Risk & Compliance

It’s Official: Fastows Plead Guilty

In separate pleas, former finance chief and ex-assistant treasurer agree to 10 years and five months of prison time, respectively. Also: J.P. Morga...
Stephen TaubJanuary 15, 2004

The Fastows are going to jail.

Former Enron Corp. CFO Andrew Fastow pleaded guilty on Wednesday to two counts of conspiracy and agreed to forfeit $29 million in assets, most of which were previously frozen by federal authorities, according to Reuters. He also reportedly agreed to cooperate with prosecutors in exchange for 10 years in prison.

Two hours later, his wife, former Enron assistant treasurer Lea Fastow, pleaded guilty to one count of filing a false tax return in a deal that would put her in jail for at least five months, according to the news service.

Indicted on 98 criminal counts, Andrew Fastow pleaded guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit wire fraud and securities fraud. The charges concerned, respectively, self-dealing transactions involving a special-purpose entity called Swap Sub and a scheme to manipulate financial statements via another SPE called Talon.

“While CFO, I and other members of Enron’s senior management fraudulently manipulated Enron’s publicly reported financial results,” reads the statement Fastow gave prosecutors in his plea agreement, according to the paper. “I also engaged in schemes to enrich myself and others at the expense of Enron’s shareholders and in violation of my duty of honest services to those shareholders.”

Lea Fastow’s charge was linked to $141,000 she gained in 1997-2000 from a wind-farm deal, according to the Houston Chronicle.

Andrew Fastow is the highest-ranking former executive of Enron to plead guilty to a crime.

(Editor’s note: For much more on the continuing responses by corporations and regulators to financial engineering and white-collar crime, read our special reports on off-balance-sheet financing and corporate cleanups.)

J.P. Morgan Gobbles Up Bank One

In a deal worth about $58 billion, J.P. Morgan Chase has agreed to acquire Bank One, The New York Times Web site reported late yesterday. The deal would reportedly spawn a financial organization rivaling Citigroup, which with its $1.1 trillion in assets is the world’s current banking leader.

The merged company would continue to be known as J.P. Morgan Chase, according to the report. Currently, J.P. Morgan Chase is one of the largest Wall Street banks, while Chicago-based Bank One focuses on consumer banking and is one of the biggest credit-card issuers in the world.

According to the terms of the all-stock merger, J.P. Morgan Chase would trade 1.32 of its shares for each Bank One share, the Times reported. Based on J.P. Morgan Chase’s closing stock price of $39.22 yesterday, each Bank One share would be valued at $51.77 under the terms of the deal, according to the companies. That represents a 14.5 percent premium over Bank One’s $45.22 closing share price.

Wife of Former Parmalat CFO Arrested

Italian police yesterday arrested Donatella Alinovi, the wife of former Parmalat finance chief Fausto Tonna, on suspicion of money laundering, according to Reuters, which cited a judicial source.

Italian police also seized two safe-deposit boxes held under her name at a Parma savings bank, containing checks worth almost one million euros, the wire service added. Alinovi reportedly drew the money from “suspect” accounts belonging to Parmalat units.

Arrested on New Year’s Eve, Tonna reportedly is believed by magistrates to have been at the core of decade-long efforts to hide losses at the food group. He resigned as CFO in March.

In another major Parmalat development, Italian tax police seized documents from the Milan offices of Eureka, a Citigroup unit, as part of an investigation to determine whether someone at Citigroup helped Parmalat to dupe bond investors, according to Reuters. The seizure reportedly stemmed from Citigroup’s legal complaint.

The banking giant has lodged its own legal complaint accusing Parmalat of forging 200 million euros worth of credit notes in 2003, a judicial source told Reuters.

On Wednesday, investigators were trying to determine whether anyone from Citigroup helped companies associated with the food group raise debt backed by inflated invoices, Reuters reported, citing another judicial source.

The documents reportedly concerned about 30 companies linked to Parmalat, which might have helped it raise money on the back of fake invoices. “There was a sort of securitization of invoices for large amounts over the years. We’re talking about a significant figure,” the source told Reuters. “The inquiry is trying to understand if someone from Citigroup helped these affiliates carry out the securitization and if this was inflated and in some way represents a distorted reality.”

