Enron's Former Top Accountant Pleads Innocent to Charges of Securities Fraud, Conspiracy
Enron's former top accountant, Richard Causey, surrendered to the FBI Thursday but pleaded innocent to six securities fraud and conspiracy charges before a U.S. District Court judge in Houston. The Securities and Exchange Commission also filed civil charges against him on Thursday stating that he helped engineer fraudulent schemes to hide poorly performing assets from Enron investors while artificially inflating financial results in a effort to drive up Enron's stock price.
The federal actions follow guilty pleas last week by Enron's former CFO Andrew Fastow and his wife, Lea Fastow. Andrew Fastow pleaded guilty last Wednesday to conspiracy to commit wire fraud and securities fraud. He faces a 10-year prison sentence and forfeiture of $23.8 million in cash and assets, and is permanently barred from serving as an officer or director of a public company. His wife pleaded guilty to one count of filing a false tax return. She was an assistant treasurer at Enron until 1997.
What was most important about Andrew Fastow's plea bargain agreement was where he might lead the federal Enron Task Force prosecution team, which is pressing forward on its pursuit of many more individuals involved in Enron's undoing. So far, Enron's former Chairman, Kenneth Lay, and former CEO, Jeffrey Skilling, have not been charged.
Causey was Enron's chief accounting officer from 1998 until the end of 2001, when Enron collapsed. He reported to Skilling and worked with Fastow and Treasurer Ben Glisan, who also has pleaded guilty to conspiracy charges. Causey was fired in February 2002 after a special investigative report prepared for the company's board concluded that he failed to provide proper oversight on the company's off-balance sheet partnership transactions. His firing came a week after he pleaded the Fifth Amendment when called to testify on Enron's demise before a House of Representatives committee.
"Richard Causey and the other corrupt executives that ran Enron into the ground used some of the most sophisticated tricks in the corporate fraud playbook to con the public into believing that Enron was a success," said Deputy Attorney General James B. Comey, who leads the president's Corporate Fraud Task Force.
The Justice Department's indictment describes how Causey, Andrew Fastow and other Enron senior managers allegedly employed a variety of deceptive devices, ranging from use of improper financial structures to manipulation of reserve accounts and business segment reporting, to produce consistent financial results that would meet investment analysts' expectations but did not truthfully reflect the condition of Enron's businesses.
These devices included a series of fraudulent "hedging" structures known as the "Raptors" that formed the basis of guilty pleas of both Andrew Fastow and Glisan. The Raptors were designed to allow Enron to lock-in the values of many of its volatile, poorly performing and fraudulently inflated assets on its public financial reports, and to ensure that the company would not have to report expected future losses in the value of many of those assets, according to Justice's statement on the indictment.
Causey implemented the "Raptors" by allegedly entering, on behalf of Enron, into an improper and undisclosed side agreement with Fastow. As alleged in the indictment, Causey guaranteed that the LJM entity would receive the return of its money plus a large profit for providing Enron with the fictitious "outside" funding that would be required for Enron to claim that the "Raptors" did not have to be consolidated in Enron's financial statements.
In return, Fastow ceded effective control over the Raptors to Enron. Consequently, as Causey and Fastow allegedly knew, the "Raptors" never qualified for the accounting treatment Enron gave them because the "outside" funding by LJM was not at risk and LJM never exercised the requisite control over the Raptors that was necessary for them to be off Enron's balance sheet.
The indictment charges Causey with five counts of securities fraud and one count of conspiracy to commit securities fraud. If convicted, he faces a maximum sentence of 55 years in prison and a $5.3 million fine.
The SEC's civil complaint alleges that Causey, along with others at Enron, engaged in a wide-ranging scheme to manipulate Enron's publicly reported earnings through fraudulent financial reporting of results from a variety of assets and operations, including the following: Enron's merchant asset portfolio; off-balance-sheet special purpose entities; Enron's retail energy business, Enron Energy Services; its broadband unit, Enron Broadband Services; and the reserves in its wholesale energy trading business.
"The dominoes continue to fall as we expose the truth about the massive fraud at Enron," said Assistant Attorney General Christopher A. Wray. "On the heels of guilty pleas by Enron's former chief financial officer and treasurer, today's indictment demonstrates that the same tried and true law enforcement methods that we use against drug cartels and organized crime families will also penetrate the most complex corporate fraud scheme."
Twenty-eight individuals have been charged to date, including 20 former Enron executives. Ten defendants have been convicted to date. In addition, the Enron Task Force has retained more than $95 million in proceeds derived from criminal activity, according to the Justice Department.
Enron, at one time the seventh-ranked company in the United States with its stock trading as high as $80 per share in August 1999, filed for bankruptcy protection on Dec. 2, 2001 and its stock became virtually worthless.