Conspiracy of Fools (105 page)

“Of the larger of these, which was responsible for 80 percent of the SPE-related restatement, it appears important information was not revealed to our team,” he said, referring to the Chewco side deal.

He looked up at the faces of the congressmen on the panel. “We have notified the audit committee of possible illegal acts within the company,” he said.

The next morning, Causey stormed down a hallway on the fiftieth floor, carrying a copy of the morning newspaper. Near his doorway, he veered left, heading into McMahon’s office.

“Can you
believe
what Berardino said?” he fumed. “They told the board about illegal acts?
I
never heard that. Ever.”

McMahon squinted at Causey, puzzled. “Well, do the minutes reflect anything like that?”

“No!” Causey shot back. “And Lay said they were
never
told by the auditors about illegal acts.”

McMahon paused for a second. “So what are you telling me? That he lied to Congress?”

Causey shook his head. “I don’t know,” he said. “He certainly didn’t tell the facts.”

Berardino hadn’t lied, but he had been mistaken. The team that had drafted his comments had, in fact, not been aware of many of the details of the Chewco transaction and the events that followed the discovery of the side deal.

So while several accountants had concluded that the hidden reserve accounts might constitute a crime, David Duncan never formally conveyed those suspicions to the audit committee, a group he appeared before on November 18, fifteen days after the discovery of the secret deal.

Andy Fastow had fled the country. Maybe to Israel, possibly to Brazil. The rumor rocketed rapidly around Houston and Washington and in no time turned up in news reports.

There were good reasons to believe it. On November 14, Fastow had been subpoenaed to give testimony to the SEC. But on the agreed-upon day, Fastow didn’t show. The SEC had gone to court, asking a judge to compel his appearance. Ken Johnson, a spokesman for Energy and Commerce, added fuel to the fire by stating that House investigators couldn’t find him.

Simply denying the rumor would do little to convince a skeptical public, Fastow’s lawyers realized. So on the afternoon of December 12, David Boies, a topflight litigator who at that point was leading the defense, called a press conference at his Manhattan offices. Once the reporters were settled, Boies strode into the room, followed by Fastow. The two men took seats behind a table cluttered with reporters’ microphones.

Fastow, wearing a gray suit and a red tie, smiled wanly. Boies addressed the crowd. “There have been increasingly over the past twenty-four hours a variety of reports that Mr. Fastow was not available,” he said. “He has not fled the country. He is going to respond to inquiries. He will provide documents.”

Fastow sat still, looking ill at ease. Reporters began pressing questions, and Boies fielded them all, refusing to let Fastow speak. The mood in the room grew testy; couldn’t Fastow say
anything?
Boies turned to his client and prompted him.

“Hello,” Fastow said. “I wish you a happy holiday season, and thank you for coming.”

And that was it.

At nine on the morning of December 14, Lay’s secretary notified him that Joseph Berardino was on the line. Lay leaned over his desk and picked up the phone.

“This is Ken Lay,” he said.

“Hi. Joe Berardino.”

Lay’s lawyers had instructed him days before on what to say when the time came for this conversation.

“I appreciate the call,” he said. “But I’ve been advised it’s not wise for us to discuss this matter. I regret that, but that’s where it is.”

Berardino poked around a little bit, trying to see if he could get some sort of dialogue going.

“Joe, I’m sorry,” Lay said. “I can’t do this.”

A minute later, the two corporate chieftains, each trying to smother the flame of scandal licking at his feet, bid one another a polite good-bye.

Fastow walked through the doorway of Michael Kopper’s house. The two had been speaking on and off during the unfolding debacle at Enron. But now, on this day in December, they knew the magnitude of what was unfolding. There were investigations, both criminal and civil. They needed to be sure their story was straight.

There was one thing particularly worrying Fastow, a single transaction that he feared posed the greatest threat to him. He looked at Kopper.

“Now you know,” Fastow said, “I never received any money from RADR.”

RADR. Their first successful crime together. The one that had resulted in Kopper funneling huge sums of cash from front investors to his boss. Fastow’s statement now was a lie. Kopper knew it. He understood.

