Fastow Testifies Against Former Enron Bosses

RAY SUAREZ:

The federal government's trial of Ken Lay and Jeffrey Skilling is now in its sixth week. The pair of former Enron executives are accused of fraud, conspiracy and other charges in the energy company's collapse.

Today, the most widely anticipated witness in the case, Andrew Fastow, took the stand. Fastow was Enron's chief financial officer when the company filed for bankruptcy in 2001 in what would become the largest corporate scandal in American history.

Fastow, who has already pleaded guilty to fraud, could face 10 years in prison in return for his cooperation in the trial. Fastow worked directly for Skilling, who became the company's chief executive. He also worked for Lay, the company's former CEO, who eventually became the chief again after Skilling resigned.

We get an update now on the trial and where Fastow fits into the larger case from Kurt Eichenwald of The New York Times. He's followed the Enron story from the very beginning and is the author of a book on the subject, called "Conspiracy of Fools."

Kurt Eichenwald, what was the story the jurors heard today from Andrew Fastow?

KURT EICHENWALD, REPORTER, NEW YORK TIMES:

It could be summed up in two words: Skilling knew. Basically, what Fastow did was go into a number of criminal transactions that we were already aware about. The jury might not have been aware of them, but we were aware of them.

And in several of the instances, he said that Jeff Skilling had, in fact, been aware of or specifically approved of elements of the transactions that made them illegal.

RAY SUAREZ:

So Fastow is, in effect, attaching to Skilling the things that he's already pled guilty to himself in a federal court?

KURT EICHENWALD:

Not completely. There are things that Fastow pled guilty to that were purely about his own self-enrichment. But when it comes down to the issues of transactions that were done by Enron, utilizing these off-books partnerships that Fastow had helped to create, he is saying that Skilling knew of and approved of the elements of those transactions that made them illegal.

RAY SUAREZ:

Andrew Fastow, for his part, has always said that he's done these things with the knowledge of the board, with the knowledge of Skilling and Lay. Is it Jeffrey Skilling and Ken Lay's contention that they didn't know that any of this was going on?

KURT EICHENWALD:

Well, the problem we've always had is the word of "this," because ultimately there is nothing about the larger transactions that people didn't know about from reading the financials.

People knew there was an LJM2. This is the investment fund that was run by Andy Fastow. They knew that it was run by Andy Fastow. They knew that there were transactions that Enron was entering into that were used to hedge investments. They knew there were off-books partnerships. All of this was disclosed by Enron in its financials.

What was happening that made these transactions illegal was that Enron was providing Fastow with guarantees against loss. In other words, he was making investments with his partnerships that were not investments.

If you're guaranteed to get your money back and you're going to get a percentage return on your money, that's a loan. And that changes the accounting of everything. That means that what you have revealed as a sale isn't a sale.

I know that gets a little complicated, but when people say people knew, when someone says, "People knew," you have to get to the point, not did they know there were partnerships, not did they know there was a transaction, not did they know any other broad thing, but did they know there was a guarantee against loss? Because that is what makes it illegal.

RAY SUAREZ:

You've written in The New York Times that it may have represented a gamble for the prosecution to put Andrew Fastow on the stand. What made it so, in your view, and did today bear out the prosecution's hunch that he would be an effective witness?

KURT EICHENWALD:

What made it a gamble was the strength of the government's case so far. I think one of the deep misperceptions about this case is that it has been Andy Fastow versus Skilling and Lay; it's not.

The government has done a very effective job of painting a very broad canvas here where they are looking at particular transactions throughout the entire company, transactions that have nothing to do with Andy Fastow, and bringing in evidence suggesting that those transactions were fraudulent and that the senior officers knew about it.

By bringing in Andy Fastow, there's one thing that's been created. Andy Fastow is an admitted criminal. And by criminal, I don't mean he manipulated the income statement; I mean he basically stole money.

Andy Fastow is somebody whose best friend went on the stand in 2004 basically to say he couldn't count the number of times he's been lied to by the man. So he is not the kind of person who you want to give up for cross.

And for the next several days, Andy Fastow — the spotlight is going to come off of Skilling and Lay, the spotlight that has been strongly placed there by the government and has stayed there throughout much of this trial. It's going to come off of Skilling and Lay, and it's going to go into the deep, dark recesses of Andy Fastow's history, which is not a pretty area to be.

RAY SUAREZ:

Well, as you mentioned, the prosecution's roster of witnesses has already been quite long. Have there been some days that have been either good for the prosecution or good for the defense, that they've been able to neutralize some of the stories that the prosecution wants to tell this jury?

KURT EICHENWALD:

There have been, I think, more positive days for the government than for the defense. The defense had a very good beginning during the testimony of Mark Koenig, who was the head of investor relations, where the government basically left the door open for them, for the defense, to come in and introduce a number of videotapes that allowed them on the first witness to tell their version of the Enron story, as seen through the eyes of Lay and Skilling.

But from then on, a lot of things have gone the government's way, particularly the testimony of David Delainey, who was the head of both its wholesale division and later its retail division. And he was a very powerful witness.

He was a witness who described specific meetings where he is sitting there feeling concerned that something that's really wrong is going on and directly tied Jeff Skilling to those meetings.

RAY SUAREZ:

And quickly, before we go, Kurt, when the defense team gets this case, what kind of witnesses are we expecting to hear from then?

KURT EICHENWALD:

We're going to hear a lot of character witnesses. We are going to hear from whatever witnesses they can bring in who are going to support Lay and Skilling. And we are going to hear certainly from Skilling almost, and probably from Lay.

One of the things that I think has gone unmentioned here is the government's case against Jeff Skilling has been pretty powerful. The government's case against Ken Lay, I think every day people are waiting for more information to be introduced. And we haven't quite seen it yet.

So I'm not sure if Lay is going to feel compelled to get on the stand, given what's been introduced; that's going to depend on what comes out in the government's case over the next few days.

RAY SUAREZ:

Kurt Eichenwald of The New York Times, thanks for joining us.

KURT EICHENWALD:

Thanks for having me.