Former Enron Corp. CFO Andrew Fastow and some of his subordinates may face criminal indictments by the end of next week, according to several reports. The sealed criminal grand jury indictment apparently includes fraud charges and other allegations, and Fastow is expected to turn himself in to authorities in Houston by Wednesday. Ironically, one of the attention-grabbing off-the-book partnerships created and managed by Fastow that destroyed Enron filed for bankruptcy last week.

A successful prosecution of Fastow, who was CFO between 1999 until he took a leave of absence in October 2001, would be a major coup for federal investigators because of his role in setting up the infamous special purpose entities, which apparently hid huge financial losses from investors, financial analysts and federal regulators.

Michael Kopper, a Fastow subordinate and former managing director of Enron Global Finance, pleaded guilty in August to two counts of felony conspiracy to commit wire fraud and money laundering under a plea bargain with the Justice Department (see NGI, Sept. 2). Kopper is scheduled to be sentenced in April 2003, and apparently has provided investigators with the details of many of the partnership schemes, offering “substantially” more information than has been publicized to date. Kopper resigned from Enron several months before its financial collapse, and he is the first former Enron executive to admit wrongdoing in the accounting scandal.

Meanwhile, the Wall Street Journal reported Wednesday that Enron’s outside directors will be safe from the Securities and Exchange Commission’s scrutiny, even though two formal inquiries have blamed them for “actions and inactions” that led to the company’s bankruptcy. The Journal reported that unnamed sources “close to the SEC’s investigation” indicate that its enforcement division is not targeting outside directors, and “any inquiry into their responsibility is a low priority.”

The decision to not take action against the directors centers on concerns over significant legal problems, according to sources, “especially when the agency is overburdened with investigations into accounting scandals.” Apparently, the SEC also is concerned that if the outside directors face “too much risk from disciplinary action, companies won’t be able to attract qualified directors.”

Following the bankruptcy and subsequent investigations, Enron’s board commissioned an independent inquiry into what had happened. The 218 page-report, completed in February, found that all of the major players — former Chairman Ken Lay, former CEO Jeffrey Skilling, Fastow, the board of directors and auditor Arthur Andersen — either directly or indirectly were responsible for Enron’s demise (see NGI, Feb. 11). Known as the “Powers Report,” because the investigation was led by University of Texas Law School Dean William Powers, former Enron board members also contributed, including Raymond S. Troubh and Herbert S. Winokur Jr.

Another 60-page report on Enron, completed last summer by the Senate Governmental Affairs Committee’s Permanent Subcommittee on Investigations, also concluded that the outside directors failed to do things (see NGI, July 15). The subcommittee staff interviewed 13 board members and reviewed board documents and minutes, concluding that there were more than a dozen incidents in the past three years that should have raised red flags about the illegal activities.

LJM2 Co-Investment, which entered into 26 transactions with Enron over a two-year period to help conceal debt and move assets off of its balance sheet, filed for Chapter 11 bankruptcy protection on Wednesday in Dallas. It was nearly one year ago that the infamous LJM entities first became news, after it was disclosed that they all had been set and managed until June 2001 by Fastow, who allegedly made more than $30 million on the side from the special purpose entities (see NGI, Oct. 29, 2001).

Of the approximate $450 million that LJM2 invested in complex transactions related to Enron or its affiliates, the bankruptcy filings indicate that the investments now are worth about $46.3 million. Total assets are worth about $68.8 million; liabilities total $125.7 million. By filing for Chapter 11, the remaining seven assets of LJM2 will be protected as it fends off lender and partner lawsuits, including one for $70 million. LJM2 also will be allowed to continue its lawsuit against former Kopper, for $19 million he allegedly owes to the entity.

Under Fastow’s direction, the LJM entities, including LJM2, were formed in October 1999 as investment tools, which ostensibly were to be used to help Enron improve its credit rating by reducing its debts and locating buyers for businesses that the company no longer valued. Fastow apparently raised $386 million from investors and the partnership earned fantastic returns. Some of LJM2’s largest investors were the Arkansas Teachers Retirement system, which had $30 million at stake; AIG and Sun America, which combined had $40 million invested; and Rho Management subsidiaries, which invested about $30.5 million.

Investors also included some of the largest investment firms in the country, including JP Morgan Chase, CIBC and Citicorp. At Merrill Lynch & Co., individual executives invested on their own, including former Vice Chairman Thomas Davis and Houston banker Schuyler Tilney. They were recently fired by Merrill Lynch for refusing to testify before the Senate about their dealings with Enron (see NGI, Sept. 23).

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