Conspiracy of Fools (40 page)

Worse, Martin thought, Rebecca Mark still seemed to have no idea how
Azurix would bring in her promised hefty returns. Skilling, she thought, had to stop the IPO. Azurix needed to stay under Enron’s skirts a little longer.

“I am really concerned about the IPO,” Martin said.

Skilling watched her, chewing his food.

“I’m afraid that Azurix just isn’t ready,” she said. “Once we’re out there, we’re going to be running naked. And I’m really nervous about that.” Skilling set down his fork.

“I want my money back,” he said. “I fell on my sword for this one with the board. We didn’t have a unanimous vote. I promised them I would get our money back and that we wouldn’t make any more investments in this business.”

“But, Jeff …”

“Just get out there and do the best IPO you can. I know you can do it. Market the shit out of it. And it’s going to work. Make it happen.”

Martin took a deep breath. “Well, okay,” she said. “But I’m also concerned about Rebecca.”

Skilling cut her off. “She’s a smart woman.”

There was a pause. “You don’t want to talk about it, do you?” Martin asked.

Skilling’s face was expressionless. “No, I don’t.”

Fastow had been hitting the hustings, speaking to bankers about his fund. This was not going to be a splashy deal like the planned Enron Merchant Partners. This was smaller, for only $15 million of outside investments.

He approached Kevin Howard, the prime banker for Enron at Greenwich NatWest. “I have a deal to discuss,” Fastow said. “But I have to insist on total secrecy.”

He would be setting up a fund, tentatively called Martin, Fastow said. It would be like any special-purpose entity, with a small sliver of capital from outside, independent parties like Greenwich NatWest. Fastow would be investing himself, maybe Kopper, too. Enron would kick in more than $220 million in the form of company stock. That would back up the fund’s commitment to provide the hedge for Enron’s investment in Rhythms.

Howard listened attentively and agreed to forward the idea to bankers in structured finance. The response was uniform: what the hell was Fastow talking about?

The thing sounded like nonsense. Enron would give $220 million to its CFO, and then get that money back if its Rhythms investment lost value? Wouldn’t it get the stock back anyway, or at least be paid for it?

On May 28, David Bermingham, a structured-finance banker with
Greenwich, reviewed Howard’s e-mail about the proposal. He couldn’t shake the feeling that this whole thing sounded like some sort of scam being perpetrated by Fastow. He hit “reply” and began banging out a response.

“The fact is that a two-bit LLC called Martin, owned by a couple of Enron employees, will all of a sudden be
gifted
$220 million of Enron stock,” Bermingham typed.

In fact, the way the deal was structured, Martin would never have to do anything for Fastow to get rich, he wrote.

Fastow and Kopper could “sell the stock in the market, pack up their bag and disappear off to Rio,” he wrote. “If you owned it, wouldn’t you? Now I’m beginning to understand why these guys are so keen to get in on it.”

Bermingham hit “return” on his keyboard.

“What am I missing???????” he typed.

“Why would any director in his or her right mind ever approve such a scheme?”

That same day, Ben Neuhausen—a partner with Andersen’s top accounting division, the Professional Standards Group—was at his computer in the firm’s Chicago office. David Duncan, the lead partner on Enron, had consulted him about some harebrained idea from the company to have its CFO manage an outside fund, one set up to do business with Enron itself.

Neuhausen was floored. The idea made no business sense, and it screamed of conflicts. So on May 28, Neuhausen began typing his response to Duncan, expressing disbelief that any company would ever try something like this.

“Even if all the accounting obstacles below are overcome, it’s a related party,” Neuhausen typed. “Would Enron want these transactions disclosed every year as related party transactions in their financial statements?”

But that wasn’t the main thing bothering Neuhausen. The way this fund was being set up, it looked like Enron hoped to use it as its own little marketplace, available to purchase assets. That was fine, but Enron couldn’t then turn around and book profits from those sales to its captive fund, Neuhausen wrote. That would be going too far.

Early the following Tuesday morning, June 1, David Duncan logged on to his computer and read the e-mail message from Neuhausen that had arrived after he left on Friday. He clicked “reply” and started typing.

“On your point (i.e. the whole thing is a bad idea) I really couldn’t agree more,” he wrote.

