Conspiracy of Fools (104 page)

“How will I be able to file for unemployment and food stamps?” she asked plaintively.

Employees poured out of Enron into the streets of Houston. About four thousand people had been laid off, more than half its Houston workforce. Senior managers had fought to provide generous severance payments, but the lawyers had forbidden it. Creditors would just sue to get the money back, they said. They capped the payments at around five thousand dollars.

Reporters swarmed the plaza outside the Enron building as employees lugged boxes of belongings to the sidewalk. Many ignored the media’s questions, but some were willing to share their thoughts and anger.

“These people who made $50 million a year, they destroyed the company because of their greed,” Charles Weiss, once with the broadband division, told a reporter. “They’re putting families at risk.”

Someone was sitting outside Bowen’s office, waiting for him to arrive.

It was Jim Bouillion, the executive in charge of purchasing Enron’s insurance. The executive who, years before, had been unsuccessfully championed by McMahon at the PRC for bonuses and promotions. The executive whose contribution had been waved aside by top officers as insignificant, not in the
same league as the work done by the whiz kids who put together deals like the Raptors.

As part of the reorganization of finance, Bowen now oversaw insurance, making him Bouillion’s new boss. As he approached his office, Bowen greeted Bouillion and invited him in. Bouillion took a seat in front of the desk, and the two discussed the new arrangement for several minutes.

Bouillion swallowed. “Ray, I just want to thank you.”

“For what, Jim?”

Bouillion’s eyes filled with tears. “For not firing me,” he said. “I’ve lost everything.”

His kids were all out of college, Bouillion said, and he had thought that he was heading into the home stretch of his career. “But now, if I didn’t have this job,” he said, “I would literally be broke.”

The words hit Bowen hard. Here was a man who had done his time, was happy to have survived, felt guilty that others hadn’t. He saw the fear in Bouillion’s eyes.

“Jim,” Bowen said, “we’re going to figure out how to make this as good as we can, no matter how shitty it was.” Bouillion thanked him and left the room.

In the weeks and months that followed, the new management became very familiar with the insurance that Bouillion had purchased for Enron. It was as complicated as McMahon had said years before when he had lobbied for him at the PRC, hardly a job, as other executives laughingly described it, that a monkey could handle. Bouillion’s work had been spectacular; the insurance was ironclad. Enron and its executives were protected for every contingency, including the one they now found themselves in.

The financial structures and machinations so celebrated by the PRC were all gone; only Jim Bouillion’s insurance remained. And now the executives who had once dismissed him as a nobody clung to his top-notch work like a life raft, hoping it would protect them from the hundreds of lawsuits they now faced.

“Is your name Jeffrey Skilling?”

Paul Minor, a former chief polygraph examiner with the FBI, watched as chart paper scrolled past, marking a spot where he had asked his question. Across from him sat Skilling; his shirt was off, with tubes wrapped around his chest and head, and wires attached to his fingers.

It was the next day. Skilling was in an interior conference room at O’Melveny & Myers, submitting to a lie-detector test. He wasn’t quite sure why his lawyers wanted him to take it; they had said something about the
benefit of having the results available. But he suspected that, in truth, they wanted to make sure he wasn’t deceiving them.

He was terrified. What if he failed? Would his lawyers drop him as a client?

“Are you concerned that you might fail this test?”

“Yes,” Skilling replied.

After a minute, Minor asked the first relevant question. “While president of Enron, were you aware of any improper financial arrangements that were concealed from the board of directors?”

“No,” Skilling replied.

Over two separate tests, Skilling was asked questions about his own and Enron’s finances. Repeatedly, he replied that he had done everything properly, taking only money that had been approved by the board and always believing the accounting for the partnerships was correct.

Minor made a few more marks on the paper, then stopped the machine. “Thank you very much,” he said.

Skilling hesitated. “How did I do?” he asked.

Minor began removing the wires and tubes. “I’ll communicate with your lawyers tomorrow with my written conclusions,” Minor said.
Oh, God
. He failed. He knew it.

