Conspiracy of Fools (25 page)

Some partners mentioned Enron’s complex accounting, stressing how close to the edge it flew.

Goddard held up a hand. “That’s why I’m glad Rick Causey is in there. Without him, I might be more concerned. But Rick is a very strong player.”

Bass couldn’t help himself. “Steve, I disagree. I don’t think Causey is as strong as you say he is. I think he’s got some serious deficiencies as an accountant”

The room was silent. Goddard eyed Bass evenly. “Well, that’s your opinion,” he replied. “I don’t agree.”

That was it. No one asked Bass to explain, to find out whether representing Enron might be riskier than they imagined. Goddard moved on to the next topic on the agenda.

———

In Snowmass, Colorado, the Big Burn ski lift rumbled around a curve. Skilling and Fastow climbed aboard, lolling their skis in the air as the lift set off up the mountain.

The two were excited, almost giddy. They had come to Colorado for a public-pension-funds conference about investments beyond the bread-and-butter stocks and bonds that dominated their portfolios. Skilling felt sure Enron had a lot to offer. At that point Enron and Calpers, the California fund, had a four-year record with the JEDI partnership. The deal had been wildly successful; its only problem was that JEDI had pretty much committed all of its cash.

There were hundreds of other pension funds, but somehow, after JEDI, Fastow had largely ignored them. He preferred working with bankers, who practically begged to do his deals so they could win Enron’s fees. For pension-fund money, Fastow would have to do the begging.

But banks make loans, pension funds make big investments. So Skilling and Fastow had come to Colorado hoping to whet their appetites. In a presentation at the conference, Skilling had laid out the workings of JEDI and Enron. He didn’t expect to wow the crowd; by that point he considered JEDI pretty run-of-the-mill. But at the break, fund managers flocked to the two men, thrusting out business cards, almost pleading for a chance to invest.

As the lift glided up Big Burn, Skilling couldn’t help but gloat about the moment. “I’m just stunned how well that went. You know, there was probably a trillion dollars of capital sitting in that room, looking for a place to go.”

“Yeah, we need to pursue this,” Fastow agreed.

Skilling thought for a moment. “We need to spend more time with these guys, find mutually agreeable deals.” Fastow promised to get right on it.

He knew the executive who could get the job done: Jim Timmins, a specialist in private equity who had been sniffing around Enron for a job. Fastow brought Timmins on board just a few weeks later, in February 1997.

The timing seemed fortuitous. A couple of deals were coming down the pike that needed outside investors. With Timmins’s contacts, Enron would be able to tap into those pension funds and start building some new relationships.

But Fastow had no intention of seeking Timmins’s help. Not on the next deal. He had another idea.

Amanda Martin settled into her office chair and flipped through some papers. It was March 1997, months after her run-in with Fastow over the co-generation deals, but Martin still felt wounded by the experience. She knew she had lost her friend, and didn’t understand why.

The Calpine sale was wrapping up. Causey had helped devise a way to do the deal without highlighting the loss. It would be announced March 31, the last day of the first quarter—by Calpine, not Enron. Enron investors who might notice would no doubt assume the deal’s financial effect was going to hit that quarter’s results. But sort of accidentally, Enron left a closing document unsigned until days later. That technically pushed the deal into the second quarter; the loss would be reported months later, buried where no one could find it. A mistake that could rightly call into question Enron’s mark-to-market accounting would disappear in plain sight.

Now a new deal had come along. In January, Enron had acquired Zond Corporation, a wind-farm operator. But three of Zond’s assets—Zond Windsystems, Victory Garden, and Sky River—raised the same problems as the co-generation plants. They were qualifying facilities, or QFs, meaning under law they could be paid higher rates, but those larger payments would disappear once Enron finished its acquisition of Portland General. The wind farms would be worth a lot less if Enron kept them; they needed to be sold.

Martin finished reviewing the records for the plants and assigned two deal makers, Mike Miller and Mark Miles, to look for a buyer. Not long after, Miles and Miller came back to Martin’s office with news.

“Kopper’s working on a wind deal,” Miles said.

Again?
Martin wasn’t ready for another round of hand-to-hand combat with Fastow. She wanted out.

“Guys, we don’t need to put up with this shit again,” she said. She called Baxter, who oversaw asset sales.

