White Collar Crime Part 3 — Former Enron CFO Andy Fastow on the Problem of “Legal Fraud”

Published on
December 23rd, 2020
Duration
93 minutes

A Credit Expedition Part 2 – Pockets of Opportunity Amid the Chase for Yield with Robert Cohen


White Collar Crime Part 3 — Former Enron CFO Andy Fastow on the Problem of “Legal Fraud”

The Big Picture ·
Featuring Andrew Fastow and Quinton Mathews

Published on: December 23rd, 2020 • Duration: 93 minutes

Former Enron CFO Andy Fastow is infamous for his role in Enron's collapse; however, since serving his time and reflecting on his actions, he has turned over a new leaf, speaking about ethics and the problem of "legal fraud". In this interview with Quinton Mathews, managing member at QKM, Fastow argues that the biggest problem is the incredible number of loopholes that exist, allowing executives like himself to mislead and misrepresent without ever breaking a specific law and even having these misleading statements signed off on by corporate lawyers and auditors. Using poignant examples from Enron and other companies, Fastow highlights many of these loopholes and makes the case that closing them alone could not prevent the problem. Since leaving prison, Fastow has also began investing in a potential solution—Keen Corp's natural language processing software, which he believes if implemented could help corporations to avert white collar crime and detect problems in their ranks before gaining too much momentum. Andy Fastow can be contacted at FormerEnronCFO@gmail.com and KeenCorp can be contacted at NorthAmerica@KeenCorp.com. Filmed on December 16, 2020. Key Learnings: "Fraud" is not always a question of breaking a specific law, and there will always be routes for executives to "legally" mislead and misrepresent. Investors conducting fundamental analysis must be cognizant of this and do their homework when examining financial statements.

