Conspiracy of Fools (36 page)

McMahon was an accountant. He knew the equity portion of Chewco had to be independent. “That works?” he asked. “I mean, that doesn’t make it an affiliate?”

“No, the lawyers all signed off,” Brown replied.

McMahon brought his hand up to his head and laughed. “Okay. That seems kind of crazy. I mean, if there was an officer of the company in that box, or even an officer’s wife, that would raise a lot of accounting questions.”

Brown shrugged. “Yeah, well, Kopper’s not an officer. And Dodson’s not a wife.”

Boy. That seemed an awfully thin string to hang such a huge accounting question on. Why did Enron do it this way?

“All right, so what’s your question?” McMahon asked.

“Okay, here’s the issue. Michael is representing Bill in this negotiation”

McMahon sank in his chair. “Oh, Christ. Why is he doing
that?”

That was the way that Dodson set it up, Brown said.

McMahon was flabbergasted. “All right, well, I guess you negotiate with Michael. Just get a reasonable deal.”

“That’s the problem,” Brown said. “Michael is being a real prick about negotiating Chewco’s fees, and he’s close to Andy. So all this is likely to go to Andy.”

“So?” McMahon said. “Bring it on. Get a reasonable fee, and if he doesn’t agree to it, we’ll go to Andy and tell him that Michael’s harming the company.”

He smiled. “Remind Michael who signs his paychecks. It says Enron on the bottom of those things, and if he’s trying to get a few extra hundred thousand for his domestic partner, let’s tell Andy he’s screwing the company.”

“Okay,” Brown said. “So I’m going to go ahead and negotiate this as hard as I would with anybody else?”

McMahon leaned in. “Yeah, Bill. That’s how it works.”

Joe Sutton stepped into the Enron boardroom, eager to share the good news with the finance committee. The government in Sào Paulo, Brazil, needed cash. Another stake in Elektro was up for sale. Enron had the inside track.

“This is a fabulous opportunity,” Sutton declared. “By making an additional investment, Enron International will enjoy either a substantial increase in recurring earnings from Elektro or a substantial gain by selling the equity when market conditions improve.”

Of course, there were risks, Sutton said, such as the chance of a currency devaluation. But a sharp drop was unlikely. The government was working to get its finances in order, he said, and the International Monetary Fund had put a plan in place to stabilize the country’s economy.

After a brief discussion, the committee authorized a bid of as much as $700 million for an increased stake in Elektro at the auction scheduled for January 15. The next morning, the full board signed on to the idea.

Everyone was excited. It seemed like a smart move.

Ben Glisan swiveled his chair, pulling up to his desk. His twenty-seventh-floor office was piled high with accounting and financial files—cluttered testimony to the esteem he had won at Enron. All the best deals, all the challenging transactions, were coming his way. His accounting acumen made him irreplaceable in special projects, and both Fastow and Kopper were making sure to take good care of him.

Reaching onto his desk, Glisan picked up a form authorizing an electronic funds transfer. A bank wire.

Here was graphic proof of his new standing. Glisan, just thirty-two years old, could sign his name, and that same day corporate funds would move out of Enron’s bank account to whatever account he designated. He reviewed the form.

$400,000
. For Chewco. Payment of a fee from Enron.

Glisan scribbled his name on the authorization line.

This was the fee that Brown had been negotiating and that McMahon suggested taking to Fastow. In the end, Kopper got what he wanted. Under the new deal, the percentage of cash distributions going to Chewco was moving
up
. And Fastow ordered that Chewco get its fat fee for being willing to revise the agreement. In essence, Chewco was being paid a fee for agreeing to take more money.

The illogic was staggering. But in secret, events were taking place that made the reasons for the payment clear. After receiving his fee, on December 30, Kopper wrote a series of checks—to Andy, Lea, and their two sons—each for ten thousand dollars or less. Just below the level that had to be reported to the IRS. Just below the amount that would force the bank to issue a currency-transaction report to the government, as a guard against money laundering. Then, in January, as a new tax year rolled around, Kopper wrote checks again. All told, Fastow received more than sixty-seven thousand dollars of the fee, tax-free.

