Conspiracy of Fools (49 page)

Those actions, Walker said, communicated the lesson. “Our message deploring the practice of earnings management has been forcefully delivered and is being embraced, I believe, by responsible practitioners and issuers.”

Still, Walker said, some companies were continuing to pump up their numbers—crafting bogus sales with secret side agreements, overvaluing assets, hiding important facts from accountants. Auditors themselves were falling down on the job, allowing their independence to be compromised out of fear of losing fees. But the SEC was stepping up enforcement, Walker said. No longer were regulatory investigations going to be genteel matters, resolved with fines and promises to be good. Instead, the SEC was working more closely with federal prosecutors.

“We are moving toward turning the ‘numbers game’ into a game of Monopoly,” Walker said. “Cook the books, and you will go directly to jail without passing go.”

Three days later, at 9:35, Andersen’s offices in New Orleans, San Antonio, and Houston received an e-mail from the firm. It included a copy of an article describing Walker’s speech to the accountants. In the Houston office, someone printed out the e-mail and stuck it in a file.

———

Jeff McMahon clicked up a slide.

“These are the 1999 investments by Enron to date,” he said. “As you can see, there is a significant gap between the original estimates and actual performance.”

It was the afternoon of December 13. The board’s finance committee was holding its last meeting of the year to hear details of Enron’s financial condition. Fastow had just given his spiel, and now it was McMahon’s turn.

The news McMahon delivered was disturbing. Enron executives had originally estimated they would make somewhat more than one billion dollars in investments in 1999. Instead, they had exceeded that budgeted amount by almost four billion dollars.

Fastow broke in. “Anything we did that was in excess of the approved plan required my group to find additional financing,” he said.

A minute later, a new slide clicked up. It was headed “Year End Transactions.” There were a number of planned deals listed, worth $2.8 billion, all involving sales of assets to entities put together by Enron itself. All to help fix up the numbers before the company issued its financials.

Bob Belfer, one of Enron’s largest shareholders, followed the flurry of financings with unease. “I find it disturbing that we’re so close to the end of the year and we have to do all of these transactions,” he said.

Heads nodded around the room. The directors conferred, then issued instructions. Enron should never get into this kind of situation again. Not if it could be avoided.

Three hours later, a cavalcade of black limousines moved through Houston’s post-rush-hour traffic, pulling up to the front of Saks Fifth Avenue. The Enron directors and their spouses emerged and headed inside up to Ruggles Grill 5115, an elegant Houston restaurant closed to the public that evening for Enron’s annual Christmas party.

Inside, festive lights and holiday decorations reflected off of a wall of mirrors. A pianist added ambience, playing holiday songs. Lay greeted the guests, congratulating them for helping Enron achieve so much.

“I’d like to commence dinner with a blessing,” he said. Everyone bowed their heads.

“Dear God, we thank you for all the blessings you have bestowed on us,” Lay said. “And we thank you for this group of leaders, both directors and their spouses, that indeed have led Enron to another great year.”

The prayer ended, and the guests dug in to their meals. Later, as dinner was cleared away, a voice boomed out.

“Ho, ho, ho! Merry Christmas!”

A man dressed as Santa Claus, loaded down with a sack, moved through the room. He called the directors to the front, asking if they had worked hard to help Enron that year. Satisfied with their answers, he presented each with a Sony digital video camera. Once Santa departed, the directors sang Christmas carols, beginning with “The Twelve Days of Christmas.” Each director played a part; Lord Wakeham, a former British Cabinet minister, was the natural to belt out “ten lords a-leaping.”

The joviality was the perfect tonic for the directors on the finance committee. The presentations from that day had shocked some of them, but now they heard only laughter and singing and the clinking of glasses. The top executives there seemed so self-assured, high-spirited even. Maybe these numbers were just a hiccup. With Enron’s profits so strong, there really couldn’t be much reason for concern.

“Changing the accounting on this is going to cause Enron to take a charge of thirty million to fifty million dollars,” David Duncan said. “We can’t do that.”

