Timothy DeSpain, Enron’s assistant treasurer from 1999 to 2002, was arraigned before a federal magistrate Tuesday and released on a $100,000 bond in connection with securities fraud criminal charges that he conspired with other Enron executives to present Enron’s financial picture in a false light to investors.
Late Tuesday, Mr. DeSpain entered into a plea agreement (his statement in support of the plea deal is here) in which he pled guilty to a single count of securities fraud in return for the Justice Department’s agreement to grant him immunity from prosecution for any other crimes that he committed at Enron or his subsequent employer so long as Mr. DeSpain truthfully testifies in Enron-related criminal trials and cooperates with the Justice Department’s on-going Enron criminal investigation.
According to the Justice Department criminal information pleading, Mr. DeSpain was in charge of keeping Enron in touch with credit-rating agencies and was involved in schemes intended to make Enron appear healthier than it was to pump and maintain investment-grade credit ratings. Low or below investment-grade credit ratings make it expensive for companies to borrow money, which was critical to Enron’s online energy trading business. Under his plea agreement, Mr. DeSpain alleged that, at the direction of Enron treasurers, he and others frequently misrepresented cash flow from operations in order to hide the nature of the transactions and benefit from the pumped-up credit rating.
Mr. DeSpain worked for three treasurers at Enron. Ben Glisan, who is currently serving a five year prison sentence after pleading guilty to one count of conspiracy to commit wire and security fraud in September 2003; Raymond Bowen, who resigned last week as Enron’s chief financial officer and treasurer and who has never been charged with a crime; and Jeffrey McMahon, who has never been charged with a crime, but whose name was recently mentioned by Michael Kopper during his testimony in the ongoing Enron-related Nigerian Barge criminal trial as Andy Fastow‘s proposed “fall guy” if Enron’s accounting treatment of the barge transaction were ever to fall apart.
Another transaction mentioned in Mr. DeSpain’s plea bargain involves Project Nahanni, an Enron deal that arose in 1999 when Enron was at least short of its cash flow target. Enron reported cash from the sale of Treasury securities as a result of Profect Nahanni, but Mr. DeSpain alleges in his plea bargain that he was aware of no business purpose for the transaction other than to create cash flow. As a result, Mr. DeSpain claims that Enron falsely advised credit agencies that Project Nahanni was the sale of a merchant asset rather than explaining the true nature of the transaction, which Mr. DeSpain contends would have undermined Enron’s credit rating.
Finally, in his plea bargain, DeSpain also alleges that he was involved in fraudulent conduct in connection with Enron’s “prepay” strategy where the company reported that it had sold an asset and generated cash, but did not disclose that it had incurred a future debt obligation. Mr. DeSpain alleges that Enron’s treasurers ordered him no to reveal to the credit rating agencies the true nature of the prepay transactions.
The Justice Department’s plea deal with Mr. DeSpain is consistent with the strategy for generating witness testimony that the prosecution is currently using in the Nigerian Barge trial. Four of the prosecution’s first six substantive witnesses in that trial intially denied any wrongdoing in connection with the transaction. However, after reaching plea bargains with the Justice Department, those witnesses now contend that they were involved in a coverup of an alleged “side deal” between Enron and Merrill Lynch. The prosecution contends that the alleged side deal, if disclosed to Enron’s auditors, would have required Enron to restate earnings that it booked from the transaction with Merrill Lynch.