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US: Fastow grilled about 'smoking gun' document

by Greg FarrellUSA TODAY
March 9th, 2006

A defense lawyer in the trial of former Enron CEOs Ken Lay and Jeff Skilling spent Thursday morning trying to undermine the testimony of the government's star witness and questioning the authenticity of a "smoking gun" document.

Dan Petrocelli, the lead attorney for Skilling, questioned the witness, former Enron CFO Andrew Fastow, about the circumstances surrounding his 2004 discovery of a copy of a handwritten memo.
The agreement, described by Fastow in detail during his direct examination Tuesday, is significant because it is the only document that supports the government's theory that Enron boosted its earnings numbers by engaging in sham transactions with partnerships Fastow controlled.

Fastow testified that the partnerships he ran on the side, LJM1 and LJM2, engaged in numerous end-of-quarter transactions with Enron that no true third party would have entered into, transactions that helped Enron make its projected earnings. The only reason he engaged in those transactions, Fastow said, was that Skilling gave him verbal assurances that LJM wouldn't lose money on the deals, even when LJM was buying weak assets, such as Cuiaba, Enron's troubled power plant in South America.

Fastow testified that he drew up the document in the summer of 2000, in order to make sure that Skilling and Rick Causey, Enron's chief accounting officer, knew that Enron still owed money to LJM on nearly a dozen deals he had entered into over the previous two years. Causey's initials appear on the document.

But Petrocelli reminded the jury that Fastow said he destroyed the original document in the summer of 2001, when Fastow sold the partnerships to a subordinate, Michael Kopper. Fastow testified that he had misplaced the copy, and only discovered it in May of 2004 after he had decided to plead guilty and cooperate with the government's investigation.

Petrocelli argued that the document actually surfaced in April of 2004, when Fastow's wife, Lea, was about to be sentenced to one year in jail for filing a false tax return.

"Isn't what's going here is that a document surfaces for the very first time in April of 2004, at a time when it's really important to provide some 'ammo' to the Enron Task Force?" Petrocelli asked. "You think this incriminates Mr. Skilling?"

"Among others, yes," Fastow replied.

"It would be really helpful for the Enron Task Force to have new evidence, wouldn't it?" Petrocelli continued.

"I was obligated to turn over all documents related to Enron," Fastow replied. "When I discovered that document, I immediately contacted my attorney."

Petrocelli continued chipping away at Fastow, contesting whether there was any secret side deal with Skilling that obliged Enron to buy the Cuiaba plant back from LJM. The Cuiaba "side deal" was at the top of the list on the "global galactic" agreement.

Petrocelli noted that during the summer of 2000, when Fastow originally put the list of side deals together, Enron was in fact trying to sell all of its international assets to a Middle Eastern sheik as part of a program known as "Project Summer." He showed Fastow a series of emails and documents indicating that Enron planned to buy Cuiaba back from LJM anyway, despite Fastow's claim that the buyback was only a verbal guarantee.

He also challenged Fastow's testimony that LJM's share of Cuiaba had dwindled in value from $10 million to $100,000. Fastow denied that Cuiaba's valuation had sunk so low. But then Petrocelli introduced a document Fastow sent in September 2000 to investors in his LJM fund, saying Cuiaba was in fact worth only $100,000, and suggesting that LJM's partners allow him to unwind the investment.

Petrocelli asked Fastow how he explain that inconsistency.

"I was trying to cheat my limited partners," Fastow said, sparking laughter throughout the courtroom. Fastow, 44, has pleaded guilty to two felonies and admitted that he used his LJM partnerships to steal money from Enron and its shareholders. He has agreed to serve a 10-year jail sentence for his crimes. His cross examination is expected to last into Monday.





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