Fastow: Enron Didn’t Have to Go Bankrupt

Enron's Demise Wasn't Skilling's Fault: Fastow
Enron's Demise Wasn't Skilling's Fault: Fastow

Former Enron Chief Financial Officer Andy Fastow—who developed many of the structured finance transactions that are often blamed for the energy giant's epic 2001 collapse—says the bankruptcy could have been avoided. And he says his one-time boss, former CEO Jeff Skilling—just re-sentenced to 14 years in prison—is not to blame for what was at the time the largest bankruptcy in U.S. history.

"Enron did not have to go bankrupt at the time that it did,"Fastow told an audience of around 2,500 at the annual conference of the Association of Certified Fraud Examiners in Las Vegas. Each year, the association invites a convicted white collar criminal to speak and offer insights.

Responding to a question from the moderator about Skilling's prison sentence, Friday to 14 years from 24 years, Fastow said the lower sentence is nonetheless "significant" and"devastating."

While he declined to say whether Skilling deserves the punishment, Fastow said, "The decisions that made Enron go bankrupt were made after Skilling resigned."

Skilling resigned "for personal reasons" in August, 2001, after just six months as CEO. Fastow said the fateful decisions were made in October of that year. Enron, once the nation's seventh largest company, filed for bankruptcy on December 2, 2001.

Fastow himself served six years in prison after pleading guilty to reduced charges in exchange for his testimony against Skilling and Enron founder and Chairman Kenneth Lay at their 2006 trial. Skilling and Lay were not accused of causing Enron's bankruptcy. They were accused of conspiracy and securities fraud, so Fastow's assertions about who was or was not to blame did not come up in the trial.

Still, Fastow's conciliatory comments about Skilling were greeted angrily by Skilling defense attorney Daniel Petrocelli.

"Perhaps the number one reason Jeff was wrongly convicted and received that devastating sentence was because Fastow agreed to lie about Jeff to reduce his own sentence," Petrocelli said in an e-mail.

(Read More: The Truth About Why Jeff Skilling's Jail Sentence Got Downsized)

At the trial, Fastow testified he and Skilling had entered into secret side deals to move troubled assets off of Enron's books, which Skilling denied. A jury convicted Skilling on 19 criminal counts. Lay was convicted as well, but he died before he could appeal, so his case was thrown out.

In his speech on Wednesday, Fastow said all of the deals he worked on were blessed by attorneys and accountants, though he now realizes the transactions were misleading and fraudulent.

"My role was engaging structured finance transactions that made Enron look healthy when it was not," he said.

But he said those transactions did not cause Enron to go bankrupt. He would not elaborate on which decisions in October, 2001 were to blame for the collapse.

Andy Fastow, former CFO of Enron speaks at the Association of Certified Fraud Examiners Conference in Las Vegas.
Justin Solomon | CNBC

It was a pivotal time for Enron. Lay had returned to the CEO position following Skilling's resignation. The company's assets had been declining in value for months, and the September 11 terrorist attacks sent markets and the economy into a tailspin.

On October 16, 2001, Enron announced a $618 million quarterly loss, most of it resulting from a one-time charge for terminating"certain structured finance arrangements."

Those arrangements, known as the Raptors, allowed Enron to move liabilities off of its books and into a series of Fastow-controlled partnerships known as LJM. The vehicles were backed by Enron stock, which was already losing value.

(Read More: JPMorgan Energy Spat Resurrects Ghost of Enron)

A special committee of Enron's board of directors later said the Raptors strategy of using the company stock as a hedge "runs counter to a basic principle of accounting and financial reporting."

By the fall of 2001, the committee found, Lay was presented with a series of options for the Raptors, none of them particularly desirable:leave the Raptors in place—which would have required issuing more Enron stock and diluting the share price, restructuring them and complicating Enron's finances even further, or terminating them and putting the bad assets back on Enron's balance sheet. Lay chose the latter.

Within weeks, Enron was in an irreversible death spiral.Whether a different option for the troubled vehicles would have led to a different outcome for Enron can never be known.

Today, Fastow says while his transactions followed the rules and were approved by auditors—"I thought I was being clever"—he now realizes he was missing the point of the rules.

"I should have asked myself, 'Did I intentionally mislead?'"

(Read More: Berlusconi Tax Fraud Sentence Upheld by Italian Court)

Fastow, 52, insists he lives every day with the pain he caused, and while he completed his sentence in 2011, he still carries his prison ID card with him as a reminder.

But he says corporate executives are still falling into the same trap he did, concentrating on the letter and not the spirit of the rules.In fact, he says fraud today is "ten times worse" than it was in the Enron era.

"Transactions today make me blush," he said, "and I was the CFO of Enron."