Stalking Fastow: Why it is important to lay in wait and the CEO’s link to the investigation of corporate crime at Enron

Investigating complex fraud is characterized by the need to create an investigation blueprint that accounts for restrictions of an investigation and the complex problems an investigation may find. The Working Party team (1992) state that complex refers to a need for a team investigation rather than an individual investigator. It was noted that specific expertise, experience and time involvements are paramount to the decision of a case being classified complex or not (Working party team, 1992). Furthermore it was suggested that the components of the activity in question , such as the off the balance sheet transaction at Enron, will help to determine how complex a case may be and assist in identifying the level of expertise and experience that will be appropriate for an effective investigation.

Figure 1. Organization & Component factors in Investigation strategy for complex fraud.

Organization variables

Component variables

Time factors

Specific expertise

Experience

Financial loss

Transaction complexity

Jurisdiction factors

Complexity of law

Corruption of public figures

A successful method that is used to track white collar crimes is called the stepping process. This is due to how it accounts for the complexity issues. Blaintiff states that white collar crime is concealed inside the legitimate activities of business. That has been demonstrated clearly by Kopper and Fastow at Enron, however investigators may only have insufficient evidence to successfully prove criminal intent against Fastow at present. The stepping process however allows for stringing together evidence and convictions piece by piece which will eventually lead to the most deeply concealed offences. Blaintiff states that an investigation follow the path of firstly identifying the evidence requirements that would prove intent. Secondly the evidence must be organized carefully into briefs so prosecutors can present it in court clearly.

Figure 2. Techniques for establishing criminal intent

Activity inconsistent with legitimate intent

Repetitious wrongful activity

Conflicting statements

Systematic organization of misleading information

Use of informants

Admissions by suspects

Misrepresentation and disguise of Purpose

To achieve these objectives. Blaintiff proposes that investigators follow the path of firstly identifying the evidence requirements that would prove intent. Secondly the evidence must be organized carefully into briefs so prosecutors can present it in court clearly. To achieve these objectives it is recommended that skills for document and record disocovery and techniques for exposing concealed evidence including interviewing and interrogation techniques of witnesses and suspects are adopted. This states Blaintif will require considering the elements of establishing criminal intent (see figure 2).

The working party team state that concealment calls for creativity in investigation methods however the fact that agents must follow standardized investigation methods is going to hinder creative investigation. Other aspects that may hinder an investigation includes inter jurisdiction co-operation dilemmas and inadequate legal expertise. These factors combined can create a need for a complex classification for a case. The major issue of complexity in complex commercial fraud is that issues of complexity that are not addressed will lead to failure of a criminal prosecution and often result in less desirable civil remedies which may show criminal law as an inefficient deterrent to white collar criminals. Therefore it is suggested that investigators must be cautious and creative.

The investigation of complex cases must account for two major principles, being standardized investigation techniques and the evolution of the methods of operation used to complete offences. It will be necessary that an investigation blue print account in full for the common methods of operation involved in complex crime, which are generally accounted for in the standardized techniques of a given law enforcement agency. The institute of management and administration have outlined the techniques which are important to a successful investigation of criminal fraud (IOMA 2002 mar). This encompasses clearly identifying all evidence that directs the prosecution to clearly prove allegations of fraud (IOMA, 2002, mar). For success it is recommended that private investigations uncover as much specific intelligence to reduce the pressure on the overburdened justice system. The aspects of intelligence is related to a need to consider expertise and experience that is appropriate to the type of fraud in question as outlined in the more general framework guidelines (see figure 1). To avoid the case being unsuccessful it is important to be as accurate as possible with information, which will require expert knowledge above that of most investigation officers. Once the relevant intelligene had been gathere it will help if the matter is refered to the most appropriate law enforcement agency. This can help to avoid failure and reduce conflicts of jurisdiction. Preperation is important. A detailed explanation of the allegations, copies of evidence and a list of all the witnesses and contact details is a must. It is important to remember to follow through with the case to the end, which will involve being aware that public authorities will expect future further co-operation including acces to original documents and assistance in arranging interviews with witnesses (etc).

It will be necessary that an investigation blue print include a creative approach that will account for elements such as evolution of offender methods of operating and complex legal maneuvering by offenders and offender legal representation. According to O’Gara (cited in IOMA 2002, May) there are some key step to recognize and detect fraud. These include establishing a timeline, identifying middlemen, identifying questionable practices, and alerting as may possible witnesses and informants as possible. The timeline is useful, especially for complex fraud, as it determines where the offences began. The start point is useful as it is here where the offender will make mistakes that later on will not be noticed in accordance with and organized offenders evolving method of operating. Therefore documents and transactions including phone records, transaction records, employee lists during the early stages in the timeline can lead to vital evidence that can help prove the necceccery classifications of criminal intent (outlined in Figure 2, p. 3) including activity inconsistent with legitimate intent. The identification of middle men may uncover vital clues to the issue of directions from upper management, which can be achieved by searching company log books or other such documents. It is important to remember that a middleman may have been disposed of inorder to conceal the offences. An example of this is how Duncan from Anderson was fired, which as suggested by King () to help conceal anywrong doing by Enron as they had a tendency to dispose of rule oriented company associates even though the whole firm was also taken of the Enron payroll. Most importantly is the identification of questionable practices This can be don by locating internal complaint registries and going insearch of external complaint registries. This indicates a high probability of illegal acts associated with ignorance and lack of respect for the law and authority which is an important red flag for the occourance of any crime.

