Former Enron CFO Andy Fastow on the Problem of Legal Fraud (w/ Quinton Mathews)
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- Опубликовано: 8 сен 2024
- 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.
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Former Enron CFO Andy Fastow on the Problem of Legal Fraud (w/ Quinton Mathews)
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The only reason it's fraud was because Enron went bankrupt. Otherwise it would have just been creative accounting.
That's like saying politicians would be in prison if it weren't for the government.
That is like saying "the only reason Bob was changed for involuntary man slaughter is because someone died". In order to charge fraud you have to prove someone was damaged by your intentional actions. The bankruptcy was the damage.
Andy Fastow, Michael Kopper and a few others (as I recall) did steal money from Enron through some of these SPEs for which he/they could have been charged if Enron uncovered it. This theft made their fraud case indefensible and both plead guilty.
That said I still disagree that this was not just "creative accounting". In my opinion LJM is where Andy's creative accounting crossed the line into fraud. To over simplify what the LJM SPE was doing; they would create a SPE and "sell" troubled assets whose value needed to be written down into that SPE for a value much higher than the assets were actually worth. SPEs must be controlled by a 3rd party that is not Enron, and of course no 3rd party is going to intentionally take on an asset at a value much higher than its actual worth. So to get around this Enron would put into the contract that any losses by the SPE would be recouped by issuance of Enron stock. SPEs are created to limit any losses related to a certain asset group to just that asset group; but in this case Enron still had ultimate responsibility for all losses, due to the stock guarantee. Essentially Enron was promising to issue stock at a later date and recording the value of the stock issuance as revenue. Under GAAP organizations are not allowed to recognize revenue from an issuance of stock. I don't know how or why Arthur Anderson would sign off on this, and to be fair there were auditors who raised alarm, but they were always dismissed or moved to other areas.
You could also argue that Enron's asset valuations under fair value accounting were fraudulent, but that is harder to prove as it falls into more of the gray area of accounting that Andy was speaking of in this video. The primary issue is that the SEC and Arthur Anderson allowed them to use fair value accounting for so many assets with ambiguous fair values.
They all knew they were being misleading. Being misleading is also known as lying. He admits it was unethical. They manage to jail him, so the prosecutor must have been able to prove illegal activity. Yet, at the time, he did not see it as wrong, knowing they were lying ? The hamster wheel of justification of evil is off the hook.
Appreciate someone who can come out and admit they did wrong. Sounds like he's gotten his life together and is trying to do right now.
This is what makes the world a better place. Thank you guys.👍
He’s slime
Absolutely fascinating, can't believe it only has 10k views. Had no idea that everything he did got the ok from Arthur Anderson.
Immoral yet legal.
Enron The Smartest Guys In The Room book goes into details on this, fascinating stuff indeed!
They’re at fault but he withheld information too.
What is legal isn't necessarily ethical. It's why ethics is the golden standard in finance and accounting rather then regulations.
Oh please. He’s slime, he knew. He just didn’t care.
Very helpful discussion. In thinking back on my career, I can see that we followed the same logic path in many of the executive level decisions that we made. This resulted in my predecessors going to federal prison for bribing the Dutch royal family and other nasty things, which were all told to the management to be legal and compliant at the time by the corporate lawyers.
A fascinating discussion. Matthews was definitely not being honest in his evaluations, certainly not in the second study evaluating the horizontal driller's provable reserve estimates. Asa short seller, he is just looking to pump an angle, a narrative, push it in the press (among other kess-than-ethical methods) to get a one-time price correction that will trigger his contracts.
Claiming every oil and gas company following GAAP standards was committing fraud by not abandoning gaap for a more "mark to market" approach for estimating energy prices is just the kind of misrepresentation a short seller would push to a receptive media accomplish to drive down the price before a rational explanation emerged to explain the reality. There the short seller will claim to be "following the letter of the law", but in reality he is in a much darker grey area than the energy executives he is trying to explout.
If the GAAP-accepted average price was $50.00, yet the oil price skyrocketed to $150 in December, what price should a CFO use for calculating the value of reserves?
Always use the lowest number possible? If you do that, every energy company goes bankrupt because they'd never get a loan.
What's more, those same principles / decisions apply throughout GAAP, not just for energy companies. In fact, mark-to-market was one of the villains of the 2008 crisis, making companies unable to get financing because every loan had to be written down to zero due to a single day or week's liquidity crunch.
The rules are far greyer than the host acknowledged, and as a short seller he does far worse using the same justification, but without the accountability.
Structured financing is going to take down the whole system. This new one will break the camels back...SPACs 🤦♂️😱
What a nice interview! At least from the perspective of a person that didn't get affected by the Enron scandal.
This has to do the most interesting interview you guys have done, thumbs up!
Comments here are about as interesting as the interview. Thanks for enabling. Good to see he's taking action to help prevent corporate fraud.
This was a REALLY good one. Enjoyed it.
Was he evil or creative? Is light a wave or a particle?
