Former Enron Corp. CFO Andrew Fastow and some of his subordinates may face criminal indictments before the end of the month, according to a published report in USA Today. The sealed criminal grand jury indictments apparently include fraud charges as well as other allegations.

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.

The newspaper, citing an “unidentified person close to the investigation,” reported that the government had secured a sealed grand jury indictment against Fastow and several others who profited from the partnership arrangements. There was no mention of whether former Chairman Ken Lay or former CEO Jeffrey Skilling were included in the indictment.

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 Daily GPI, Aug. 22). 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.”

Linda C. Thomsen, the SEC’s deputy enforcement director, told the Journal that the commission would not “shy away from difficult cases,” but noted that cases targeting directors “would be difficult to win, given high standards of proof required by federal law.” Outside directors, she said, are “so removed from the day-to-day operations that proving their involvement and their intent and their state of mind becomes more difficult.”

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 Daily GPI, Feb. 5). 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 former directors Raymond S. Troubh and Herbert S. Winokur Jr.

A 60-page report on Enron, completed last summer by the Senate Governmental Affairs Committee’s Permanent Subcommittee on Investigations, concluded that the outside directors failed to do the following: 1) protect company shareholders from unfair dealing in the questionable LJM partnership in which Fastow had a personal financial stake; 2) require the company to disclose off-the-book liabilities; 3) ensure the independence of auditor Andersen; and 4) monitor or halt abuse by Lay for a company-financed, multi-million dollar personal credit line he obtained (see Daily GPI, July 9). 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.

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