A defense lawyer for former Enron Corp. CEO Jeffrey Skilling continued his punishing cross examination of ex-CFO Andrew Fastow on Thursday, trying to undermine earlier testimony and discredit a handwritten three-page memorandum, which Fastow claims secretly documents shady deals between him and his former boss.

The memo, dubbed the Global Galactic agreement, is considered a key piece of evidence against Skilling, who hired Fastow in 1990 and promoted him to CFO in 1998. The three-page document lists assets sold by Enron to LJM, one of the company’s special purpose entities run by Fastow, which allowed Enron to remove the poorly performing assets from its balance sheet. According to Fastow, the agreement lists the terms of about a dozen oral transactions between himself and Skilling. It is initialed by Fastow and former Chief Accounting Officer Richard Causey — the memo does not carry the initials of Skilling nor Enron founder Kenneth Lay, who is also standing trial in Houston.

While unimpressive in appearance — and barely legible in some places — the Global Galactic agreement supports a key argument by the Justice Department that Enron was manufacturing earnings through accounting tricks. Fastow’s handwritten copy is available at the Justice Department’s Enron website at www.usdoj.gov/enron/exhibit/03-07/BBC-0001/Images/EXH026-00046.PDF

Fastow, who agreed to testify against Skilling and Lay after accepting a 10-year prison term in a plea-bargain agreement with the government, has admitted in testimony, which began Tuesday, of playing a critical role in illegally manipulating Enron’s books. He also has admitted to stealing millions from the company through shady partnership deals. On Thursday, Skilling lawyer Daniel Petrocelli blasted Fastow about some of the illegal deals and tried to distance his client from any wrongdoing.

Petrocelli, who has appeared amazed and disgusted by some of Fastow’s testimony, sarcastically called the Global Galactic memo a “smoking gun,” which mysteriously materialized as Fastow’s wife Lea was trying to bargain her way out of prison in 2004 on an Enron-related tax fraud charge. Fastow testified he destroyed the original memo in the summer of 2001 after selling the LJM partnerships to his subordinate Michael Kopper. However, Lea Fastow discovered a photocopy of the memo in early 2004 hidden in the couple’s safe deposit box at a Houston bank.

“What’s going on here is a document surfaces for the very first time in April 2004 at a time when it’s really important to provide some ‘ammo’ — to use your words — to the Enron Task Force,” Petrocelli said to Fastow. Petrocelli also noted Fastow’s account of the memo’s discovery contradicted the account originally given to federal investigators.

Bank records indicate Lea Fastow opened the box in April 2004, about four months after she and her husband were indicted. Fastow conceded under questioning that he did not turn the memo over to prosecutors for six weeks because the document was in a folder that sat on his desk at home for six weeks before he opened it.

“You think this incriminates Mr. Skilling?” Petrocelli asked.

“Among others, yes,” Fastow replied.

At the time a copy of the memo was found, it was “really helpful for the Enron Task Force to have new evidence,” wasn’t it? Petrocelli asked.

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

Fastow, less animated and appearing tired after two long days of testimony, explained two specific transactions in which he said Skilling personally guaranteed LJM would not lose money by purchasing Enron assets. In September 1999, LJM agreed to buy Enron’s interest in a Brazilian power plant after Skilling told him, “don’t worry, I’ll make you all right on this project.” Fastow called the deal a “bear hug,” which he said was strong oral assurance — without a written guarantee.

Skilling, said Fastow, offered LJM another bear hug in December 1999 when LJM agreed to buy some Enron power barges moored off the Nigerian coast. Fastow said Skilling personally told him Enron would buy back the barges after the financial reporting periods had lapsed, and he told Fastow the partnership would not lose any money.

Petrocelli asked Fastow if he had any written records of Skilling’s involvement in the transactions.

“He didn’t give me a document,” Fastow said. “He didn’t say, Mr. Fastow, here’s a coupon for a bear hug.”

Fastow told jurors he briefed Causey on all of the transactions on the Global Galactic memo, and he said Causey told him he in turn reviewed the transactions with Skilling. But Fastow conceded he had no proof that Skilling was aware of the transactions.

“I believe the only risk I was taking was whether Mr. Skilling would live up to his obligation to make sure LJM was taken out of the deal without a loss,” Fastow replied. “I don’t recall Mr. Causey saying he went over every term of every agreement with Mr. Skilling… My understanding was that Causey had reviewed these transactions with Mr. Skilling, and Mr. Skilling agreed to them.”

“You made no notes of these conversations?” Petrocelli asked.

“I don’t recall any,” Fastow replied.

“If you really wanted to be sure Mr. Skilling was on board with these items, you could have taken the 60 seconds to walk over to his office, couldn’t you?” Petrocelli asked.

“I suppose so, but it never dawned on me it would be necessary to do so,” Fastow said. “You’re right, I could have gone to Mr. Skilling, but I went to Mr. Causey.” Fastow told the jury, “We had side agreements… That’s how we did business. This was a list of side agreements after the agreements had been entered into… Because the list was getting long, this was my way of keeping track of it, and Mr. Causey, he was keeping track of it the same way.”

“You thought these three pages were the smoking gun didn’t you?” Petrocelli asked.

“I know they incriminate me, and I think they incriminate others as well,” Fastow replied.

“By others, you mean Mr. Skilling, right?”

“Yes, among others.”

Questioned again about the Nigerian power barge transaction, Fastow testified LJM reluctantly took the barges, which he considered a poor investment, so that Enron could take them off its balance sheet and appear healthier.

“I wouldn’t have done it without a bear hug” from Skilling, Fastow said.

While Skilling apparently gave Fastow a bear hug on the transaction in December 1999, Fastow in turn gave a bear hug about the barges to investment banker Merrill Lynch, promising several company executives he would buy the barges back in six months time at a hefty profit (see Daily GPI, Sept. 18, 2003; April 22, 2005). According to prosecutors, then-Enron Treasurer Jeffrey McMahon approached Merrill Lynch about creating the partnership with LJM. The transaction allegedly was set up to help Enron show a profit on its books in 1999.

To ensure the deal would occur, prosecutors allege Fastow promised Merrill executives Enron would repurchase the barges at a profit within six months. Enron sold an interest in the barges to Merrill for $28 million, which enabled Enron to book a $12 million profit for 1999. In the indictment, there is text of an e-mail by a Merrill executive, which indicates Fastow phoned another Merrill executive and “promised to pay us back no matter what.”

“You were not relying on any bear hugs when you decided to acquire the interest of the barges from Merrill Lynch?” Petrocelli said.

“No sir,” Fastow replied. “In my mind I still had the bear hug [from Skilling] in December of 1999.”

Cross examination of Fastow is expected to continue when the trial resumes on Monday in Houston. To review the prosecution’s evidence, visit www.usdoj.gov/enron/index.html.

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