Conspiracy of Fools (107 page)

He looked Skilling in the eye. “And from then on, it doesn’t matter what you say. It’ll never wash off.”

Skilling wasn’t quite sure what to say. It wasn’t that bad. Baxter, he thought, was getting a little overheated.

The men muttered a few parting words, then Baxter went on his way, leaving Skilling behind to forever wonder about the clues he had missed the last time he saw his friend alive.

By Friday afternoon, January 11, the somber mood in Andersen’s Houston office had decayed into despair. One at a time, employees and partners were escorted into private offices where lawyers grilled them about the shredding. By then, everyone had already told about the e-mail from Nancy Temple urging the Enron team to get in compliance with the document policy. It was an uncomfortable set of facts.

Shannon Adlong, David Duncan’s secretary, was asked to meet with the lawyers. She felt torn; she didn’t think Duncan had done anything wrong. He had followed orders, and now the firm was hanging him out to dry. After her meeting, she tracked down her boss to let him know what had happened.

“Well, you know,” Duncan said, “all I can tell you is to tell the truth and to be honest.”

He glanced away. “I don’t know what’s going to become of all this. I wish I had never received that e-mail.”

Boxes of documents were piled high around the offices of the Energy and Commerce investigations subcommittee. The records had been shipped over by Enron in response to a document request, and now staffers were digging through the paper, searching for anything that might be useful at a hearing.

A committee staffer, Peter Spencer, was thumbing through a stack of papers. One looked different; it had no letterhead, no signature. It was apparently a personal letter addressed to Ken Lay. Spencer started reading.

Dear Mr. Lay, Has Enron become a risky place to work? For those of us who didn’t get rich in the last few years, can we afford to stay?

Spencer’s astonishment grew. This letter had been written to Lay, accusing Enron of engaging in an accounting fraud! He hurried over to find his boss.

The letter that Sherron Watkins had toiled over months before had found a newly receptive audience.

Oh, my God! It’s a smoking gun!

Mark Paoletta, the chief counsel for the subcommittee, read the anonymous letter that had been left on his desk. It was his job to put together the
Enron hearing, and now he wanted to know everything he could about this warning that had been sent to Lay.

He quickly learned that Watkins had been the author. It was all too delicious. This was a document that could drive an entire hearing. He wanted to think about it, to decide how best to handle this stunning revelation.

All he had to do was outlast Lay. It couldn’t be much longer. Mark Palmer was sure of it. Maybe a few more days.

Palmer had been quietly battling Lay’s worst impulses for weeks. Over and over, Lay seemed to argue that Enron’s troubles were just caused by bad publicity, not by a flawed business model, not by a mismanaged balance sheet.

Signs of Lay’s resistance to the truth were everywhere. An old favorite, Beth Tilney, who specialized in happy-face posters and who had been arguing about the need to defend Lay, was suddenly at his side again. There was no better sign that Lay didn’t understand what was happening. Tilney, whose husband, Schuyler, was a Merrill banker in charge of the Enron relationship, was an investor in LJM2.

So it was no surprise to Palmer when Lay summoned him up to his office to let him know that he had a new boss.

“Mark, I’m going to have Beth Tilney in charge of public relations,” he said. “What do you think of that?”

Palmer was past the point of corporate diplomacy.

“Well, Ken, it stings,” he said simply. “And I don’t think the two of you are seeing the big picture here.”

Lay sat back in his seat. “What do you mean by that?”

“Ken, if all we’re going to focus on is salvaging your reputation, it’s going to look like that’s all we’re doing,” Palmer responded. “The best way to do that is to pay everybody back. That should be the message.”

Palmer gave Lay a stern look. “We can’t change the past, we can’t define the past, and I’m sure as hell not going to defend the past” he said. “Now we have to focus on moving forward, focus on the future.”

Lay was silent for a second. “Beth’s going to be your boss,” he said simply.

Fine, Palmer said. He turned to head out the door.

I just need to outlast this guy
.

On the morning of January 12, a Saturday,
The Washington Post
splashed the latest damaging article about Enron across its front page. “Hidden Numbers Crushed Enron,” the headline read. “ ‘Partnerships’ Shielded $600 Million Debt.”