He was on the phone with Carl Bass, now a member of Andersen’s Professional Standards Group. Duncan had called with a question about the restructuring of LJM1; apparently, he had misunderstood the accounting rules that applied to the options in the transaction. The restructuring had changed the nature of the Rhythms hedge, Bass told him, requiring Enron to recognize losses. But Duncan wouldn’t hear of it. The amount was too big.

“I can’t go back to them on this now,” he said. “This deal is already signed or it’s about to be signed.”

“Dave, our advice has been consistent on this and timely,” Bass replied.

It didn’t matter, Duncan replied. He wasn’t reversing course now. Enron would keep its unearned windfall, generated solely because David Duncan didn’t know what he was doing.

As far as Fastow and Causey were concerned, the LJM1 hedge for Rhythms had been a blazing success. And it set them to wondering: if Enron could use its own stock to lock in profits from one investment, why not for dozens?

The money sunk into merchant investments was a hidden threat to Enron’s profitability. The market had been booming for years, but now momentum had changed. If it tanked, Enron’s losses could be horrendous. But if the company could lock in the values of its investments—if it could hedge them using Enron stock again—that danger would dissolve.

Fastow and Causey talked over the idea with Glisan. Getting the Enron stock was the easy part, they all agreed. Maybe shares already contributed to
the Whitewing fund could be drained off and assigned to another entity, which could then follow the LJM1 example in providing the hedge.

The concept was bounced off Skilling, and he liked what he heard. Causey approached Wes Colwell, an accountant who headed the division known as transaction support, who in turn assigned the job to two accounting whiz kids, Ryan Siurek and Kevin Jordan.

Glisan and the other accountants began brainstorming, taking turns sketching models for the hedge. It would require a lot of effort, but almost from the moment they started, the accountants knew—just
knew
—that this would work. They could protect Enron from future losses.

Rupert Murdoch, the international media mogul and chairman of News Corporation, was at his desk in his New York office. It was ten on the morning of December 16, and Murdoch had just heard that his visitor had arrived. A secretary escorted Ken Lay in, and Murdoch stood.

“Ken, good to see you,” Murdoch said.

Lay nodded. “Thank you, Rupert. How have you been?”

Lay and Murdoch had bumped into each other in the past, usually at the annual World Economic Forum in Davos, Switzerland. But this meeting was all business. The two men walked over to a conference table and sat.

“So, Ken, what brings you to New York?” Murdoch said.

“Well, Rupert, we’ve got some exciting projects under way, and I wanted to discuss them with you, because I think there’s a good chance we could work together.”

Enron was moving fast to expand its broadband division, Lay said, and was looking at streaming video across a cutting-edge network. Murdoch—through his Fox network and movie studio—had plenty of video content. The two companies were a natural to work together, Lay said.

“We’ve developed some top-notch technology,” he said. “Head and shoulders above anything else out there.”

The two companies, he continued, should see what they could do for each other. After forty-five minutes, Murdoch promised to have his staff check into what Enron was up to. This broadband effort, he said, really sounded top-rate.

Bill Collins, an executive in Enron Communications, was sick of the hype, the lies. All around him, executives babbled about their technology, their strategies, the importance of broadband for Enron’s future. There was a time when Collins, as director of business development, was a believer; now he thought the whole thing was a crock.

The division was a mess. The people running it had no technology background.
No one was making tough choices about how to target resources. Worst of all, nobody was being honest about the troubles they faced. What worked in small demos was proving a lot tougher in the real world.

On December 20, Collins was ready to throw in the towel. He was weeks from quitting in frustration, but before he did, he wanted somebody to hear the truth. He banged out an e-mail to one of his supervisors. Enron’s ballyhooed effort to develop a software-driven network was fizzling, he wrote, with no market share, no purchasers, and no users. Enron talked a good game but wasn’t playing one.

“I don’t care what lipstick and rouge you paint that bitch up with,” he typed. “She’s still just dead meat lying on the sofa.”

LJM2 had only been around for weeks but was already driving Bill Brown crazy. Brown, who worked with McMahon, had started negotiating with Kopper over some deals—if it could be called negotiating. Kopper had attended Enron’s strategy sessions; he knew the prices it would accept and wasn’t willing to discuss paying a penny more.

