Friday, October 06, 2006

RBC, TD Could Get Chance to Challenge Fastow's Statements

  
Financial Post, Theresa Tedesco, 6 October 2006

A Houston judge has agreed to allow Enron Corp.'s former chief executive to be released from U.S. federal prison to provide 75 hours of testimony to lawyers involved in a multi-billion-dollar class-action lawsuit.

Judge Melinda Harmon ruled that Andrew Fastow, 44, can give a detailed deposition expanding on the testimony he filed last week in a 24-page declaration in which he claimed that a group of 10 banks, including Royal Bank of Canada and Toronto-Dominion Bank, had participated in the manipulation of Enron's reported financial statements.

Mr. Fastow, who began serving a reduced six-year prison sentence last week, will be available to lawyers representing the banks and The Regents of the University of California, who launched the US$45-billion shareholder civil claim against the financial institutions, over a 10-day period, commencing Oct. 16.

The deposition will be given behind closed doors in Houston and sources say he will be cross-examined by a lawyer representing the 10 banks implicated by Fastow.

The banks wanted access to Fastow after he claimed the group of financial institutions acted as "problem solvers" and helped him create accounting structures that allowed the energy trader to hide its debt and artificially boost its financial results before it collapsed in 2001, wiping out about US$60-billion in shareholder value.

Officials at Royal and TD said the banks would vigorously defend themselves against the allegations made by. Fastow. As tier-two banks, they say they are not among the main institutions, including Royal Bank of Scotland, Merrill Lynch, Credit Suisse First Boston and Barclay's, that conducted business with Enron.

As well, they questioned the merits of Fastow's "evidence" because it was filed at a time when he was attempting to secure a more lenient prison sentence.

Both Canadian banks had attempted to have their names dropped from the class-action suit. Royal's attempt at dismissal was rejected by the court last year, but the bank has since filed a new request asking for a summary judgment. In doing so, Royal filed a statement of defense and asked the judge to throw out the case against Canada's largest bank based on the merits of its position.

In the case of TD, its motion for dismissal is pending.

Some banking sources say the lawyers representing the class-action plaintiffs encouraged Fastow's testimony because they are desperately trying to hang onto their lawsuit in the wake of the judge's dismissal of Barclay's from the class-action lawsuit.

Since then, William Lerach, the U.S. attorney spearheading the class-action, filed a motion requesting the court allow his clients to amend its allegations to include more details of Barclay's alleged involvement.

Enron investors have received more than US$7.3-billion as a result of settlements with four banks, including US$2.4-billion from Canadian Imperial Bank of Commerce, named in the class-action claim.

The six hold-out banks are waiting for the outcome of the appeal filed by Mr. Lerach. If he does not succeed in overturning the judge's decision, the Canadian banks will undoubtedly use the same legal arguments to have their names dropped from the civil lawsuit.

"They [class-action lawyers] are trying to extract settlements before any decision on Barclay's appeal is rendered," said a source close to the Canadian banks who asked not to be named. "They are desperately trying to keep their case together."

But Mr. Lerach said Royal and TD are in "denial." In an interview, Mr. Lerach described Fastow as a "highly credible witness" who's testimony will be "corroborated" by the banks' own documents.

"Fastow has come to grips with what he did, unlike the banks, Fastow has accepted responsibility for his conduct even though he is going to pay a heavy price for it," Mr. Lerach said.
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Bloomberg, Laurel Brubaker Calkins, 6 October 2006

Andrew Fastow, the former Enron Corp. finance chief who began a six-year prison sentence last week for his role in the fraud that destroyed the company, will receive day passes to give depositions in Enron investor lawsuits.

David Gerger, Fastow's lawyer, said U.S. District Judge Melinda Harmon in Houston, who presides over the civil class action cases brought by Enron investors, has agreed to release Fastow for several days this month to give depositions.

"He will be out for the depositions," Gerger said in a telephone interview late yesterday. "He isn't being released, and he'll be escorted back each day when he's done."

Fastow, 44, began serving his sentence Sept. 26 at a maximum-security federal prison in downtown Houston. He must remain in the custody of U.S. marshals while outside the prison and cannot go anywhere except the deposition center, which is located several blocks from the prison, Gerger said. He declined to say when Fastow's day passes will begin or how long the process will take.

Lawyers representing Enron investors asked Fastow's sentencing judge to delay sending him to prison until he could give depositions fully describing the role some of the nation's largest banks played in helping Enron distort its financial statements through bogus transactions. Fastow gave the court a 24-page declaration that outlined the banks' role in Enron's fraud before he was sentenced.

Fastow pleaded guilty to two counts of conspiracy to commit wire fraud. In addition to his prison sentence, he forfeited almost $24 million in cash and property. With time off for good behavior and for completion of a drug-dependency program, Fastow could be released in less than five years.