Comments

Transcript

  • JW
    Jim W.
    1 January 2021 @ 02:56
    Wow, I wish I could "Powershare" this with some of my old Enron friends...and what Andy says about "will Anderson approve this structure" was definitely the case. There was pushback on a number of deals and structures from them. For those of you curious about all the details of the SPVs, the Powers Report is an excellent (and long) analysis. Quinton did a great job of going back and forth with Andy on these things, pushing in some interesting places (the treatment of off balance sheet O&G leases for example) --what is wrong with GAAP if you can have a 400 M difference in earnings based on whether it is on or off the balance sheet--and in introducing Keen. The Keen pitch was a bit too long, though--I understand how it works, and it is interesting and backtestable, but this sort of tool tends to get deployed after the problem, not before IMO. There were definitely people (Lou Pai comes to mind) who were selling at the top, but who may or may not have realized how precariously things were set up. Inside of Enron, I heard rumors of lots of tension from the "build/buy hard asset guys" vs the "asset-light mark everything to market" guys. Broadband (where I worked) was much more in the "we need to be asset light, but we have to create a new market" category.
  • DA
    Domenico A.
    31 December 2020 @ 10:40
    The issue with this is the assumption that people are fundamentally good and looking to do the right thing within the law. The contention is that what is "right" becomes dependant on the frame of reference. There are other cases where there is no blurred lines. Where the only interim is self enrichment.
  • KA
    Kevin A.
    31 December 2020 @ 04:31
    Fastow should be cleaning toilets at best. I couldn't even get past the five minute mark. He just makes me so sick.
  • TP
    Tom P.
    30 December 2020 @ 22:18
    He's a child. And he caused untold misery on thousands. A terrible criminal who somehow seems to have landed on his feet. However, in the capitalist system we're all children. We're all optimising amoebas trying to climb over each other to be successful. "Solve the problem + stay within the rules" is basically the mantra of how to be the best in the capitalist system. How do I fulfill the objectives of my role? Solving the problem elegantly is harder than compromising my morals, so the temptation to cheat is clear. Better still: cheat within the rules and hide behind them. If that means using the 'rules' as a human shield, as did Mr Fastow, so be it. Look, in my experience, our system benefits bright, problem-solving sociopaths who are--for wont of a better expression--Berkshire Hunts. Capitalism is a wonderful system, but there is no morality in it. Berkshire Hunts do well. It's not for them to define the morality, that is the role of the rule-setters. It's playtime. We're all children. Fastow outsmarted the dinner ladies. It's for them to set better rules.
  • MM
    Mike M.
    30 December 2020 @ 19:30
    and Note I am bulling Andy If I get kicked off RV so be it.
  • MM
    Mike M.
    30 December 2020 @ 19:27
    I guess RV will let any piece of shit have the microphone. Man get this shit off RV. This asshole has nothing of value.
  • AH
    Andreas H.
    30 December 2020 @ 13:51
    well I guess I was not legal fraud that brought him in prison! Look for incentives, this all you need to do, the wrong ones will bring down the most moral leadership team! So a good leadership team makes sure that incentives are allinged and ballanced with all stakehoders from the beginning!
  • BG
    Bryce G.
    30 December 2020 @ 00:30
    Was good until he started shilling the Orwellware at the end. Come now, software like that will only be used for the exact opposite purpose that the company describes.
    • AH
      Andreas H.
      30 December 2020 @ 13:50
      Yep!
  • JL
    Jade L.
    27 December 2020 @ 04:22
    Thanks Quinton for a great interview. I've actually looked up keen corp. It's an interesting concept. The real challenge remains - is leadership willing to take the right moral actions? I don't think there is a lack of whistle blowers, but if corporate leadership holds the mindset that treading along grey areas are okay (or worse - they dont see it even as grey!), then no amount of tech or regulations can help. Andy's explanation on how his thought process when he was Enron's CFO, to me, is a reflection of the leadership culture in quite a good amount of organizations.
    • QM
      Quinton M. | Contributor
      27 December 2020 @ 13:29
      I agree. Good insights. Thanks for watching.
    • ar
      andrew r.
      28 December 2020 @ 20:26
      What does "the right moral actions" mean? And if it doesn't mean "that which is legal," whose moral standard are we adopting?
  • sh
    steve h.
    26 December 2020 @ 22:24
    Andrew you behaved that way is because you were greedy and found ways to cut corners.. Pretty simple behind the complex... Greed
    • ar
      andrew r.
      28 December 2020 @ 20:25
      You didn't listen.
  • NI
    Nate I.
    24 December 2020 @ 06:46
    Thanks to both of you for doing this interview. Sorry to be harsh, but I'm not buying Andy's version of events. It all sounds perfectly plausible and I wouldn't be surprised if he believes some of it, but at the time insiders were dumping Enron stock hand over fist (go back and look at those SEC form 4s if you don't believe me) while at the same time those same "rule followers" were telling their employees to buy Enron stock (see the infamous videos of "Kenny Boy" talking to employees at company meetings). The Enron insiders didn't need email analyzing software to tell them they crossed the line. If the insiders didn't know there was a problem, why were they dumping their Enron stock? Anyone remember Sherron Watkins? I do. She wasn't afraid to tell the insiders there was a problem. Did they correct the situation? No. It's not that employees won't tell the insiders there is a problem. It's that they know it's a waste of time and worse yet the retaliation will be swift and harsh. Probably fired and maybe worse. Just look at what these sociopaths allegedly did to short sellers like Marc Cohodes and Fraser Perring (have a listen to their stories sometime about MiMedx and Wirecard, respectively). Then imagine what they might do to an employee. As bad as Enron was, Boeing was much worse. At