Banks play down Fastow remarks

“…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."

The Globe and Mail
September 28, 2006

Banks play down Fastow remarks
RBC. TD refuse to comment on role in Enron debacle
Gary Norris, Canadian Press

TORONTO — 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.


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