“Cliff, I’m out of this wind project,” she said. “Fastow’s in it, and I’m not going through that again.”

“Amanda,” Baxter replied, “we already have interest from some buyers …”

“If there’s somebody who’s expressed interest, you do it. Let me and my guys out of this. You carry the water this time, so if there’s a problem, you get tagged.”

Baxter raised a few feeble arguments but ultimately gave up. He didn’t have much interest in battling Fastow either. He hated the guy, but the tiny wind deal just wasn’t worth the fight. He stepped aside.

Fastow’s rages had worked. Now nothing could keep him from doing the deal the way he wanted.

The idea was so delicious, so simple it was breathtaking. Somebody was going to make money on the wind farms; why shouldn’t it be Andy Fastow and his family?

The deal Fastow and Kopper were cobbling together was a structured
transaction, where outside investors provide three percent of the deal’s capital. A company could provide 97 percent of the capital to an off-books partnership, find 3 percent somewhere else, stir in some legal legerdemain, and—poof!—an “independent” buyer was created. The company could then legally “sell” an asset to the partnership—even if most of the payment originated from its own pockets. The round-trip of cash complete, the company had converted an asset on its balance sheet into revenue. When Andersen accountants first laid out the rules, Fastow had ridiculed them, saying the three percent could come from anybody—even his gardener or his family. Now he was ready to put that thought into action.

With Kopper’s help, he constructed an entity called Alpine Investors to make the purchase. It would cost about $17 million, far more money than Fastow had in his bank account. But with the magic of structured finance, he didn’t have to worry about that. Almost $16.5 million would come in a loan to Alpine from Enron. Then Fastow—along with his wife’s wealthy family, the Weingartens, and friends like Patty Melcher, a wealthy Houstonian close to Lea—would kick in $510,000. Fastow would run the partnership, with Enron’s friends as investors.

Fastow sang the praises of the deal to Kopper. “Enron keeps control, without the burdens of legal ownership,” he said. “It’s perfect.”

Something about Alpine Investors made Jordan Mintz uncomfortable. A tax lawyer, Mintz had joined Enron a few months before, coming from Bracewell & Patterson, a Houston law firm. Abandoning a secure partner’s position for an iffy chance at a gas company struck some in his family as crazy. But Mintz had represented Enron and now wanted the thrill and challenge that came with working there.

Then along came Alpine Investors. Mintz’s job was to handle tax issues on the deal, but the whole thing just seemed weird. In a power-plant deal, he figured he would see heavy-hitting investors walking through the office. Pension funds. Maybe the capital investment unit of General Electric. Or some Wall Street private-equity fund.

Instead, he saw
Patty Melcher
. She was presented to Mintz as someone heading up the investment group providing equity for the deal. Melcher, a former investment banker whose husband was an heir to a fortune from Houston convenience stores, was pleasant enough. But this just wasn’t the way corporations did deals. Some friend of Lea Fastow’s? That felt like something put together by a backwoods county commissioner rather than by a cutting-edge Fortune 500 company.

Mintz sought out Larry Lawyer, who was working with Fastow on the
deal. “Dude, this is so strange,” he said. “How often do we bring in outside investors like this?”

Lawyer shrugged. “Not too often,” he replied.

Trouble
.

Alpine Investors wouldn’t work. Fastow hadn’t hidden his family’s role in the deal from the accountants, and they decided the structure didn’t meet the rules. If he or his relatives provided part of the three percent, they said, the magic disappeared. Enron would still own the wind farms, the plants would remain on the books, the qualifying-facility status would be lost.

The news was a disaster. It wasn’t just Fastow losing an opportunity; there was no ready fallback. He didn’t have other investors lined up to provide the three percent, and certainly not ones who would allow Enron to control the plants. If a deal wasn’t done soon, the plants would lose their special status, and their value would crumple. Coming on the heels of the retail fiasco, the collapse of Alpine Investors could spell trouble for Fastow—and for Enron.

He sought out Kopper, and together they devised a solution—a dishonest one. They needed $510,000 but had raised only $91,000 from wealthy Houstonians they knew. The rest, $419,000, would be put up by Fastow but made to look as though it came from someone else. The cash went to Kopper from the Fastows’ account, with Lea writing records showing it as a loan. Kopper then funneled the money to his domestic partner, Bill Dodson, and to Kathy Wetmore, the Fastows’ real estate agent. Both agreed to act as fronts for Fastow, pretending the money was theirs.