On Wednesday, Economy Minister Giulio Tremonti said the scandal will cost the Italian economy about 11 billion euros, or just under 1 percent of gross domestic product.

The wire service also noted that Citigroup and Bank of America have filed legal complaints alleging they were victims of the Parmalat fraud.

In fact, Parmalat used Deutsche Bank’s logo without its authorization on a letter assuring Standard & Poor’s, the credit-rating agency, of the Italian firm’s liquidity, Reuters further reported, citing a banking source.

Computer Associates Removes Wang Co-Founder’s Wife

The accounting scandal that has gripped software giant Computer Associates has turned into a nasty battle between co-founder Charles Wang and his protégé, chief executive Sanjay Kumar.

Wang’s wife Nancy Li was escorted from the company’s Islandia, N.Y. office on Tuesday after resigning as head of a subsidiary, iCanSP, according to Newsday.

Li had spent 24 years at CA and served as chief technology officer before launching iCanSP. Several managers at the subsidiary, which was formed in 2000 to develop software for companies that deliver services over the Internet, also resigned.

In a cell phone interview with the newspaper shortly after she was escorted out, Li reportedly said she attempted to engineer a smoother leadership transition but officials declined. Li said she offered to buy CA’s 90 percent stake in iCanSP from CA, but the company refused, according to the report.

Li told the paper she received no termination package and was asked to turn in her badge, corporate credit card, and keys. “I just don’t think this is the way you respect people, walking someone out who dedicated more than 20 years to a company,” she said.

After Wang’s abrupt resignation in November 2002, Wang also received no severance. Interestingly, he is still a partner with Kumar in many real estate ventures in New York, as well as the New York Islanders hockey team and New York Dragons arena football team.

But the two men apparently remain estranged. “You’ll never see them in the same place,” a person at CA reportedly told Newsday. Kumar, however, still owes Wang millions of dollars after Wang bailed him out following margin calls on Kumar’s CA stock in 2002, according to the news report, which citing people close to the men.

In an E-mail last week, Kumar reportedly declined to comment to the paper on his ventures with Wang, saying, “My personal financial dealings should be private and I think it appropriate to keep it that way.”

Wang’s last days at CA were said to be punctuated with tense disagreements with the board of directors, although CA has maintained that the board did not vote to oust him.

Earlier this weekthe SEC issued a Wells notice, indicating that it may bring charges against the company.

Bias Called Unkindest Cut

From the point of view of employees, hypocrisy and favoritism are the most unethical forms of behavior in the workplace, according to a survey of 1,200 U.S. workers conducted by Watson Wyatt Worldwide.

Few workers pointed to more concrete ethical lapses like legal or financial misdeeds when asked about issues that undermine honesty and integrity at work, Watson Wyatt found.

Asked to explain why others’ behavior lacks honesty and integrity, the workers were far more likely to cite hypocrisy and favoritism (62 percent of those who question top management’s integrity cite this factor) than dishonest financial dealings (8 percent) and investor-related violations (2 percent).

Who’s most to blame for unethical behavior? Not their closest supervisors, the survey respondents feel: 72 percent believe their immediate bosses behave with honesty and integrity. In contrast, the survey takers are not as confident about top management (56 percent) or even their co-workers (60 percent).

Short Takes

  • Taser International, which makes weapons for law enforcement such as stun guns, said it would split its stock three-for-one. The shares closed at $101.25 on Tuesday.
  • SEC chairman William Donaldson told Reuters on Wednesday that the agency is looking at the issue of accounting for oil reserves. Donaldson said he couldn’t reveal whether the commission’s attention stems from Royal Dutch/Shell Group’s recent admission that the company overbooked reserves by 20 percent.
  • Textron put back some matching funds for non-union employee 401(k) retirement accounts, effective January 1. The company will contribute 25 cents for every dollar non-union employees set aside for their retirement accounts, according to Reuters. Last May, Textron temporarily suspended its matching contribution of 50 cents for every dollar non-union employees put in their retirement accounts, up to the first 10 percent of their annual salary. About 23,000 non-union employees were affected.