Risk & Compliance

Fastow Tells How He Sweetened Earnings

''Get me as much of that juice as you can,'' Jeffrey Skilling reportedly told him, as the former CFO used off-balance-partnerships to enrich Enron,...
Dave CookMarch 7, 2006

Examine our Enron archive

Former Enron Corp. chief financial officer Andrew Fastow finally took the witness stand at the trial of Kenneth Lay and Jeffrey Skilling.

Under direct examination by prosecutor John Hueston, Fastow testified that Skilling approved the use of two off-balance-sheet partnerships to help Enron ”make its numbers, meaning to make the financial statements look the way they wanted them to look,” according to the Houston Chronicle.

The purpose of the partnerships, he reportedly added, was to ”mask potential losses of hundreds of millions of dollars” by Enron. The original LJM partnership was funded with just $15 million, noted the Chronicle, but it proved very successful at moving poorly performing assets off the Enron books. So much so, Fastow reportedly said, that in 1999 he and Skilling decided to establish LJM2, which was eventually funded with $386 million.

In Fastow’s words, reported the Chronicle, Skilling told him to ”get me as much of that juice as you can.”

Fastow considered the LJM partnerships as “a very powerful tool to make our numbers,” reported The Wall Street Journal. They had a powerful effect on Fastow’s personal balance sheet, the newspaper also noted; Fastow received a management fee as well as half of any LJM profits on its deals.

According to the Journal, Fastow testified that initially he invested $1 million of his own money in the first LJM partnership, and that Skilling defended Fastow’s profits by saying that the CFO “has skin in the game.” But asked by the prosecutor whether he truly had anything at risk, Fastow replied, “Not in my mind, I thought it was pure upside,” according to the Chronicle.

Indeed, Fastow maintained that the only downside to the arrangement was the possibility that the nature of the partnerships would become public. According to the Journal, he testified: “If this got picked up by the general public and the media and they were to report on it, whether right or wrong, it would look terrible. It would bring Enron under a lot of scrutiny and potentially cause a lot of problems.”

Regarding the “Raptors” — four entities controlled by Fastow, which he used to hide poorly performing endeavors from the public, reported the Chronicle — the prosecutor asked why Enron simply didn’t sell those projects to a third party. Not only were the deals unattractive, Fastow reportedly replied, but they would encourage investors to look more closely at parts of Enron’s business that the company would rather keep under wraps.

Fastow’s list of partnerships eventually grew so extensive, he reportedly testified, that he wrote out a list for Richard Causey, Enron’s former chief accounting officer; Causey told him that Skilling approved the list, he reportedly added. When he was indicted, the Chronicle reported, Fastow couldn’t find the list at first; eventually he uncovered it in his safe deposit box, “behind my employment agreement.”

Fastow testified that Lay approved the structure LJM partnerships at board meetings on at least two occasions, reported the Journal, but otherwise Skilling was the primary target of today’s testimony. Tomorrow, when cross-examination by defense attorneys is expected to begin, it will be Fastow in the cross-hairs.