But, he pointed out, this was far from a done deal. After all, it would have to be approved by the board, the general counsel, everybody. Once the
directors realized what Fastow was up to, Duncan felt confident that they might kill the proposal outright.

“This thing is still very much in the brainstorming stage, but Andy wants to move through it very quickly to get all this done, if possible, this quarter,” Duncan typed. “Andy is convinced that this is such a win-win that everyone will buy in. We’ll see.”

If it did go through, Duncan wrote, he would need Neuhausen’s help to stop Enron from trying to book profits through sales of its assets to the fund. “I’ll need all the ammo I can get to take that issue on,” he typed.

The dark BMW 740i pulled out of the garage at Allen Center before turning onto Smith Street. Inside, Cliff Baxter gripped the steering wheel lovingly, enjoying the engine’s finely tuned growl as he drove toward Dong Ting, a favorite Chinese restaurant. Beside him, Ray Bowen glanced around, admiring the fine leather and fancy trimmings. “Nice car, Cliff,” Bowen said.

“Thanks,” Baxter responded. “I thought about getting the 750iL, but it would have been a bit too flashy.” Bowen nodded.

“You know, Ray, I don’t live in River Oaks,” Baxter said. “I could, but I didn’t want to. I live in Sugar Land, outside of town, and I wanted a nice car for the commute.”

“Well, it’s a nice car,” Bowen responded.

Baxter, who worked as the top deal maker with wholesale, had invited Bowen to lunch that day in hopes of persuading him to take a new job. The merchant-investing effort was a mess; deals were being done for all the wrong reasons, largely by executives who wanted accomplishments to brag about when bonus time came around. But the follow-through was terrible; for every successful investment like Rhythms, there were untold numbers of disasters costing Enron plenty. Baxter wanted to set up a division of sharp-eyed finance guys like Bowen to serve as a check on the unfettered enthusiasm of the company’s deal makers.

This, Baxter said, would be real quality control, digging through the deals’ numbers and assumptions. Supposedly, this was the job Rick Buy was doing with RAC, but Baxter wasn’t impressed with their performance. They seemed to have neither the time nor the spine to root out the bad deals and stop them. Those were decisions, Baxter said, that should be made inside the wholesale family. Bowen found the idea intriguing and told Baxter it sounded like a challenge he would be eager to take on.

Baxter kept his eyes on the road.

“Well, part of that, you know, is you’ll be leaving finance,” he said. “What do you think of that?”

“I have no issues with leaving Fastow,” Bowen said. “I don’t want to be in that organization anymore.”

Baxter smiled. This was music to his ears. “Good. I’m not surprised. I’d heard you were ripe to move on.”

The two began gossiping about Fastow. Baxter clearly detested the man and his ideas. Both of them had heard about this fund that Fastow was putting together. Bowen asked Baxter what he thought of it.

“Ray, I don’t understand why we’d do that. Don’t you think there are better ways to set up a pool of capital?”

“Yeah, there are better ways.”

“Yeah, I don’t understand Skilling and Fastow. I don’t understand why Skilling sees Andy as a great CFO. I don’t think this advice is the best for the company.”

The restaurant was just ahead, at the Stuart Street intersection.

“Skilling sees Andy as a problem solver,” Baxter continued. “He’s got a blind spot when it comes to Andy. I’ve talked to him more than once about it. But he won’t listen to me about Andy. He’s just got a blind spot.”

Signaling with the blinker, Baxter turned the car in to the lot for Dong Ting and pulled up to the valet on duty.

Lay reviewed the three-paragraph letter that had been composed for him. It was short and to the point. An attachment that ran five pages laid out the details. They were impressive, Lay thought with satisfaction, ample evidence to persuade
CFO
magazine that it should recognize Fastow as one of America’s best chief financial officers.

The project to win Fastow the accolades had been under way for six months. Skilling had put in the nomination. Ben Glisan, the young accountant down in special projects, had written a letter from the employee’s perspective, raining praise on Fastow. Now the crowning touch—Ken Lay’s glowing endorsement.

His eyes darted over the last paragraph: “Andy’s innovative and creative approach to financing is exemplary of the caliber of talent we employ at Enron. Andy is a true example of Enron’s intellectual capital, which we consider to be Enron’s greatest asset.”

Everything seemed in order.

Four days later, Fastow was in Skilling’s office, practically gloating. “We’ve got it, Jeff. We’ve worked out a hedge for Rhythms. You’re going to love it.”