Kopper then dutifully entered the transactions into the file on his laptop, keeping score of how he and Fastow were doing on their secret deals.

Mike Jakubik reached for the telephone in his London home and dialed Houston. For weeks, he had been parrying with Enron over the job offer and making only minor progress. The compensation package, while unspectacular, was all right, but the company was shortchanging him on his title. He was a managing director at Bankers Trust, but Enron wanted him to come in one step back, as a vice president. Still, he was uncertain about his future at Bankers Trust and plowed ahead on the Enron offer.

The Jakubiks entered into contracts to sell their London house and buy another in Houston. Mike’s wife, Nancy, shopped for schools in Houston for their sons. One boy was autistic, and arrangements proved difficult. But the Jakubiks decided that the Enron opportunity was worth all the effort.

Then, a stumbling block. Out of the blue, Bankers Trust paid Jakubik a huge bonus and promised to make him a key player in its future. McMahon bristled at the news; he refused to sweeten Enron’s offer. It was take it or leave it.

Now, twenty-four hours later, Jakubik had made his decision and called McMahon. “Jeff, it’s Mike.”

“Hey, how you doing?” McMahon said coldly.

“I’m going to take the job, Jeff.”

“Ahh, great!” McMahon replied, his tone warming instantly. “Fantastic!”

The next morning, Jakubik gave notice to Bankers Trust. He and his wife took the final steps for selling their house and pulling the kids out of school. They had cast their lot with Enron. There was no turning back now.

Why the hell did Enron need Mike Jakubik anyway?

Fastow had been thinking about it. He didn’t really know Jakubik. He didn’t know whose interests he would represent. The guy seemed pretty independent. There was a better idea. A better alternative.

Michael Kopper
. If Kopper was running the investment fund, Fastow could
have a piece of it. Maybe it would be his ticket out of Enron, his route to big money. Kopper would be there for him, would let him play a role. Jakubik might not be so accommodating.

It was settled. The fund would be Kopper’s job. Jakubik could do something else.

Few corporate start-ups spend their early lives in a palace. That is because, with huge initial expenses and little hopes for massive revenue, hoarding cash to pay only for the essentials is often necessary for survival.

Azurix, Enron’s new water company, was an exception.

The new Rebecca Mark division was set up in Allen Center, across the street from the Enron building. Mark’s own office was built with a private bathroom, gorgeous fixtures, deep woods. Nearby, an extravagant circular staircase was constructed between two floors, lending the place an air of elegance.

The free-spending attitude spread. In one of her early days at Azurix, Amanda Martin was in Mark’s office when she glanced at the floor. No carpeting or polished wood here; instead, limestone had been installed.

“Rebecca, this is
good,”
Martin said, admiring the floor. “I want limestone in my office, too.”

She got it. And then so did one of her colleagues.

“I ought to be CFO of the Year.”

Fastow was perched on the edge of his chair in his expansive fiftieth-floor office, one arm resting on the circular conference table. Across from him sat Mark Palmer, Enron’s head of corporate communications, whom he had just summoned for a special assignment.

“I’ve seen it in
CFO
magazine,” Fastow said. “Each year they name CFO of the Year. I want it to be me. Could you do that, get them to write a nice article about me?”

Palmer smiled, then laughed. Fastow was CFO of Enron, a Fortune 100 company. Why worry about such silliness?

“Are you joking?” Palmer asked.

Fastow squinched his face, shutting his eyes tight for a second before jerking up his eyebrows. Another tic.

“No, no, I’m serious,” he replied. “Do you realize what a great job I’ve done at this company?”

He rattled off his achievements. He was using Enron’s stock in creative ways—sticking it in partnerships as capital, all sorts of things. And the Elektro and Wessex financings—strokes of genius, Fastow said. He had persuaded investors
to buy debt from off-balance-sheet entities just on the
promise
that Enron would issue new stock to pay them back if they ever got stiffed. For nothing but a future commitment, Enron got billions—
billions!
All thanks to Fastow and his innovative thinking.