At his home, Mark Paoletta from Energy and Commerce read the article in a fury. It revealed the role played in Chewco by Barclays Bank. This was
information that Paoletta’s staff had already figured out, and he had been considering exploring the issue at the upcoming hearing. But now this article—leaked by whom? the bank? the subcommittee’s Democratic staff?—had preempted him. A lot of work for nothing. But there wasn’t much he could do about it now. He was supposed to take his seven-year-old daughter to her basketball game that morning, and they needed to get going.

About an hour later, Paoletta was sitting in the gym, stewing as he watched his daughter play, when suddenly it hit him.
Sherron Watkins
.

If the Barclays information wasn’t fresh, why not use the Watkins letter for a hearing? Or better yet: put out a letter now from the committee and subcommittee chairmen, demanding to know what Enron did about the allegations. With untold numbers of congressional committees grabbing pieces of the Enron inquiry, that letter would put Energy and Commerce at the lead of the pack.

At halftime, Paoletta walked out to the hallway. He needed to call his staff director and get this idea in motion.

Two days later, David Duncan was walking down Fifth Street in northwest Washington, accompanied by three lawyers from the firm of Sullivan & Cromwell. He was feeling anxious and uncomfortable. No surprise, since he was about to meet with representatives of the FBI, the Justice Department, the SEC, and the Internal Revenue Service to answer their questions about Enron and the document destruction.

Duncan and his lawyers walked into 450 Fifth Avenue, the modest headquarters for the SEC, and were escorted upstairs to a conference room. It was packed with people.

“Mr. Duncan, I’m Leslie Caldwell, and I’m a prosecutor with the U.S. attorney’s office in San Francisco.”

The Enron Task Force’s new director—a title she had not yet adopted as her own—looked hard at the Andersen partner who had overseen the disaster at Enron.

“I’m relatively new to the Department of Justice’s case,” she said. “Because of that, I’m not prepared to say whether you’re a target of this investigation. If you were, I would tell you. But right now, I just don’t know.”

Duncan nodded silently. The gravity of the moment was setting in on him.

First, the logistics. Both the SEC and Justice had agreed to hold these discussions with Duncan under terms that his statements would not be used against
him in the future, except to challenge later testimony or unless he lied. But Charles Clark, a top SEC official in the room, noted that Duncan’s agreement with the prosecutors was separate and apart from his deal with the agency.

“Now,” Caldwell said, “the focus of our discussion today will be the destruction of documents relating to the auditing and other services Andersen performed for Enron.”

She eyed Duncan. He was pale and jittery. “Why don’t you offer your understanding of those events?” she asked.

Duncan nodded. He’d done nothing wrong. He just followed the lawyers’ intructions. He needed to make that clear.

“It all began on October 12, when Mike Odom forwarded an e-mail to me from Nancy Temple in our legal department.”

At the office of Energy and Commerce, the final touches were going on a letter to Lay. It was all about the Watkins memo, quoting extensively from it and demanding related records. The letter, signed by Congressmen Billy Tauzin and Jim Greenwood, mentioned nothing about Watkins as the memo’s author. The committee decided to leave her name out of it for now.

It was as if the world had exploded. Within minutes of the letter’s release, Watkins’s name was being reported as the Enron whistle-blower. The story now had a full cast of characters, including a heroine who appeared to have tipped off Lay to problems months before Enron’s collapse.

Scores of telephone calls poured into the offices of the Energy and Commerce subcommittee, where Ken Johnson, a spokesman, was ready with a statement.

“Obviously,” Johnson told callers, “this is an explosive new development in our investigation.”

After being grilled all day long, a frazzled David Duncan went out to dinner with his lawyers. He had answered every question—about the document destruction, the Raptors, Chewco, everything. Throughout, he insisted that he had done nothing illegal.

As dinner wore on, one of his lawyers’ cell phones rang. It was a reporter. Andersen had just announced that Duncan was being fired, the reporter said, asking for comment. In a minute, the lawyer got off the phone and informed Duncan of what he had been told.

