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Fastow links Skilling to losses at Enron
Updated: 2006-03-08 09:38

The ex-CFO is central to the defense as well: Lawyers for Lay and Skilling say there was no overarching fraud at Enron, and that the only crimes at the company involved Fastow and two of his former lieutenants stealing money through his schemes.

Fastow's time on the witness stand is expected to last several days. His testimony Tuesday focused on Skilling, and he has yet to be questioned about Lay or to be cross-examined.

When talking about his admitted frauds at the company rather than his home, Fastow spoke with confidence, appearing almost professorial. He was known at Enron to have a quick temper, but under questioning from prosecutor John Hueston, he showed no combativeness.

He said the LJM partnerships gave Enron a buyer of risky investments or poor assets so the company could record income and wipe debt off its books. Enron didn't mind that other buyers likely wouldn't touch them, he said.

"We were doing this to inflate our earnings, and I don't think we wanted to show people what we were doing," Fastow said.

The LJMs weren't the only entities created to help Enron manipulate earnings, Fastow said. He discussed so-called Raptors, four fragile financial structures created in 2000 by his hand-picked treasurer, Ben Glisan Jr. The structures were backed by Enron stock and used to lock in the energy company's gains from asset values or investments and keep hundreds of millions of dollars in debt off the energy company's books. The Raptors were intertwined with LJM2 as well.

"Raptor was hiding losses," he said.

But despite his finance and accounting tricks, Enron's mounting problems caught up with the company by the second half of 2001, Fastow said. The Raptors imploded as the company's stock price fell. International assets were overvalued, sometimes by $1 billion or more. Retail energy and broadband divisions were flailing.

"I thought the foundation was crumbling and we were doing everything we could to prop it up as long as we could," Fastow said. "We were in pretty bad shape."

In mid-October 2001, Enron disclosed hundreds of millions of dollars in third-quarter losses. The shutdown of the Raptors also led to a $1.2 billion writedown in shareholder equity. Six weeks later, Enron collapsed.

Fastow said the LJMs were legal and were used to conduct many legal deals. "Certain things I did as general partner of LJM were illegal," Fastow said.

He told jurors LJM1, set up in 1999, helped Enron head off potential future losses from its investment in a small Internet startup firm. But it couldn't finance many other deals because it only had $15 million in investment capital, so Fastow talked to Skilling later that year about setting up LJM2 with at least $200 million.

"He said, `Get me as much of that juice as you can,'" Fastow recalled. Skilling said the same thing in 2000 about a possible LJM3, though the third version never materialized, Fastow said.

LJM2's carefully coordinated deals often involved "warehousing" Enron assets, or pretending to buy them with a guarantee that the energy company would buy them back at a premium, Fastow said. The deals allowed Enron "to report the numbers it wanted to report," he said.

Fastow also said Skilling was concerned about how detailed disclosures to investors about the partnerships would have to be.
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