As Fastow boasted, Palmer occasionally glanced off to his left at a long buffet-type table. It was built from wavy strips of blond wood, with bumpy, impractical surfaces. It was furniture as art, a triumph of form over substance, much like Fastow himself these days. After landing the CFO’s job, he had stuffed his office with expensive knickknacks, with the seeming purpose of displaying an elevated taste worthy of Houston’s moneyed class. His wife, Lea, had even begun decorating him, hiring a fashion consultant to make sure he dressed the part.

Fastow fiddled with a pen. This thing with
CFO
magazine was important, he said. It would be useful for him to have before the time of Performance Review Committee—the PRC—where bonuses and promotions at Enron were awarded.

“Every year I schedule time with Jeff Skilling and go tell him how great I am,” Fastow said. “It’s right before the PRC, and it’s all about Andy.”

Fastow squinched his face again. “I do it because I want to keep my profile up with Jeff, let him know the great things I’m doing”

Palmer tried not to recoil. He had heard of businesspeople with huge egos, but he had never actually encountered one whose conceit matched his reputation.

“If
CFO
magazine writes a nice article, names me CFO of the Year, I can use that,” Fastow continued. “I can show Jeff I’m being recognized. It’ll help with the PRC.”

Now Palmer got it. Fastow wanted to be recognized by the magazine so he could make more money.

“Well, okay,” Palmer began. “But understand, Andy, I don’t know how to proceed on this. No guarantees.”

Fastow nodded and stood. “Keep me updated,” he said.

Palmer headed down to his division on the forty-ninth floor. Maybe, he thought, if he assigned the task to a top lieutenant like Karen Denne, there would be a chance of pulling something off. He found Denne at her desk.

“Hey, Karen,” he said, “I’ve got an opportunity for you to hit a home run with the CFO.”

Just after lunch on January 8, 1999, much of Enron’s senior management made their way to the Highland Room on the second floor of the Four
Seasons Hotel. They were there for the PRC, the ranking system advanced by Skilling as the best method to reward Enron’s top talent.

The competition was intense. Rankings were one through five—ones being worthy of fat bonuses and big promotions, fives needing to get their act together or move on. Skilling believed the PRC prevented a single boss from impeding a subordinate’s career; and indeed, in the early days of the trading business, the process worked well, since everyone knew everyone. But as the concept expanded throughout the company, the PRC became all horse-trading and lobbying. In such an atmosphere, any employee without a boss’s strong support was guaranteed a substandard ranking, the very result Skilling had hoped to avoid.

Executives gathered at a U-shaped table surrounding another table that was divided into five sections, one for each of the rankings. As the day wore on, small cardboard placards with employee names were placed in the sections, based on the recommendations of supervisors. Once the table was full, negotiations would begin. Only a set percentage could be at each level, usually meaning that some had to be moved down.

The moderator, Rocky Jones from human resources, stood in the center of the room, calling out employee names for discussion. Jones picked up the next placard.

“Jim Bouillion,” Jones said. “Who’s his sponsor?”

Jeff McMahon, flipping through a three-ring binder, raised his hand. “That’s me,” he said.

McMahon found his materials on Bouillion, although this was one case he could make by heart. Bouillion didn’t have a glamorous job, just an essential one. He purchased Enron’s insurance, making sure coverage was complete, negotiating the best rates, handling disasters. If a pipeline exploded, Bouillion was there. If the directors or senior managers were ever sued, it was Bouillion who protected them with liability insurance. McMahon thought he was top-rate.

But the PRC didn’t. Bouillion had been at Enron for years, but time and again was passed over for promotion and never received much bonus. When McMahon started as treasurer, Bouillion had dropped by, explaining his situation. McMahon had promised to watch Bouillion’s work and—come January, if he was impressed—to go to bat for him at the PRC. Bouillion hadn’t let him down.

McMahon found his one-page summary in the binder.

“Okay,” he said. “He runs the risk-management group, basically his job is insurance coverage.”

Citing statistics and other details, McMahon made the case for Bouillion but was soon losing his audience. Some yawned. There were no splashy deals here, no accounting maneuvers that created profits. Just insurance. No one cared. After two minutes McMahon wrapped up his spiel.

“Okay,” Rocky Jones said, holding the cardboard placard. “Where would you put him, Jeff?”

The key to the PRC. Don’t go too high, don’t start too low. “I would put Jim in the two category,” McMahon replied.