Thursday, September 28, 2006

Fastow Accuses Several Banks of Involvement in Enron Scam

Canadian Press, Gary Norris, 28 September 2006

Royal Bank of Canada and Toronto-Dominion Bank reacted cautiously yesterday to being mentioned by Enron's former chief financial officer before he was taken away to prison.

Andrew Fastow, in a statement presented as he received a six-year sentence on Tuesday in Houston, said RBC and TD were among 10 banks that aided him in assembling financial structures that hid debt and boosted Enron's reported financial results before the energy trading enterprise collapsed in late 2001 in one of the biggest corporate scandals in U.S. history.

His statement was seized on by lawyers pressing multibillion-dollar litigation launched by Enron shareholders against the two Canadian banks and other financial institutions after Enron's bankruptcy wiped out $60-billion (U.S.) in stock market value.

"This matter is still before the courts; we don't have anything new to report," TD spokesman Simon Townsend said yesterday.

"We are going to aggressively defend ourselves against the allegations," said RBC's Beja Rodeck, who like Mr. Townsend declined to say anything further on the case.

Mr. Fastow declared that he "viewed certain banks as problem solvers" -- a statement seen as possibly adding pressure on banks that have not settled a shareholder class-action lawsuit.

The University of California, the lead plaintiff in the litigation, stated that Mr. Fastow's testimony "makes it very clear that, in many cases, Enron didn't tell these banks what to do -- but just the reverse."

William Lerach, the lawyer leading the class action, said Mr. Fastow's statement, "coupled with the smoking-gun e-mails, memorandums and other documents that we have uncovered, make it clear for all to see that the Enron banks were not innocent drivers but served as the actual masterminds behind the scheme to defraud investors in one of the greatest financial frauds in history."

Investors have so far received close to $8-billion arising from various Enron-related legal actions, notably $2.4-billion in a settlement last year with Canadian Imperial Bank of Commerce.

Citigroup, Bank of America and JPMorgan Chase have also settled but a half-dozen banks have refused to do so, including RBC and TD -- both cited by Mr. Fastow as "tier-two" lenders to Enron.

His statement cited Merrill Lynch, Credit Suisse First Boston, Royal Bank of Scotland and Barclays as the banks most actively involved in his machinations.

Although Mr. Fastow, 44, had inside knowledge of the off-balance-sheet transactions that obscured Enron's shakiness, his statement might be seen as tainted by his desire for leniency -- a 10-year sentence had been expected -- and by his admitted criminality.

While the Royal Bank of Canada is fighting the shareholder lawsuit, it paid $49-million in July, 2005, in a settlement with Enron itself, which said then that RBC "played the smallest role of any of the financial institutions involved in this case."

But Mr. Fastow stated he "had worked with RBC on structuring off-balance-sheet transactions to help Enron meet its financial reporting objectives as far back as 1991," and "based on my conversations with RBC bankers, I believe they understood that certain structured-finance transactions would have had a material impact on Enron's financial reporting."

He also said that although RBC was viewed as a second-tier lender to Enron, he regarded it as a tier-one bank after the autumn of 2000, when a team he had worked with previously at Royal Bank of Scotland's NatWest subsidiary joined the Canadian bank. TD, meanwhile, received a brief mention in Mr. Fastow's declaration as "a tier-two bank with which I dealt."

His statement had no discernible effect on investors, as the shares of all five big banks made modest gains yesterday on the Toronto Stock Exchange.

The Globe and Mail, Sinclair Stewart, 27 September 2006

In one of his final acts before heading to prison yesterday, former Enron Corp. chief financial officer Andrew Fastow personally implicated a handful of financial institutions --including Royal Bank of Canada and Toronto-Dominion Bank -- in the massive accounting fraud that precipitated the energy trader's collapse.

Mr. Fastow was sentenced to six years in prison by a Houston judge for his role in masterminding a series of complex transactions that led to Enron's demise and that ultimately swindled investors out of more than $60-billion (U.S.).

As part of his sentencing hearing, the disgraced executive provided a declaration that could ratchet up the legal fight between the energy traders' investors and several of its former lenders.

Mr. Fastow told lawyers waging a class-action lawsuit on behalf of Enron investors that these banks helped him to devise complex structures that enabled Enron to artificially achieve its financial targets and mask the company's debt.

"I and others, including certain of Enron banks, worked together, intentionally and knowingly, to engage in transactions that would affect Enron's financial statements," he said in the declaration submitted at the hearing yesterday.

"I believe that my work made the company look more healthy and profitable than it actually was. I worked with certain banks to accomplish this goal and I viewed certain banks as problem solvers."

William Lerach, the lawyer leading the class-action effort, suggested yesterday that Mr. Fastow's evidence will help extract lucrative settlements for investors from the company's bankers.

"The testimony provides a clear road map of how the banks were an integral and active player in perpetrating the Enron fraud," he said in an e-mail.

"Fastow's co-operation will help us hold the banks accountable and further our ultimate goal of a substantial recovery for Enron investors."

These investors have already received more than $7.3-billion from numerous settlements, including a record $2.4-billion agreement last year with the Canadian Imperial Bank of Commerce. Six banks, however, have refused to settle, and one -- Barclays Bank PLC -- won a major victory in July when a judge removed the British bank from the class-action suit.

Mr. Lerach is trying to have the bank reinstated among the list of defendants for a planned trial next year, but David Braff, a New York lawyer for Barclays, dismissed any notion that Mr. Fastow's testimony might sway the court.

Mr. Braff pointed out that lawyers for the class-action case were among those who asked the judge to extend leniency to the once high-flying Enron official for his co-operation.

"Given the source of the Fastow declaration, and the circumstances of its filing, its credibility is highly suspect," Mr. Braff said.

Mr. Fastow highlighted Merrill Lynch & Co., Credit Suisse First Boston, Royal Bank of Scotland, and Barclays, as among the banks most intimately involved with Enron. Yet he also singled out RBC and TD, two others that have not settled.

Spokesmen for the two banks declined to comment.

Mr. Fastow said that although RBC was only a "Tier-2" lender to the company, he treated it like a "Tier-1" after the bank hired a trio of British investment bankers in 2000 from Greenwich NatWest. He acknowledged he had a "close, personal relationship" with Gary Mulgrew, who along with David Bermingham and Giles Darby have become known as the "NatWest Three."

The men lost a lengthy extradition hearing on fraud charges relating to their former employer, and were recently granted bail by a Houston court.

"I believe that they knew what I expected of RBC, and that they structured transactions at RBC that contributed to causing Enron to manage its balance sheet and generate funds flow from operations," Mr. Fastow stated. He added that he worked with RBC on off-balance sheet arrangements dating back to 1991.

RBC, Canada's largest bank, paid $49-million a year ago to settle a separate legal action in which Enron itself targeted former lenders.

At the time, Enron interim CEO Stephen Cooper provided RBC with an endorsement of sorts, explaining the relatively low sum reflected the fact that RBC "played the smallest role of any of the financial institutions" involved in the Enron affair.

TD received the least attention in Mr. Fastow's declaration. He simply described the bank as a Tier-2 lender, and said it was involved in six "prepay" transactions between 1998 and 2001 that were designed to create "funds flow from operations" at the end of a specific quarter.

Enron engaged in numerous prepay transactions, according to the declaration. These deals made it look as though the company was booking income from selling assets, when in fact it was incurring a future debt to its banks.