“Yes,” he said.

He was the first major player in the door, the first Enron executive promising to tell criminal investigators everything he knew. He agreed to testify for immunity.

A secret meeting was arranged between the FBI and the executive. It was an event known in law enforcement as “queen for a day,” when a potential defendant could come in and spill his guts to the government, in hopes of
striking a deal. If prosecutors didn’t like what they heard, the statements couldn’t be used as direct evidence.

For hours that December day, the FBI agents threw questions at the executive. The answers were always pretty much the same: sure, there were suspicious things he had seen, but he had never committed a crime, never done anything that wasn’t on the up-and-up.

The interview ended, and it didn’t take long for the government to reach its conclusion. As far as prosecutors and agents were concerned, Ben Glisan was lying.

“How come we’re not defending the company!” John Duncan shouted. “How come we’re not defending the board!”

Duncan, the head of the board’s executive committee, was on the phone with Kean and Palmer, the executives running Enron’s communications strategy. The news stories were just terrible, he said. They never gave Enron’s side. How come Enron wasn’t putting up more of a fight?

Kean responded. “John, there’s not a lot we can say, because we don’t know the facts. We’ve got Bill Powers’s investigation that’s going on to reveal the facts.”

“Bill Powers!” Duncan shot back, furious. “Bill Powers does not represent the company. I don’t know what he’s going to say. It could be terrible! I just want to know who is going to defend the company!”

Finally, after several minutes, Duncan calmed down. “Listen, I know this is impossible for you guys. I just needed to get that off my chest. It’s so frustrating.”

The wheels were coming off the Enron criminal investigation. With so many prosecutors’ offices involved, different and often conflicting demands for evidence were being delivered to the company from all over the country. Nobody was in charge of an overall strategy.

Then, a key player in the probe dropped out. The U.S. attorney’s office in Houston withdrew, ruling that too many of its top prosecutors were conflicted in a case involving what had once been the city’s premier corporate citizen.

By that time Robert Bennett—the Washington super-lawyer with Skadden, Arps, Slate, Meagher & Flom who had represented former President Clinton—had begun working on Enron’s behalf. And his first task was simple: get the prosecutors to decide who was running the show.

Bennett telephoned David Margolis, the associate deputy attorney general.
“Enron wants to cooperate,” he said. “We just don’t know who to cooperate with.”

Word of Bennett’s complaint soon reached Michael Chertoff, the wiry and aggressive chief of the Justice Department’s criminal division. For months, Chertoff had been spearheading the division’s antiterrorism efforts and had been only vaguely aware of the goings-on in Houston.

Now, after hearing about Bennett’s concerns, Chertoff made himself familiar with the Enron inquiry. With Houston out of the picture, a unique opportunity had been created, he thought. He contacted Margolis.

“We should step in and set up a task force,” Chertoff said. “Recruit top assistant U.S. attorneys to put this case together, really give it the prominence and attention that it seems to deserve.”

Margolis agreed. The Enron case would have its own team of prosecutors to dig down every rat hole until they figured out what crimes had been committed and by whom.

Scouting around for someone to lead the task force, Chertoff sounded out Robert Mueller, the former U.S. attorney in San Francisco who had been appointed director of the FBI just months before.

“You might want to look at Leslie Caldwell,” Mueller said. “She was really terrific when I was out at the U.S. attorney’s office in San Francisco.”

Chertoff knew Caldwell by her reputation as a no-nonsense, aggressive prosecutor who had taken on tough criminals in Brooklyn before moving to San Francisco, where she ran the office’s securities-fraud unit. She had handled complex accounting-fraud cases. She was perfect.

But before he could call her, a sudden development emerged that rapidly transformed the criminal case.

In Andersen’s Houston offices, a lawyer flicked on a laptop computer. Within minutes the lawyer—from Davis Polk & Wardwell, now representing Andersen on Enron—clicked open an e-mail program and began scrolling through messages, looking for information to help prepare partners for interviews with the Energy and Commerce Committee.

