Why Enron's Fastow may only serve five years

Fortune's Peter Elkind explains why the very people Enron's former CFO Andrew Fastow helped defraud helped him to a lighter sentence.

By Peter Elkind, Fortune editor-at-large

(Fortune Magazine) -- Howls are still being heard about the sentence granted Enron's former CFO Andy Fastow. Fastow cut a plea bargain to cooperate with the feds in return for ten years in the slammer, and he was expected to get close to that. But at his Sept. 26 sentencing in Houston, U.S. district judge Kenneth Hoyt gave Fastow just six years instead - partly because of pleas for mercy from some of the very people he had helped defraud.

Give credit to a very synergistic bit of lawyering by San Francisco criminal defense star John Keker. As it turns out, Keker not only represents Fastow but is also the personal criminal defense attorney in an unrelated federal investigation for Bill Lerach, the controversial plaintiffs attorney who represents Enron shareholders in their massive class-action lawsuit.

Andrew Fastow is serving six years in Oakdale, La.

In an 11th-hour deal benefiting both of Keker's clients, Fastow agreed to aid Lerach's Enron class action, which has already collected a record $7.3 billion in settlements (mostly from the big banks that helped Enron cook its books). Fastow provided detailed debriefings to the plaintiffs' lawyers, naming Enron bankers he considered complicit, and he agreed to sit for deposition.

In return Fastow won the formal support of the Enron investors in his pleas for leniency (a factor the judge explicitly noted). He was dismissed as a defendant in Lerach's lawsuit and even got the plaintiffs' attorneys to pay his legal fees for the deposition. If Fastow is accepted into a prison drug-treatment program for his claimed addiction to anti-anxiety pills, he could be out in five years.

Fastow's cooperation also provides a massive windfall to Lerach. He gets fresh evidence against the seven big banks (including Merrill Lynch (Charts) and Credit Suisse First Boston) that have thus far refused to settle, including testimony that could well persuade them to cough up an extra billion or three. In addition to benefiting Enron investors, this would enrich Lerach, adding $100 million or more to the contingency fee for the plaintiffs' lawyers and raising the prospect that they could walk away with close to $1 billion from the case.

While the remaining bank defendants have dismissed Fastow's cooperation, Lerach, in a statement, declared that the CFO's testimony helps prove the banks were "the actual masterminds" behind the Enron fraud. Indeed, the attorney for one Enron bank that has already negotiated a big settlement says the imprisoned CFO's involvement with the plaintiffs has "got the banks very nervous." If Fastow's affidavit helps the class action survive summary-judgment motions, says the attorney, "that alone is worth billions to Lerach."

Lerach has retained Keker as his own criminal lawyer in an ongoing federal investigation of his longtime firm, Milberg Weiss. Lerach, who split off from Milberg in 2004 to form his own firm, has been named a target in the case, but insists he has done nothing wrong. (Full disclosure note: Lerach's firm has lawsuits pending against Time Warner, Fortune's parent company.)

Despite previously vilifying Fastow, Lerach himself is famously pragmatic, often declaring that in plaintiffs work he has "no permanent friends, no permanent enemies."

For John Keker, who declined to comment for this story, it's hard to imagine a better result for both his clients. Says Columbia law professor John Coffee: "He was in the right place at the right time to broker a deal."


For more information on Bill Lerach, see The Fall of America's Meanest Law Firm.  Top of page