Is Schrödinger's cat dead or alive?
How isnt this more popular?!
Great interview.
This is why Real Vision is so great.
I cannot believe that Andy Fastow ONLY got 6 years for all the lives he destroyed. This type of "slap on the hand" only promotes criminal behavior. Many would exchange 6 yrs of their lives to live the rest of their lives wealthy. It appears that the laws have not been amended to eliminate these issues.
Andy Fastow is still trying to justify what he did "was this evil or genius?", he obviously still does not have a moral compass. I would bet that he is still doing these type of "genius" nefarious strategies. How can he talk about ethics if, it's obvious that he does not understand what ethics means. Ethics is binary.
Financial crimes like his are complicated. They involve many parties and so determining where and how much rests on each party is difficult. He was CFO, but he relied on greedy bankers looking the other way, a fraudulent accounting auditing firm, delusional CEOs, bad government cronyism, etc.
He also got a break in his sentence because he pleaded guilty and helped prosecute other players involved as part of his plea deal.
Get an accountant to interview an accountant. He does not seem to have a grasp of what auditors do , nor how accountants work.
It's a cautionary tale more for managers than auditors. Enron and banking management enabled his fraudulent activities. The auditors are just there as a screening mechanism/safeguard.
@@Matt-gf4gd i don't think you understood my comment it wasn't aimed at whether enron was caused by auditors it was more aimed at the interviewer's knowledge of what an auditor does..
@@rachelcamfield7265 okay... But if auditors played a small role in the overall story of Enron and Andy, then why would you put more weight on getting an accountant to conduct the interview?
@@Matt-gf4gd because the interviewer made it out that the audit processes in place then and applied to all companies did have a large role. I would have appreciated an interview aimed at investors who have read an auditor's report not one that seems to be aiming for people who skip it. Given this channel is supposed to be for seasoned investors not amateurs.
Fastow is still wealthier than most Americans...
These are some awesome guests you invite.
I think it's great that Andy gives us an inside perspective. Too many people think they are saints, but if they were put in Andy's shoes I doubt they would have acted differently.
YES!!!!!!
He’s a waste of oxygen
I found him to be the most interesting in the documentary smartest guys. I remember questioning to myself if he leans antisocial. He seemed charming which raised a red flag.
The story really caused me to question how many companies are in the same spot. Did any big bankers go to prison in 2008. I was thinking their fortunes remained intact. Am I wrong on that?
Just hire Marc Cohodes and he will sniff out crimes quickly. Lol
In conspiracy of fools written by kurt eichenwald, Ray Bowen had to teach andy fastow what a put and call option was.
I don't mean to be mean. I just thought it was sort of funny. It really was a great book.
Quinton comes across to me as both a little naïve and out of his depth. Andy shares some incredible wisdom and knowledge. If you've ever felt reassured because the financials are "audited", you're due for a world of hurt one of these days.
If the financials are audited, what are we supposed to do next so we're not in a world of hurt?
@@Caleb_Mandrake872actually pay attention
Very interesting interview I read the book and watched the documentary thanks
Definitely eye opening
Auditors should have been independent, in the case he is describing they were not.
Great interview, this needs about 100k more views.
This was truly insightful. Thank you.
(51:25) Quinton expresses his thought - the US has really "outsourced.. regulation to law firms. Nobody.. ever gets to see the internals."
This guy says he did something very wrong at the start and then proceeds to spend over an hour arguing that he did nothing wrong.
he argues that he did nothing illegal. Pretty sure he knows now what he did was quite wrong.
That’s accounting for ya. You can be aggressive. You can structure deals differently to meet your objective. One big change that came out of it was new accounting rules for public companies, but just as technology changes like Bitcoin the market and deals may be newer then there are rules leaving for lots of new deals. Like he said. They’re the first company to lease an intangible asset. What they should have just done is sold whatever small company owned a piece of the company they wanted to deal with the pipeline.
They really should just expand the definition of fraud to just manipulation to achieve a better stock price. Corporate buy backs of stocks was just purely manipulating the stock price.
It had no real economic long term meaning haha.
He says he found loopholes.... Which is wrong... But not strictly illegal.
Disagree
This was a fascinating interview!
Listen to this snake oil salesman explains exactly why ENRON hired him. He knows how to wheeze and sneak his way out of difficulties.
Excellent broadcast
What your victims deserve is complete restitution. Every last dime. Short of that, you haven’t paid your equitable debts.
I don't know about that. Does he have some culpability? Of course. Investors should know that they're taking on inherent risks by putting their money in the market. Granted Enron is an extreme example of said risk, there are many ways companies can go bankrupt. If you're going to put your whole nest egg into one stock, then you should expect both the upside potential and downside risk. For investors not looking for that type of risk there are index funds and ETFs that have extremely low downside risk relative to the overall market, but also a capped upside.
Surprisingly a lot of these guys look better coming out of prison than they did 20 years ago when they went in.
The financial “If I did it”
Except he said he did it..