least no one died at Enron as a direct consequence of the financial fraud. I will concede that Andy is right about one thing. Significant swaths of Corporate America have completely lost sight of right/wrong and they've replaced right/wrong with legal/illegal. As long as they can send their legions of lobbyists to Washington DC to carve out the loop holes they need for some new shenanigan, they will and they'll think it's all just fine. But it's not just fine and our declining standard of living, political polarization and moral decay clearly demonstrate that it's not just fine. Not to mention the dead bodies in some cases like Boeing. Good luck developing a piece of software that transplants a moral compass into the skull of today's corporate executives or our political leaders for that matter. Quinton is right about that. Nothing changes until we see some real prosecutorial ardor combined with legislative reform to remove about a zillion of these loop holes (accounting and engineering test/QA).
    • QM
      Quinton M. | Contributor
      27 December 2020 @ 13:38
      Nate- thanks for your comment. I come down somewhere in the middle here. From my experiences, I think that corporate crooks are sociopaths and therefor there is a real sense of believing they aren’t doing anything wrong. When shit hits the fan and they are dumping stock, again I think it’s probably nuanced. Of course they know what they are doing at this point, but in full panic mode I’m not sure they fully reconcile what they are doing. I’m not giving them a pass, I just think the psychology of it is fascinating and complex and hence why we can’t understand why someone would do such things. Anyway thanks for watching and commenting.
  • GF
    Gordon F.
    25 December 2020 @ 03:23
    Interesting. I'm glad I watched it. I worked for several years where most of my responsibility was for environmental compliance, then went to work for our internal safety and environmental compliance group. The details of financial compliance as discussed here are different, but as I listened, flash-backs of internal discussions we had kept dancing through my mind. Compliance with rules - How do we comply? Especially when the rules were written by people who didn't understand or foresee the situations we were dealing with. Even sometimes when strict compliance with the rules could make the situation worse. In many cases, our answer was to document why we took the decision that we did, and why that was the best way to meet the intent of the rules and requirements, knowing that a regulator looking for a finding might well declare us in violation. Tension among employees - Working in an internal audit group, we were assigned to visit different departments to perform internal evaluations. I discovered early on that many of the employees of those groups were initially nervous about talking to me, thinking of me as a potential adversary. I would open the conversation by telling them that I was not there to cause them problems, but to try to prevent them, and that if they had concerns that their supervisors were not addressing, I could evaluate said concerns and their supervisors WOULD pay attention to me. Then I would listen. In any case, I always saw my job as an auditor as keeping my employer in compliance with the law and out of the news.
    • QM
      Quinton M. | Contributor
      27 December 2020 @ 13:34
      Gordon- really interesting insight. I think one of the big issues facing investors is they don’t understand how these systems really work at a corporation. My goal was to pull the veil back a bit. Glad you enjoyed it.
  • JJ
    John J.
    25 December 2020 @ 21:02
    Fabulous. I watched the whole thing. Probably the best interview I have seen on RV. Quinton is without a doubt the best interviewer on RV. He was fair, asked great questions, and pushed back on some of the responses rather than just accept everything as gospel - no "spot on" or "well said" comments. Ash and Ed take note. A great leaning experience. As a former partner at a Big Four firm, all of the issues discussed were real and well explained. The folks on the Enron Board might have been well qualified, but how many transactions did they really analyze? Probably very, very few. And those that were did not have the objective analysis required. Too bad we never got any insight into Kenny Boy.
    • QM
      Quinton M. | Contributor
      27 December 2020 @ 13:32
      John, thanks for the kind words. Not sure I’m the best, but I’ll take it.
  • JC
    JP C.
    26 December 2020 @ 03:28
    Question for Mr Fastow... And what of the FED and The Treasury's varied use of SPV's and Credit Protection etc. Genius or Evil?
    • QM
      Quinton M. | Contributor
      27 December 2020 @ 13:32
      Ha! Great question. I say evil but like fastow says, he answer probably lies somewhere in between.
  • MS
    Marius S.
    26 December 2020 @ 12:03
    The idea of the Keen Software is interesting, but I suspect it will have limited real-life application. There is a whole set of reasons that stand in the way of wide-spread adoption, but the obvious one is that people act differently when they know their mails are being analyzed. Having good retrospective results on use-cases where this was not the case is therefore misleading. If employees do not know that their mails are monitored that opens up a different group of problems. Thanks to both gentlemen for a very detailed and thought provoking discussion.
    • BM
      Brook M.
      27 December 2020 @ 04:09
      Anyone working for an organization of more than 20 who doesn’t think his company emails are being read by his own company management is pretty naive!
    • QM
      Quinton M. | Contributor
      27 December 2020 @ 13:30
      Marius, thanks for the comment. I agree probably a hard battle to win via software for multiple reasons, but I am interested to see how much traction these types of solutions get.
  • RJ
    Robert J.
    26 December 2020 @ 20:13
    This is an excellent interview. Hark the wisdom of Charles T. Munger: “Show me the incentive and I will show you the outcome.”
  • GO
    Glenn O.
    26 December 2020 @ 08:20
    Fascinating interview. Andy took the blame for his part in Enron and I believe gave me a different perspective of what happened there. I like the fact that he is looking at solutions for the problems. FDR hired Joseph Kennedy to be head of the SEC not because he was a decent human being, but because he knew how the street worked and knew what to look for when looking for rule breakers. Well worth the time to watch the entire interview. Thank you Glenn Olnick