With the “investors” in place, Fastow and Kopper created two entities for the deal, naming them RADR ZWS and RADR ZWS MM. The $91,000 in authentic investments came in, right alongside the $419,000 cash hoard that secretly belonged to Fastow. RADR closed in May 1997.

With a little money laundering, Fastow had pulled off the very deal that the accountants had said couldn’t be done—at least not legally.

On the morning of May 14, an Enron corporate jet banked over the Sacramento River before landing at the Executive Airport, minutes from the California capital. Fastow unfastened his seat belt and stood as the pilot taxied to a stop. Four colleagues lined up behind him.

They had come to Sacramento for a meeting that could well reshape Enron’s future. The company was preparing JEDI II, another fund to provide financing to energy producers. And again it wanted Calpers as a co-investor.

The executives headed to the front of the terminal and piled into a waiting private car. Arriving at Calpers’s offices in downtown Sacramento, they
were whisked upstairs to a second-floor conference room. Barry Gonder, Calpers’s head of alternative investments, arrived, all smiles.

“Andy!” he said. “How you doing?”

“Great, Barry,” Fastow said, pumping Gonder’s hand.

A few Calpers staffers trickled in. Fastow pulled out a six-page presentation and laid it on the table.

“We wanted to come out here to give you an update on JEDI, talk to you about how the partnership is doing, and discuss some new opportunities we think will be particularly attractive to you,” Fastow said.

Fastow glanced down at his presentation. The cover was emblazoned with a logo for JEDI. He turned to the first page, studying it. Down the table, Shirley Hudler sat stone-faced, trying not to wince.

He’s going to wing it again
. Hudler had put together the presentation for this meeting, but, as always, her work had been a waste of time. Fastow seemed to excel at being unprepared. She had watched him in previous meetings reviewing a presentation for the first time as he delivered it. He would get his facts wrong, flipping through the pages, trying to find his way as he spoke. Somehow, Fastow seemed to believe he was smarter off the cuff than executives who did their homework. He wasn’t.

It didn’t take long for his first mistake. He was boasting about Enron’s accomplishments, its creativity. Why, he proclaimed, it had even figured out how to use its Transwestern pipeline, which had always moved gas out of California, to deliver fuel back into the state!

It’s the other way around, Andy
, Hudler thought.

Finally, Fastow reached his main point. “We’re thinking about doing another private-equity partnership. Obviously, we’d like you to be our partner in it. And we’d really like to expand the box a little bit.”

The original JEDI had made investments in the gas industry. But Enron wanted JEDI II to invest in anything energy-related. Wind, oil, coal—whatever was promising.

“This one’s going to be bigger,” Fastow said. “A billion dollars. And this time we’re not going to be putting in stock as our contribution. We’ll invest cash. So whatever the partnership puts its money into will be something Enron wanted a piece of, too.”

Gonder looked uneasy. “That sounds good, Andy. But I’m not sure how the board would receive making another Enron investment. We’ve got $250 million in JEDI. I don’t think they’d be happy tying up more with one company.”

Fastow was ready with a response. “That’s the beauty of our idea, Barry,” he said. “Enron will take you out of JEDI. We will buy your interest in the partnership. Then you can roll the proceeds straight into JEDI II.”

Under the plan, Fastow said, Calpers’s half interest in JEDI would be purchased for almost $350 million, locking in its annual return at better than 20 percent. Then Calpers could use that money for JEDI II and participate in a much wider array of energy businesses.

Gonder looked intrigued. “It’s an interesting idea, Andy. Why don’t you guys put together a full proposal, and we’ll see what everybody here thinks.”

Mission accomplished. Everyone could tell that Gonder was eager to do the deal. Any fund manager would lick his chops at the chance to lock in returns—all while getting a chance to put money into a new, broader opportunity.

But some of the Enron executives who had listened to the pitch were bothered by its gaping holes. Enron
itself
couldn’t purchase the Calpers interest in JEDI; if it did, all of its assets would come crashing onto the company’s balance sheet. The whole purpose of JEDI was to provide financing to gas producers that would be off balance sheet.