@@360flip19 exactly lol. He pleaded guilty and went to prison.
CFO of ENRON should be in Guantanamo!!!
It was pure self interest.
I just want to get one message to Mr Fastow but I cant figure out how. But man, this video and insight is amazing.
Oh please. This creep should have stayed locked up, didn’t learn a thing from jail.
The information advantage is scattered in these kind of hidden gem videos with relatively few views.
I have a difficult time understanding this as I believe something is missing. While Andy speaks out on how he failed to understand when he was in an ethical scenario, however everyone knows when you "manipulate" to where there is a financial consequence or avoid a consequence, thus the company's share price is impacted or the value of the business is impacted. Also when you aggressively dealt with investment houses, bankers auditors, etc who questioned Andy's actions and push as Andy did, Andy certainly knew what he was doing. "Creative loopholes" tend to be manipulative. I have difficulty of "that's how my brain is working" to justify how Andy handled it at the time.
Conflict of interest isn't illegal.......in finance. Sadly, Andy is correct. Financial engineering isn't illegal either, until the stock blows up. Not sure if Arthur Anderson is the best support for anyone's premise. Pretty obvious that the rules are in the favor of conflict of interest, corruption, and all the other variables that support markets that hurt everyone in the long run.
A look behind the curtain. Wow.
Fascinating guest! I started listening to this as a podcast and switched to RUclips halfway through; sometimes webcams can be distracting...
This was amazing! So inspiring to see. Thanks to both!
Thankyou thankyou thankyou; some risk that a corporation might arrange routine, genuine encryption on all internal communications; even while operating ethically (protecting intellectual property) - I guess that's already on the red flag list. But then I guess that AI could learn "tension" indicators within the metadata of the encrypted messages.
Fascinating
Well at least the guy owned it. Enron's collapse is so fascinating, the "Smartest guys in the room" documentary I've watched many times. It's also gotta be something to have multi-millions, mansions, fancy cars etc. to lose all of it.
Great video!
Thanks for posting.
So Fastow says telling is a white lie isn’t really a lie. None of them were shredding documents because they were technically following the rules.
Great interview
The "rules" do mot properly define the game and corps are incentivized to obey and do fraud rather that let the game rule pound this behavior out.
Great interview. “Operating lease on an intangible asset “ made me life harder then I have in the hole month
ah ok he didn't ask himself, what could happened to the little investor
The whole point of teaching corporate ethics to accounts in college is to instill the same principals used in the judicial system when interpreting the "intent" or "spirit" of the law. Just because GAAP accounting standards and SEC rules don't address every possible situation doesn't mean you should celebrate loopholes when they deceive! I found both Andy Fastow and also Quinton's attitudes rather repulsive in this regard. Take the high road and give shareholders the full and honest picture. At a minimum, tell shareholders what the oil reserves would be valued at given BOTH $90 and $50, then let them decide. There is a REASON operating leases are regulated in law and GAAP. There is a history there. Obey the "Intent and Spirit".
This dude is a legend
Lol, looks like he’s doing very well for himself. I’m sure he’s very sorry - this guy shouldn’t be allowed to invest any of his money and only work at fast food joints (or still be in prison. )
i dont think he understands google and msft both provide nlps for basically free
And the queen or crown
@ 22 minutes onward
Its not evil dude but it a little genius
I like to call it "Evil Genius" mooahahahahaha
DESPITE HIS LEGAL PROBLEMS, FASTOW IS NO SLOUCH !!
Obviously not.
I noted above. He was most interesting to me on the documentary smartest guys.
Why do you have a guy in black face at 04:00
This is quite a harmful thing to say about a person of colour.
@@stacyliddell5038 I agree very harmful. I’m sure it gave him cancer after reading my joke
I was enjoying this interview until it turned into an advertisement for a convicted fraudster’s investment. Pretty absurd
Don't be evil 😇😹
This dude talks like he's still committing fraud lmao, dishonesty is clearly corporate bread and butter. Theres a clear defining line between misleading and performing realistic financial options in order to increase the value of a company. The intertwinement of law and business is a fucking joke and so is this 500k worth clown holding up his white collar trophy. I give the interviewer props for calmly trying to drive the point that the grey area is really a bullshit indicator for people who know what the fuck they're doing. Ask yourself this, why would anyone who has been successful with loopholes make law more simple to avoid said loopholes? Our brains don't naturally exploit everyone just to prop everyone up. Maybe the federal reserve, but the common man wants to help one another for their mutual success. Honesty and straightforward nature is the only way to progress, this clown is living in the past and so is a majority of the market. WAKE UP INVESTORS AND BUSINESS OWNERS. taxation has been theft since this great country was founded. The people need to reaffirm their republic. Educate themselves and their children. Do the right thing.
I could not stomach listening to this criminal for more than 5 minutes.
Best to avoid any politician speaking to the media then. They're beyond worst than this guy and Enron execs.
🤑
Andy Fastow is irrelevant.