Skilling put on his shirt as Minor left. In minutes, he headed to another room where his lawyers were waiting. He pushed open the door. Members of his team, Hiler and Elizabeth Baird, were waiting for him. Baird grinned.

“What?” Skilling asked. “What are you smiling at?”

“He told us you were telling the truth, with no attempt to deceive,” she said. “Congratulations.”

Skilling sighed and lowered his head onto the table.

“Oh, thank you, God,” he said.

With the polygraph completed, three of Skilling’s lawyers accompanied him the next morning to the SEC’s Washington offices, where he would testify. Nine SEC lawyers, accountants, and other staffers were there. Skilling sat in the middle, watching Christopher Cutler, the SEC attorney who asked most of the questions.

“Mr. Skilling,” Cutler asked, “when did you join the Enron Corporation?” Skilling sniffed. “August 1, 1990,” he answered.

The interview went on for two days. On the second morning, at 9:40, Cutler went back on the record. He picked up a document—the presentation made by Fastow to his LJM2 investors in the fall of 2000—and handed it to Skilling. As he flipped through it, a number jumped out at him on page 20.
It was the internal rate of return, or IRR, that LJM2 had obtained from the Raptors. And it was huge.

Skilling held up the document. “I would like to start out by saying that this is an interesting document.”

He pointed out the column he had been studying. “The numbers, the current IRR and the projected IRR number, for a number of these transactions would strike me as being totally not understandable,” he said.

If he had seen this document, Skilling said, he would have demanded that Fastow provide proof that LJM2 took sufficient risk to justify the huge returns. And he would have given him twenty-four hours to come up with it.

It was the closest Skilling had ever come to suggesting that Fastow might have cheated the company.

At about that same moment in Houston, three staffers from the House Energy and Commerce Committee, including Mark Paoletta and David Cavicke, were being escorted into a conference room on the forty-ninth floor of the Enron building.

The congressional competition was on. Numerous committees were scrambling to put together hearings on Enron. In a perfect world, the Energy and Commerce hearings would have been held in December, but they had already given up on that idea as unrealistic. There were too many documents to review, too many people to question.

Today, the staff was beginning that process. For days, Paoletta had been on the phone with Enron, trying to arrange for interviews. Finally, Enron had agreed to make McMahon, the new CFO, available for a few hours in Houston.

The men found their seats. Minutes later, McMahon, accompanied by Enron lawyers, swooped in. He made no effort to hide his impatience. His company had filed for bankruptcy four days ago, and now he was being forced to waste precious time. The congressional staffers, for their part, bridled at what they saw as McMahon’s haughtiness.

“All right,” Cavicke said. “I want to start off asking you about Enron’s book of derivatives.”

McMahon was clenching his teeth. Two hours into the interrogation, Cavicke was pressing him about the Rhythms hedge and the defects that led to the Swap Sub restatement.

“Look, I know what’s in the 8-K,” McMahon said sharply. “This transaction was done years ago. I didn’t play any role in this. I really don’t know the details.”

Cavicke bristled. “You are the CFO of this company,” he said sharply, “and you don’t know the answer?”

“I’ve been the CFO for six weeks!” McMahon snapped back. “And I’ve been kind of busy.”

“Well, what was the due diligence that Enron did in respect to this transaction?”

“I don’t know.”

The discussion veered into a recounting of the board meetings where LJM1 had been approved. What had McMahon thought about it at the time?

“I was bothered by the conflict and surprised that the board approved it,” he replied.

For another hour the staffers hit him with more questions.
What about the financial incentives to managers? Explain Chewco. Tell us about Michael Kopper
.

One question came close to the mark. “Was there a whistle-blower letter relating to Swap Sub?”

To Swap Sub?
There was the Watson letter relating to the Raptors and Condor. But they didn’t ask about that.

“Not that I’m aware of,” McMahon replied.

At the end of the interview, the House staffers weren’t quite sure what they had. McMahon, they thought, hadn’t been very helpful; his information had been scant.