The current case example surrounds the shonky dealings of high profile Enron executives. The concealment of offences has been a key roadblock that the investigators needed to overcome. At first nobody was sure how a leading firm with such good profits managed to collapse. Investigators took a long time to put some of the pieces together. They are still being very careful about how they go about this. Zellner and Carney (1002) have noted that the Justice department is using a bottom up pursuit process. That is they have tried to overcome the organization and component variables (see figure 1) of the very complex case. Most paramount is the issue of Fastow concealing $45 million in profit form Enron investors (Zellner and Carney, 2002). The Justice department and the FBI have had to do massive investigations before they could successfully link Fastow to any wrong doing. For example to get Michael Kopper, which was the key break through to ceasing Fastow's assets, the Justice department had 10 prosecutors and the FBI had 30 agents all of whom were working on the case fulltime on the investigation and prosecution (Lavel 2002). This is consistent with the problem of investigation complexity and how it requires much manpower and specific investigation and prosecutions experience. Previous to the Kopper investigation however was the investigation of the Enron’s accountants Anderson.

A major find in the Enron Investigation was how they controlled there accounting firm Anderson. Thomas and Fowler (2001) described how Anderson, under the direction of Auditor David Duncan attempted to disguise $1 billion in losses that were a result of Enron insider off the books transactions. Nancy Temple who was employed by Enron’s Legal Firm, ordered Duncan to remove Temples name from a memo that stated that Enron’s $1 billion loss was going to get worse (the Economist, 2002). Duncan was accountable for not reporting the clearness of the problem that temple reported which did eventuate in the bankruptcy of Enron. For removing Temples name from the memo Duncan was considered by a judge and jury to be obstructing justice. Although the prosecution had alleged the real obstruction of justice was the destruction of documents relating to the Enron case while being aware that a Federal investigation was imminent. These facts are consistent with the proving intent strategy of activities that are inconsistent with legitimate intent (see figure 2 p. 3). When considering legitimate intent and document destruction there is a duty to preserve documents takes prescendence over document destruction plans (IOMA may 2002). This Duty will arise if there is pending or imminent litigation or investigations(IOMA may 2002). For Anderson to destroy the Enron Documents in light of knowledge of a pending investigation would be considered the destruction of relevant documents to an investigation(IOMA may 2002). The Issue of a relevant document is established by whether or not it would be reasonable to destroy a document in light of the relevance of a document to the pending investigation. Duncan stated that he did no believe that what Temple predicted and therefore did not regard the destruction of documents as the destruction of documents relevant to an investigation. Yet Duncan admitted under oath his role in attempting to disguise the discovery of inflated profits from Enrons off the books transactions.

Duncan’s legal representation had argued that being aware of the investigation being imminent is not the same as being served with a subpoena that prohibited document destruction. Prosecutors who claimed the document destruction as there main evidence were saved by the fact that Duncan altered the Memo. CNN have reported that the major motive for Anderson to cover up Enron’s dealings was due to the fact that Anderson was enabling (King, 2002) Enron due to the fact that Enron paid Anderson 57 million per year to Anderson whom did not want to loose the Enron account or there auditing license. Fortunately the guilty verdict for Duncan has helped to allow greater freedom to investigate corrupt officials at Enron such as Fastow and Kopper, who are pointing the blame toward Anderson in an attempt to conceal their part in the off the books transactions at Enron (Zellner and Carney, 2002). This is reflected in the steping of the investigation process.

The next important break through was a guilty verdict against former senior executive Michael Kopper (The Australian, 08, 23/2002). Kopper was indicted for money laundering and wire fraud estimated at $12 million US. There are 3 off the books transaction accounts, Southampton, Chewco and RADR (ref). The key admission that exposed Enron CEO, Mr. Fastow, was Koppers’s statement to the judge about how he contributed proceeds from his transactions to Mr., Fastow. The issue of transaction complexity is a key issue that investigators must consider. Firstly Enron equity was used to make off the books transactions by Kosson and allegedly by Fastow. Kopper has pleaded guilty and has admitted that Fastow has profited from these deals. Now the Justice Department has frozen Fastow’s Assets, though no charge has been laid against Fastow yet. Fastow however is suspected of making $45 million from off the books balance sheet deals. Presently the prosecution is putting together evidence to prosecute Fastow based on information obtained through investigation and prosecutions of lower level members of Corporation including Duncan

Figure, 3. Net worth v expenditure

[ [ NW 2001 – NW 2000 ] + Living expenses ] – Legitimate funds]

= Funds Embezzled

*NW: Net worth= Assets - Liabilities

FROM (17, 479, READING 19)

and Kopper the two key witnesses so far. For the purpose of investigating Fastow it will need to be shown that Fastow did in fact receive the money unlawfully. To do this it is suggested that Fastow's assets be tested using the net worth-expenditure technique (see figure 3).

First of all it would have to be decided how Kopper transferred money from transaction to Fastow, what did Fastow do with the income and other ways of proving that these transactions were real? Secondly Fastow’s wealth should be balanced against his allowable income and assets and the difference should be what he has embezzled. This is to be achieved by collating any known legitimate income gained by Fastow, which may be obtained from tax records and Enron pay roll certificates. Added to this would be other income such as his spouse’s income and any insurance or deceased estate payouts (etc). The net worth equation (see figure 3) is then used to calculate whether or not Fastow has legitimately gained the property and income that he has.