  • SE
    Sylvain E.
    26 December 2020 @ 07:52
    Highly instructive, you don't get the chance to go so deep on what he did wrong with such a high profile. I've also liked Andrew's foreword: i'd have hated listening to someone in denial or trying to find excuses. Pure gold for someone who works in corporate finance like me. Thank you Quinton & Andrew.
  • BM
    Brook M.
    26 December 2020 @ 03:40
    Super interview. I really enjoyed this peek behind the curtain of what happened at Enron and what I suspect happens in all companies both large and small. Mr. Fastow comes off as a bit self serving (but who of us would not in his position?). As for the complaints about the Keencorp informercial, all I can say is I enjoyed hearing about this company and their product offering. Great job by Mr. Matthews. Great coup by RV in getting this guest. Very entertaining! Thanks.
  • GB
    Gary B.
    25 December 2020 @ 20:36
    Interesting interview, but I don't need a sales presentation on a new software company!
  • CL
    Chad L.
    23 December 2020 @ 23:18
    I am really struggling with this one. Haven't watched it, not sure I will. I understand that there are real lessons to be had here, but as someone who saw first hand (Enron Broadband was based in Portland were I am) how devastating his lies and fraud were to the lives of his employees (nevermind investors) I simply cannot be a party to his rehabilitation/second act. People committed suicide because they believed in him. If there is one thing wrong in American capitalism, it's that we lack sufficient (any?) accountability for the human devastation that men like Fastow wreak. I'm disappointed in Real Vision for aiding and abetting regardless of it's "value".
    • QM
      Quinton M. | Contributor
      24 December 2020 @ 00:05
      Chad, I really appreciate your opinion. My hope is that you would watch it, and see my goal was not to celebrate him nor talk about a “second half” but teach investors how to avoid getting taken advantage of by people like Andy and a potential solution he may have. Time will tell if he is sincere or if his solution works. Thanks Quinton.
    • MH
      Michael H.
      24 December 2020 @ 21:42
      I share Chad's sentiment, although I watched the video. I thought it was interesting in several regards, and I thank Quinton for it. I don't believe it celebrated Fastow, but it did conclude with a self-serving advertisement of a product that may or may not withstand much scrutiny. I'm not competent to classify anyone's psychological state. However, if your hypothesis is that Fastow is a sociopath who's making the best of his bad situation, I don't think this video would refute it in any way.
  • SB
    Sean B.
    23 December 2020 @ 21:23
    Excellent interview
  • MH
    Michael H.
    23 December 2020 @ 19:16
    This is what I consider more valuable information in comparison to many talking heads that are predicting the future.
  • PB
    Peter B.
    23 December 2020 @ 17:21
    Excellent content! Thank you RV.
  • PG
    Philippe G.
    23 December 2020 @ 16:41
    Wow - wasn't expecting this guest! Over 1 hour to go...!
  • AH
    Andrew H.
    23 December 2020 @ 16:22
    Awesome convo. Gives a much better understanding of how things look from the side the media will never portray.
  • TM
    Tommy M.
    23 December 2020 @ 14:46
    Can you display the chapters, please?
    • MW
      Max W. | Real Vision
      23 December 2020 @ 16:17
      This series, "The Big Picture" does not have chapter titles. It is a multipart deep dive series and the individual episodes can be considered chapters. Part 1: https://www.realvision.com/shows/the-big-picture/videos/white-collar-crime-episode-1-why-white-collar-criminals-get-away-with-it Part 2: https://www.realvision.com/shows/the-big-picture/videos/white-collar-crime-episode-2-how-the-sec-handles-whistleblowers
  • TM
    Tommy M.
    23 December 2020 @ 14:47
    Can we get the transcript, please?
    • MW
      Max W. | Real Vision
      23 December 2020 @ 16:11
      Transcripts are coming. Usually up within 24 hours of the air date.
  • MM
    MAX M.
    23 December 2020 @ 14:52
    Could KeenCorp do a chart of Facebook posts? Excellent interview. Great debate. Thanks!
  • KS
    KEVIN S.
    23 December 2020 @ 11:37
    I appreciated this interview. I see value in it. Too many see the world as black and white but often decisions have to be made in the risky gray (with assumptions or bias). It's often the 20/20 hindsight of the results that make it black or white. Thank you.
  • TT
    Tokyo T.
    23 December 2020 @ 11:37
    Quinton did a great job. He didn't fall for some of Andy's rhetorical questions. However, I do appreciate Andy's blunt assessment (or justification) of what goes on at the boardroom level. The book by Bethany McLean, mentioned by Andy is an incredible account of the Enron story. Having Bethany on at some point would be welcomed.
  • AF
    Andrew F.
    23 December 2020 @ 11:28
    wow
  • SP
    Sat P.
    23 December 2020 @ 10:05
    Fantastic interview. Two of my thoughts... When a society has lost all sense or morals and duty to one another, no amount of legislation or rules will prevent fraud happening. This moral decay can be seen all over the western world right now. Secondly, the software mentioned at the end looks great. But remember that in 2012, HSBC bank branch managers turned off their AML/KYC software to launder drug money in Mexico and Columbia. This is not a question of a financial, legal or economic problem, it is much deeper than this. You could call it a spiritual crisis in society as a whole. To deal with that situation, you need a completely different set of answers.
  • SG
    Sashi G.
    23 December 2020 @ 09:31
    More than laws and systems, whether one commits fraud or not is essentially just ethics. If you have unethical management, no law will ever stop fraud from happening. Determined fraudsters will always find a way. You can try to make it more difficult to commit fraud, but, at least from an investor point of view, stay only with the right people behind a company.
  • LO
    Luke O.
    23 December 2020 @ 08:41
    Why on earth would you give this man an audience?!