject to an extensive system of regulation.”

David Sun of Ernst & Young Asia Pacific said the auditor rotation plans could cause big problems in Asia, especially in developing countries. “The existing rotation rule is difficult enough,” he reportedly said at the meeting. “A five-year rotation rule makes it even more difficult.”

Update on Accounting Probes

At least three companies made news Thursday due to accounting-related investigations or restatements.

Allegheny Energy Inc. indicated it will restate its results for the first and second quarters of 2002 due to accounting errors.

Management at the struggling company said it discovered the errors during a “comprehensive review of its financial records.”

Meanwhile, Cendant Corp.’s management said the SEC has completed a review of the company’s annual report without requiring a change or adjustment to Cendant’s earnings per share.

The company had announced the review in August 2002 as part of the SEC’s review of all Fortune 500 companies.

And finally, Halliburton acknowledged that the SEC has formalized its investigation of the company’s disclosure and accounting for cost overruns on certain engineering and construction jobs.

“To the company’s knowledge, the investigation has not expanded beyond these matters,” said Halliburton management in a press release.

It added it plans to continue cooperating with the SEC.

The commission issued a request on June 11 for documents related to cost overruns on construction projects at the oil field—services company. Vice President Dick Cheney served as CEO at Halliburton from 1995 to 2000.

The Houston-based company—and Cheney—were sued in July by Judicial Watch. The public ethics watchdog group claims Halliburton overstated its revenue by as much as $445 million over three years.

Halliburton management and the White House say the lawsuit is without merit.

It’s been a tough week for Halliburton. On Wednesday, the company agreed to pay nearly $3 billion in cash, $1.2 billion in stock, and $100 million in notes to settle more than 300,000 asbestos claims.

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