Fastow fever to hit Enron trial
After 6 weeks of testimony, the government's star witness, ex-CFO Andrew Fastow, will testify next week. Sparks should fly.
NEW YORK (CNNMoney.com) - It's show time for Andrew Fastow, Enron's former financial chief and now one of the most important witnesses for the prosecution in the case against Enron founder Kenneth Lay and former chief executive Jeff Skilling.
As the Enron trial enters its sixth week, the government will finally put Fastow on the stand as early as Tuesday -- a move expected to put some zip in a trial bogged down in recent weeks by hours of details on corporate accounting.
While 10 former Enron executives and employees have testified so far about Skilling and Lay's involvement in financial fraud at Enron, it's Fastow's testimony that will be one key piece of the government's case.
"What's at issue in this case is (Lay and Skilling's) state of mind," said Michael Wynne, a lawyer at Houston-based law firm Yetter Warden who's been at the trial but isn't involved in the case. "A witness in a position like Fastow's is very important in reconstructing that."
Wynne said Fastow's senior position and close ties to both defendants will provide government prosecutors with damning evidence that Lay and Skilling were willing participants in the fraud that brought down Enron in December 2001.
But Fastow comes with his own baggage, which defense attorneys are expected to try to exploit in an effort to discredit him before the jury.
Fastow has long been considered a key player in the downfall of Enron, once the nation's seventh largest company.
He was the mastermind behind the fraudulent LJM partnerships -- the acronym actually stands for the first letters of his wife and two sons' names -- that were created to make complex deals to bolster Enron's profits and hide losses.
The partnerships, while providing Enron with a cleaner and more robust balance sheet, also provided Fastow with over $25 million in fees -- profits he collected while still serving as Enron's chief financial officer.
He pleaded guilty to two counts of wire and securities fraud in 2004 and now faces 10 years in prison in return for his expected testimony against his former bosses.
"Fastow might not make the most sympathetic or believable witness because he lined his pockets," said former prosecutor Kirby Behre, now a partner at Paul Hastings in Washington, noting some believe Fastow's personality may turn off jurors.
And defense attorneys Michael Ramsey and Daniel Petrocelli have made it clear that they intend to prove that Fastow's illegal conduct was the only wrongdoing within the company -- and was done without the knowledge of Lay or Skilling. That should make for some aggressive questioning once the defense begins their cross examination.
"Fastow can be a lightning rod for the defense," said Sheldon Zenner, a former federal prosecutor and now the head of white collar criminal practice at the Chicago-based law firm Katten Muchin Rosenman.
"The defense will try to demonize him and make him" the sole villain in the Enron scandal, Zenner said.
Fastow's credibility did come under attack late last year after newly unsealed documents in the case showed the former CFO denied being involved in a tax conspiracy with his wife. Despite the earlier denials, his wife, Lea Fastow, later pleaded guilty in the tax case while Andrew pleaded to other charges and agreed to testify against his former bosses.
That should provide fodder for the defense to discredit his testimony, experts said.
In fact, in opening arguments, the defense blamed negative publicity, courtesy of Fastow's questionable side deals, and a lack of market confidence for the company's collapse, which led to billions of dollars in losses for investors and wiped out the life savings of thousands of Enron employees.
It also was the first of a wave of corporate scandals that led to the passage of tough corporate disclosure laws, known as Sarbanes-Oxley.
A corroborating witness
"The prosecutors are wholly aware of the baggage (Fastow) carries going into this," said Christopher Bebel, a former federal prosecutor who now serves as an expert witness on securities cases. "They have done everything possible to ensure that the success of the case doesn't hinge on the viability of Fastow's testimony."
Legal observers said the government made a conscious decision to call Fastow to the stand only after a number of other witnesses had laid the groundwork for the case.
In recent weeks, a steady stream of executives ranging from Mark Koenig, former executive vice president of investor relations, to Kevin Hannon, ex-chief operating officer of the company's troubled broadband unit, have painted a picture of Enron's obsession with meeting Wall Street's expectations at any cost.
Fastow's testimony will serve to corroborate those witnesses -- and finger Lay and Skilling as knowing about and condoning the fraud.
Yetter Warden's Wynne said Hannon's testimony Thursday, in which he said that Skilling responded to a published report that was critical of Enron's valuation by saying "They're onto us," was the perfect lead-in for Fastow's testimony.
"It was a good strategic move," he said. "It left the jury with those Skilling comments to chew on over the weekend."
And that could make Fastow's corroborating testimony sound even more believable, according to legal experts.
Defense on the offensive
But experts aren't counting out the defense team's aggressive cross-examination just yet.
Ramsey and Petrocelli, both seasoned attorneys with solid records, are expected to mount a vigorous line of questioning and shift the focus to Fastow's off-the-books partnerships in an effort to show that both Lay and Skilling were in the dark about these side deals.
"The defense will try to drown jurors with all the complexities so they up their hands and give up," said Bebel, the former federal prosecutor. "The defense will try to establish that Fastow was hiding things and looting money from the company" through the creation of the complicated partnerships, known as "special purpose entities."
"I think the defense will be extraordinarily aggressive against Fastow," said Katten Muchin's Zenner. "You'll see the most vigorous and acerbic cross-examination" of any of the witnesses so far.
Is Enron's defense brilliant or just plain crazy. Find out more here.