Duncan was stunned. Before announcing his ouster to the world, no one at the firm had bothered to inform him.

———

Bill Powers opened his eyes and glanced at the clock. About four in the morning. Again. He turned over in bed, in what he knew would be a difficult effort to get back to sleep.

His mind raced. By this point, the special committee had discovered enough to know that something had gone terribly wrong in Enron’s last years. The company had used and abused the accounting rules to
create
results rather than to determine the financial consequences of decisions.

But now, it had also become an emotional touchstone for the nation, a symbol of—something. Greed? The go-go ′90s? Everyone in it, everyone touched by it, could be stained. Even, Powers realized, himself.

He was already hearing rumblings from reporters and public-interest groups. Didn’t Enron give money to the law school where he served as dean? Didn’t he have a relationship with Enron’s general counsel? Wasn’t he hopelessly mired in conflicts? Shouldn’t he resign?

Powers considered the allegations hurtful and wrongheaded but knew that at some point they would find their way into print. It was just that kind of story.

All I can do is tell the truth. Some people will be happy; some people won’t. That’s all I can do
.

He rolled over in bed and tried to get back to sleep.

Andy Fastow was sitting at a conference table in the Houston law offices of Smyser Kaplan & Veselka.

“Is this interview privileged, even though I’m a former employee?” he asked.

Chuck Davidow from Wilmer, Cutler answered. “The company’s position is that the interview is privileged.” Fastow nodded. “I understand.”

After weeks of effort, the special committee had finally arranged to sit down with Fastow. Already he was seen as the key to many of the company’s decisions in recent years. He attended with three lawyers—David Gerger, Jennifer Ahlen, and Richard Drubel.

The conversation began with Chewco. “I’m not really that familiar with the details of that,” Eastow said.

There was a quick round of questioning. One of Fastow’s lawyers, David Gerger, broke in. “Andy’s not going to answer any questions about who came up with the idea of making an Enron officer the manager of Chewco,” he said.

That set the tempo for the meeting. Fastow would utter a few words, then Gerger would announce that his client would not discuss the issue in detail.
He wouldn’t talk about whether he asked Kopper to run Chewco; he wouldn’t discuss whether he knew how much Kopper had invested.

They turned to the repurchase of Chewco, the one that McMahon had stopped when he was treasurer, the one that gave Kopper the ten million dollars in profits that he used in his purchase of LJM2.

“I knew Enron repurchased Chewco in 2001,” Fastow said. “But I intentionally didn’t become involved in those discussions with Michael.”

“And why was that?” Davidow asked.

“Michael was already a partner with me in LJM,” he said. “I just thought communicating with him about the Chewco repurchase would be inappropriate.”

Fastow was lying, and Davidow knew it. He pulled out a three-page handwritten document addressed to “Andy.” It was all about the Chewco repurchase and had been prepared by Kopper when he was fighting McMahon’s objections.

“Do you recognize this document?” Davidow asked.

Gerger took the pages and read them. “I need a moment to confer with my client,” he said.

They were gone for fifteen minutes.

When Fastow and his lawyers returned, it quickly became evident the interview was over. Fastow would not answer any questions about the handwritten note. Nothing about the governance of LJM. Nothing about Southampton.

Gerger then launched into a statement on Fastow’s behalf, portraying him as the pliant participant in Enron’s desire to create off-books entities. Fastow would never have done anything, Gerger said, without approvals. Richard Drubel, another Fastow lawyer, took it from there.

“Andy did not prepare the accounting documents regarding the transactions,” he said. “Andy was not responsible for Enron’s accounting.”

The next day, Bill Powers walked into a conference room at the Enron building, accompanied by his team of lawyers and accountants. He had never before attended the Wilmer, Cutler interviews, but this was an exception. He wanted to hear for himself what Ken Lay had to say.

Everyone found a spot at the table. Powers and Lay launched into a short discussion before the interview began. By then, Powers had come to recognize that the Raptors had been a sham designed to allow Enron to hide huge losses—by his team’s estimate, a billion dollars’ worth. He had to know what Lay understood.

“Ken, I do have one thing I want to ask,” he said. “Did you think the Raptors were real economic hedges?”