There wasn’t a lot there. Everything after November 9 looked normal, but before that it was thin. In no time, the lawyer and his colleagues were examining other laptops. Time and again, they found the same thing—a lot that seemed to be missing before November 9. It was almost as if someone had purposely deleted the information.

The lawyers decided to contact Andersen’s general counsel, Andrew Pincus.

———

Early the next morning, January 3, a Thursday, Joe Berardino was in his Chicago office at Andersen when he received a telephone call from Pincus.

“Joe, we may have a new issue down in Houston.”

“What’s happening?”

“Our lawyers have been getting people ready for their testimony and looking through their e-mail records,” Pincus said. “But the files are just too clean. We don’t know what that means yet, but I’m worried”

Thoughts rushed through Berardino’s mind. He and his team had been working so hard to pull Andersen through this Enron mess. His congressional testimony had all been part of that, and he had come away satisfied he had accomplished a lot. But if somebody was out there destroying records …

He didn’t want to think about it. Not until he knew more. “Follow up on this fast,” Berardino said.

“We are. We’re interviewing people now. And we’re scheduled to keep interviewing right through the weekend.”

“Fine,” Berardino said. “Give me a call early tomorrow morning, and update me on what you learn.”

The call to Berardino came the next morning at eight, and the information was devastating. Pincus, calling with a Davis Polk lawyer on the line, pulled no punches.

“We’ve got a big problem,” he said. “We’ve talked to a lot of people, and it seems that a lot of them have been deleting e-mails in recent weeks”

Berardino sucked in a deep breath. “What kind of quantity are we talking about?”

Staggering, Pincus replied.

The three men discussed alternatives, then Berardino issued his instructions. First, Andersen should notify the government right away. Then he wanted people in Houston interviewed night and day until the firm knew what happened. Finally, he wanted technicians brought in to try to recover the e-mails from the Houston and Chicago servers.

None of them knew that the situation was far worse than they imagined. Regardless of how many e-mails Andersen recovered, tens of thousands of documents had already been destroyed. And nothing could bring them back.

The news from Andersen knocked the wind out of official Washington. How could it have happened? How could a modern company have had such terrible procedures that employees could destroy evidence without being detected?

After being briefed on the matter, Michael Chertoff decided to alert Larry Thompson, who, as deputy attorney general, was second in command of the department. Chertoff popped into Thompson’s expansive office that afternoon.

“Larry, you got to hear this one,” Chertoff began.

Thompson sank back in his thick leather chair and listened in astonishment. He shook his head.
Wow
, he thought,
somebody really screwed up here
.

“How could the lawyers let that happen?” he asked. “They didn’t know to send out a memo telling everybody not to destroy everything?”

This, the two men agreed, was a new avenue of investigation. And Justice still hadn’t started putting together its team for this new task force. That was something Chertoff decided to fix that very afternoon.

In San Francisco, the day was winding down for Leslie Caldwell, the city’s top white-collar prosecutor. After work, she was planning to go with friends for drinks at Stars, a local hangout. But just when the workweek seemed almost finished, Chertoff called from Washington. This, she knew, could only mean something important was brewing.

Chertoff got right to the point. “We’re forming a task force to handle the Enron investigation,” he said. “Bob Mueller thought you would be the perfect person to be the head of it, and I wanted to see if you were interested.”

Caldwell knew a fair amount about Enron; her team had already opened its own investigation into the company’s collapse. Still, she wasn’t ready to jump without giving the idea more thought. Not on a Friday afternoon.

“Let me think about it over the weekend,” she said. “I’ll give you an answer on Monday.”

That was fine, Chertoff said. But when he hung up, he was confident that he had bagged his prey.

The weekend was hell for Joe Berardino. He stayed huddled at his Connecticut home, receiving periodic updates from Houston, and by Sunday, the ugly truth had emerged. This wasn’t just about e-mails; there had been a wholesale destruction of Enron-related documents, all taking place when the firm knew an SEC investigation was under way.

Berardino began planning his counterattack. First thing Monday, he decided, he would notify the firm’s five-member Global Executive Committee. Then the public had to be told. But how? A misstep here could spell ruin; if public companies feared Andersen had committed a crime, the firm could lose its client base. He was in anguish.