"This is the largest securities case in history," said Paul Howes, who represents approximately 1.6 million Enron investors in the civil class action, or group, lawsuits, in an emergency petition to Harmon for Fastow's temporary release filed last week. "The testimony of Enron's former CFO, who was the principal contact for the company's banks in structuring, designing and executing transactions that were done solely to manipulate reported financial statements, is crucial evidence that should be taken."

A Houston appellate lawyer who has followed the case said it makes sense to let Fastow participate in the civil depositions.

"At this point, why hamstring the civil lawyers?" said attorney Brian Wice. "If the object is to recover as much money as possible, why not let him out?"

The case is U.S. v. Fastow, H-02-665, in the U.S. District Court, Southern District of Texas (Houston).
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Financial Post, Theresa Tedesco, 5 October 2006

Lawyers representing two Canadian banks implicated last week by Andrew Fastow in the accounting fraud that led to the collapse of Enron Corp. could get their chance to challenge his explosive testimony as early as next week.

U.S. District Judge Kenneth Hoyt held a conference call late yesterday to debate whether to allow Fastow be released daily from U.S. federal prison, where he is serving a six-year sentence, to provide detailed testimony to lawyers representing a multi-billion-dollar class-action lawsuit against Enron and its bankers.

The conference call, which included lawyers representing six major banks, including Toronto Dominion Bank and Royal Bank of Canada, was held in response to an emergency request filed this week by The Regents of the University of California, the lead plaintiff in the US$45-billion shareholder claim.

Attorneys for the class-action asked the court that Fastow, 44, be given temporary leave from the Houston-based federal detention centre over a period of two weeks, beginning on Oct. 9. They want Fastow to provide a lengthy deposition expanding on the testimony he provided last week in a 24-page statement in which he claimed that a group of 10 banks, including TD and Royal, participated in the manipulation of Enron's reported finances.

According to Enron's former chief financial officer, the group of banks acted as "problem solvers" and helped him create accounting structures that allowed the energy trader to hide its debt and artificially boost its financial results before it cratered in 2001, wiping out about US$60-billion in shareholder value.

"I and others, including certain Enron banks, worked together, intentionally and knowingly, to engage in transactions that would affect Enron's financial statements," Fastow declared in his submission to the court last week.

Officials at Royal bank and TD said the banks would "vigorously defend" themselves against the allegations, but declined to comment on Fastow's statements, saying the matter is still before the courts. Privately, they questioned the veracity of his comments because they were made at the time he was securing a lenient prison term of six years instead of the 10 years he agreed to when he entered into a plea agreement with U.S. prosecutors.

As well, both TD and Royal have filed motions asking the court to dismiss the class-action allegations against them.

Yesterday, Barbara Stymiest, chief operations officer at Royal, downplayed Fastow's "evidence" during a conference in Montreal, saying "we were not considered one of the main banks that did business with Enron."

In his declaration last week, Fastow made short references to TD and Royal, calling them "tier-2" banks. In the case of TD, the former Enron executive said the Canadian bank had engaged in "six prepay transactions" with Enron between 1998 and 2001.

In the case of Royal, Fastow said "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."

William Lerach, the U.S. attorney spearheading the class-action litigation, said in an interview that "I think [Royal and TD] are in denial." Although he would not comment on whether he has had discussions with representatives of the Canadian banks, Mr. Lerach said, "If I was [the banks], I'd be trying to downplay it too because it's devastating to them."

Meanwhile, Craig Smyser, Fastow's civil lawyer, said yesterday he has been in discussions with a number of lawyers representing the banks named by his client in his declaration last week.

"The financial institutions have been in contact asking for various favours and questions about my client's position," Mr. Smyser said in an interview. He said lawyers representing the banks will be given "expansive access" to cross-examine Mr. Fastow during his oral deposition to class-action lawyers.

In recent days, lawyers in the U.S. class-action litigation have spent dozens of hours interviewing Fastow in preparation of his testimony.

Mr. Lerach described Fastow's statement last week as the "tip of an iceberg" compared to what he expected to testify during his deposition in the weeks ahead.

"The things that Andy Fastow is going to be testifying are corroborated by the banks' own internal documents. The banks will never be be able to refute his testimony," Mr. Lerach said.

Enron investors have already received more than US$7.3-billion as a result of settlements with four banks, including US$2.4-billion from Canadian Imperial Bank of Commerce last year.

However, TD, Royal, Merrill Lynch, Credit Suisse First Boston, Royal Bank of Scotland and Barclays, have refused to settle and a trial is scheduled for April, 2007.

Three months ago, the hold-out banks won an important victory when a U.S. District Court judge in Houston dismissed Barclays from the class-action lawsuit.

Mr. Lerach has since filed a motion requesting the court allow his clients to amend their allegations to include more details of Barclay's alleged involvement.
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