Risk & Compliance

Fastow-ian Bargain?

Perhaps it's not a deal with the devil, but guilty pleas by Andrew and Lea Fastow could have dramatic consequences for the future of corporate fina...
Marie LeoneJanuary 9, 2004

(Editor’s note: Andrew and Lea Fastow each pleaded guilty on Wednesday, January 14.)

As plea negotiations play out for Andrew and Lea Fastow, financial executives would do well to consider the consequences — and not only for the unhappy couple.

From a career perspective, there has never been a greater confirmation that, for better or worse, CFOs are the linchpin of a corporation. Witness the confidence that the Department of Justice seems ready to place in Andrew Fastow, the former chief financial officer of Enron, and in his ability to connect the dots from his subordinates to the CEO.

Fastow, who has been indicted on more than 100 charges, has reportedly been offered a plea arrangement by the DOJ that would require him to provide evidence against a onetime subordinate, former Enron chief accountant Richard A. Causey. It seems likely that Fastow would also provide evidence against former Enron president Jeffrey Skilling and former chairman Kenneth Lay, both of whom are under investigation but as yet uncharged. Notes Neil Getnick, managing partner at the New York law firm of Getnick & Getnick: “The single most important thing the government can do to improve their case against Skilling and Lay is to bring Fastow on board.”

Constructing plea bargains that affect executives up and down the corporate ladder is not unusual for the DOJ, says Getnick, a former district attorney in Manhattan, who expects to see similar deals in fraud cases during the 2004 “trial season.” Other CFOs headed for trial this year, says Getnick, may prove to be DOJ’s missing links if they agree to “fill in the blanks” regarding officials under indictment or investigation.

Former federal prosecutor Jacob Frenkel is not convinced that the DOJ will continue to target Lay, however. Frenkel, a partner in the Washington, D.C., office of Smith, Gambrell & Russell, says that as soon as DOJ’s Enron task force “gets Fastow behind them — whether by plea or jury verdict—they will set their sites on Jeff Skilling.” By Frenkel’s lights, the DOJ knows that a hands-on CFO, such as Fastow, communicates directly with the CEO, the audit committee, the outside auditor, and senior bank officials — but not necessarily with the chairman.

Going forward, executives who are found guilty, or plead guilty, are likely to be out of commission longer than white-collar criminals in the past. Under new, tougher federal sentencing guidelines, prison terms of 10 years may become more the norm than the exception, posits Frenkel. Based on historic sentencing standards, says Frenkel, Fastow’s reported plea-bargain term of 10 years is “unimaginably long.”

The length of the term is “a testament to the degree of leverage that the government gains when they prosecute a husband and wife,” adds Getnick. Lea Fastow, Andrew’s wife and a former assistant treasurer at Enron, is deciding whether to accept a plea bargain that would sentence her to five months in prison. The Fastows have two small children, ages 5 and 8; the deal would stagger the couple’s prison sentences so the children are not deprived of both parents at the same time.

Lea Fastow has until noon Friday to plead guilty or agree to stand trial beginning February 10. The presiding judge, however, has required a 60-day pre-sentencing investigation and reserved the right to impose a longer sentence.

The Fastow pleas also loom over commercial and investment banks. Some of the world’s largest financial institutions, including J.P. Morgan Chase, Citigroup, and Merrill Lynch, have paid a total of more than $350 million in Enron-related fines, though according to published reports, officials at the financial institutions still haven’t denied enabling Enron’s fraud.

As CFO, Andrew Fastow had direct and often daily contact with bankers, and some observes believe that prosecutors will ask Fastow to provide evidence against those officials, too. Frenkel, however, reckons that the DOJ will not pursue criminal charges against banks, but rather that it will extract significant settlements through civil cases. If criminal charges are levied, adds Frenkel, they will be against bank officials, since charges against the institutions themselves might ultimately cause their collapse.

Getnick, on the other hand, says that if the DOJ does pursue cases against banks, he’d like to see two complementary models of prosecution unfold. Coupled with the traditional model — individual prosecution and sentencing — would be the “Spitzer model,” named for the New York State Attorney General. In this model, Spitzer’s crusading attacks of entire industries — for example, the mutual fund sector — become a means of pushing through industrywide reforms and monitoring. These are combined with corporate reforms championed by executives who “got the message” after colleagues were hauled off in handcuffs, muses Getnick.

Another big question faces the banking industry: Is tighter regulation in the offing for an industry that apparently aided and abetted corporate fraud?

Under current chairman Alan Greenspan, the Federal Reserve Board has taken a laissez-faire approach toward regulation; under Greenspan predecessor Paul Volcker, the Fed took a hawkish stance. As for whether Andrew Fastow’s plea bargain will tilt banking regulation one way or the other — stay tuned.