They didn’t realize how close they had come to the mother lode. McMahon had volunteered nothing that wasn’t specifically requested, and they hadn’t asked the right questions. So he didn’t mention the bankers complaining of pressures to invest in Fastow’s deals, or his efforts to get Skilling to rein things in, or the Watkins letter.

It would take weeks for those details to emerge.

The next day, Ken Lay sat waiting in the office of a Vinson & Elkins partner, ready for his secret meeting. Weeks before, after the first of a wave of shareholder lawsuits were filed, he had hired civil lawyers to represent him. But now things had entered a new dimension.

Prosecutors in several U.S. attorneys’ offices had started investigating the company’s collapse—in Houston, San Francisco, and New York, just to name a few. Lay was the executive at the top of the heap. He needed to be prepared.

A lawyer told him that the expected guest had arrived. Lay walked into an adjoining conference room. There, a white-haired man with a cherubic face was waiting. It was Mike Ramsey, one of Houston’s best-known criminal lawyers.

Lay thrust out his hand. “Hi, Mike. How are you?”

The criminal defense of Ken Lay had begun.

David Duncan was sitting behind his desk at the Andersen offices, lost in thought as he looked through his office window, watching the downpour outside.

A partner in the Houston office, Emily Madison, dropped in. She was helping Andersen comply with subpoenas and had come to ask Duncan a few questions. He answered in a flat voice. He turned to look back out the window.

“You know,” he said softly, “I guess I just didn’t realize what my job was out here.”

On the morning of December 12, Congressman Richard Baker pounded a gavel. It was the first congressional hearing into Enron’s collapse ten days earlier. But what the hearing—sponsored by two subcommittees of the House Financial Services Committee—accomplished in speed, it sacrificed in detail; no Enron executive would testify, and few of the principals had even been interviewed at length.

After taking a moment to criticize Lay for choosing to attend a proceeding in bankruptcy court rather than appear at the hearing, Baker turned the floor over to the ranking Democrat, Paul Kanjorski of Pennsylvania.

“Thank you, Mr. Chairman,” Kanjorski said. “Today’s hearing will help us understand at least some of the factors that contributed to the downfall of Enron.”

While he had not reached any conclusions about the events, Kanjorski said, there were certain issues of great concern that he had already identified.

“I would like to learn more about the serious financial harm done to thousands of Enron employees,” he said. There had been press reports, he said, that employees had been blocked from selling shares in their retirement plans as the company careened into bankruptcy.

“Those hard-working Americans had to watch helplessly as their savings shrank without any recourse, while Enron’s executives could apparently sell their stock options and avoid the financial pain,” he said. “That is wrong.”

The first myth about the Enron fiasco was taking root. For years to come, the story would be repeated endlessly, in tones of righteous indignation. The greedy bigwigs at Enron had blocked the rank and file from selling their Enron shares, perhaps in a bid to slow the stock collapse.

But the story was false. In reality, over just five days, circumstance had
prevented Enron employees, including senior officers, from slightly decreasing a loss of $3.83 a share in their retirement accounts. And when the chance came to sell, many bought. But in the public consciousness, heart-stirring mythology won out over lackluster fact.

The hearing lasted most of the day. Just before the afternoon, a tall, gangly man with a slick of black hair joined others at the witness table. It was Joe Berardino, Andersen’s chief executive, who had volunteered to testify.

Baker nodded slightly toward Berardino. “Before I recognize you for your comments, Mr. Berardino, I just want to, by way of personal acknowledgment, express my appreciation to you and the manner in which you have responded to the committee,” he said. “I wish all officials who had similar participation in the issues before the committee had exercised your judgment.”

Relief swept over Berardino. A good beginning. “That’s very kind of you, Mr. Chairman,” he said.

He glanced down at his prepared text. “I’m here today because faith in our firm and the integrity of the capital markets has been shaken,” he began.

It was imperative, he said, for the causes of Enron’s downfall to be understood, so that actions could be taken and policies adopted to restore public confidence.

Defects with two special-purpose entities had forced Enron to restate its financial results, he said. He didn’t divulge the names, but he was referring to Chewco, which was undone by the reserve account, and Swap Sub, which didn’t have the capital to be treated as independent.