Fastow described the broad plan, hammered out with the help of Kopper, Glisan, and Causey. Enron would contribute the bulk of his new fund’s capital by turning over some of its stock. Outside investors would contribute about fifteen million dollars, enough to keep the fund off Enron’s balance sheet. Fastow himself would put in a million.

There were a lot of complexities, featuring entities within entities. But in the end, a vehicle called Swap Sub, backed by capital from Fastow’s fund, would sell Enron a put option on Rhythms stock. Then it wouldn’t matter if the Rhythms stock price fell; Swap Sub would be required to purchase the shares from Enron six months in the future at its current price. The value of Rhythms would be locked in place, allowing Enron to hold on to its gains.

Skilling was impressed. The idea was complicated and creative, just what he liked. He wanted to talk to Causey about it, but on first listen it sounded pretty good.

“Keep plugging away,” he said.

Ken Rice roamed through the lobby of the Houstonian hotel, looking for the Olivette restaurant. It was about 8:00
A.M
. on June 8, and Rice was headed for a breakfast meeting with Skilling—about what, he wasn’t sure.

Rice had plenty
he
wanted to discuss. Since November, he and Kevin Hannon, his co-head at wholesale, had been secretly working on their idea to start trading broadband. But now a turf war had begun: Portland wanted the new business to be part of Enron Communications, while Rice wanted it to be in his wholesale group, now called Enron Capital & Trade.

To resolve the issue, Rice had hired McKinsey to recommend the best organizational structure for the new business. McKinsey split the difference: it recommended that Enron Communications staff up in Houston while bringing in a wholesale manager to run the place. Rice liked the idea.

Rice and Skilling met up just outside the restaurant. The place was woody and bright, with chandeliers and sconces everywhere. At the table they ordered and were served quickly. As Rice munched on a piece of toast, Skilling started laying out what was on his mind.

“Ken, I’ve been thinking about creating a trading capability within Enron Communications,” he began. “And I know you and Kevin have been talking about whether that should be with ECT.”

Rice studied Skilling evenly. “Mm-hmm.”

“But,” Skilling continued, “I think the best approach would be to take a senior person out of ECT and put them in Enron Communications and build the capability there.”

That’s so typical
. Rice always suspected McKinsey acted as Skilling’s spy, revealing its conclusions to him, which he then passed off as his own ideas.

“I think you’re the perfect guy for the job,” Skilling said. “Would you be interested?”

“Yeah,” Rice said. “I would be.”

Skilling nodded. “Okay,” he said slowly. “But here’s the thing. I can’t afford to lose Joe.”

Joe. Joe Hirko, the former CFO of Portland General. Rice knew he had been running Enron Communications for a little more than a year. Rice shrugged. “That’s okay. Joe and I get along.”

“Well, I’m afraid if we don’t make the two of you co-CEOs, Joe is going to get pissed off and leave.”

Rice was stunned. “I am not going to be co-CEO at Enron Communications,” he said.

“Come on, Ken. We’ve got hundreds of high-tech people in Portland. We can’t replace them all in Houston. If Hirko leaves, then they’re all going to leave.”

“I don’t think they’re all going to leave, Jeff. I don’t even think Joe’s going to leave.”

“I don’t want to risk it.”

Skilling fixed him with a pleading expression. “Come on, Ken. Work with me. We’ve been together a long time. I promise it will work out. Just work with me on this.”

Rice took a breath. “Let me think about it. I don’t like it. But let me think about it.”

A couple of days later, Rice came back with his answer: he would do as Skilling asked. Skilling was delighted.

Enron’s latest venture, one that was supposed to be the cutting edge of the complex and ever-changing high-tech world, would be in the hands of Rice and Hirko, two guys from the gas and electricity business.

In Portland, Rex Shelby wandered past anonymous legions of casually dressed techies clattering at their keyboards. He headed to his desk and slumped in his chair.

Enron Communications was a mess. After selling his company, Modulus, to Enron the previous November, Shelby had hoped to see it aggressively pursue the vision of building a top-of-the-line, software-driven intelligent network. Instead, Enron was all over the place, talking about the network in one breath, veering off into discussions of broadband trading the next. A lot
of high-tech companies had trouble doing
one
thing well; Enron seemed unwilling to limit itself to three or four.