After a particularly infuriating morning, Brown headed to McMahon’s office. Through the glass wall he could see McMahon at his desk and hurried in.

“Man, Jeff, this thing with Andy and LJM really sucks,” he said. “It’s crazy. We walk in, and before we make our pitch, they’re telling us they know what we’ll take. It’s like selling a house when the buyer knows your bottom line. There’s not a lot of negotiating going on.”

McMahon sighed.
More trouble
. “Yeah, you’re right, that’s a problem.”

The solution was obvious. “I’ll take care of it,” McMahon said. “I’ll talk to Andy.”

“Look, this whole LJM thing is starting to become a problem internally,” McMahon said.

Sitting across from Fastow in his fiftieth-floor office, McMahon recounted his conversation with Brown.

“That’s not right, Andy,” McMahon said. “And how do you think the guys negotiating for Enron feel, knowing you own a piece of this thing? You’re also the guy who’s going to compensate them. So if they cut too good a deal for Enron, you’re going to find out about it.”

Fastow waved a hand dismissively. He wouldn’t punish anyone for acting on Enron’s behalf, he said.

“You’re missing the point, Andy. It’s the perception. If they perceive that by negotiating too hard they’re costing you money, they can’t help but wonder about the effect it will have on their bonus, on promotions.”

Fastow didn’t like the direction of this conversation. “I would never do that,” he repeated.

“That’s not enough,” McMahon replied. “It’s just ‘Trust me, I’m Andy Fastow.’ That’s not going to do it. You’ve got to fix the problems this thing creates.”

“By doing what?”

Plenty. Get people committed either to Enron or LJM—no more straddling the fence. Then take them out of the building, to LJM’s own offices, like any real third party.

“I don’t know,” Fastow said. “That might cost me some money.”

Like a normal business
. “All right, even if that doesn’t work, at least get them off the floor so they can’t just walk into strategy meetings,” McMahon said.

Fastow didn’t answer.

“But the one thing I’m adamant on is the weekly staff meeting,” McMahon said. “Kopper shouldn’t attend.”

“I won’t do that,” Fastow snapped. “Michael is a key player here. He needs to know what’s going on.”

“But he’s the guy leading the LJM charge, and by attending the staff meeting, he knows everything.”

“He
needs
to know everything,” Fastow responded.

They both were silent for a moment.

“Look,” Fastow said. “Maybe if there is sensitive information we need to discuss, we just won’t talk about it in the staff meeting. We’ll arrange another meeting.”

Companies didn’t do that. What was Fastow thinking? “I don’t see how that’s going to work, Andy.”

“Well,” Fastow replied, “let me think about it.”

As McMahon headed back to his office, his mind was churning. Fastow had never even put together an investor list for him. Why should he believe he would restructure the operations of his precious fund, just to help Enron?

Eleven days left in the year. Eleven days until Enron’s books for 1999 would close. Eleven days left to make everything look better.

The flurry of planned deals weren’t going well. Enron had a pool of loans to unload but couldn’t find buyers for the riskiest portion. Same with a stake it wanted to sell in a group of Nigerian electricity barges. And with Nowa Sarzyna, a power project in Poland. And again for MEGS, a natural-gas-gathering system in the Gulf of Mexico. The marketplace was sending a message: nobody was interested, not at the prices Enron was asking.

Eleven days. Something had to be done fast. And it would. After all, that’s why LJM2 was there.

The first to go was the Polish power plant. On December 21, LJM2 bought a 75 percent interest in the Enron-formed company that owned the plant. The fund paid thirty million dollars—part loan, part investment.

But the deal had a serious flaw. Enron was bound by its credit agreement for the plant to own almost 50 percent of the project until construction was completed. The LJM2 deal would violate that agreement. Enron persuaded lenders to waive that requirement for three months. By March 31, Enron would have to own its stake again.

That didn’t matter. By then, Enron would have made its profit numbers for 1999. LJM2’s rescue mission allowed Enron to book sixteen million dollars in earnings.

Kopper hung up the phone and headed out the door of his office. Fastow had just called, telling him that they needed to get together right away.