Conspiracy of Fools (56 page)

Many times.

“And what did he say?”

“He said he’d fix it.”

Sutton’s tone was blunt. “Okay, he said he’d fix it. So what’s the problem?”

“He’s been saying that for four months.” Well, that was different, Sutton said. What else?

“Andy being part of the compensation system is flawed,” McMahon said. “People believe they’re going to get screwed if they cut too good a deal for Enron.”

Sutton made a face. “Come on. Do you know how much money Fastow makes off of LJM?”

McMahon shook his head.

“Well,” Sutton continued, “whatever he’s making off LJM is not enough so that he’ll screw somebody who’s doing right by Enron.”

“Okay,” McMahon said. “So do
you
know how much he’s making off LJM?”

Sutton shrugged. “No, but it can’t be close to what he’s making from Enron. And I know
that
number.”

Well, McMahon said, LJM was private equity, and those funds all worked pretty much the same way. Fastow would receive a two percent management fee. While he didn’t know LJM’s size, McMahon said, he’d heard it had raised about $400 million.

“So that’s eight million annually, off the top.”

Sutton considered that. “Well, he has expenses.”

“He does? As near as I can tell, the employees are free—they’re Enron people. He’s using our office space, our phones. What are his expenses?” Sutton waved a hand. “That can’t be right.”

McMahon smiled. “Wait a minute, Joe. That’s just part of it. The eight million is just for showing up.”

On top of that, the general partner gets a percentage of the profits past a target level. McMahon ran some quick numbers by Sutton, possibilities of outcomes. All told, he said, Fastow could be pulling in about twenty-four million dollars a year.

Sutton’s eyes went wide. “That can’t possibly be right!” he said. “That’s more than
I
make!”

Later that day, Sutton walked down the hall to Fastow’s office. Since his days as an officer in the Army, Sutton had never been one to beat around the bush. He wanted to hear Fastow’s reaction to McMahon’s concerns.

After taking a seat in Fastow’s office, Sutton mentioned that McMahon had dropped by and raised some worries; he summarized everything McMahon had said.

Fastow dismissed the issue out of hand. “I don’t think there’s any problem at all. This is overseen by Buy and Causey. They have to sign off on every deal. And I don’t have any control over them. They report to Skilling.”

“All right,” Sutton said. “That’s what I understood.”

But there was also another LJM matter, Sutton said. “Are you going to make a lot of money from this?”

Fastow laughed. “Joe, come on,” he said. “I’m not going to make a lot of money here. At best, I’m just going to get a small return on the cash I have at risk.”

He pressed a finger against the desktop.

“And, Joe,” he said, “any money I do make will be insignificant compared to my compensation as Enron’s CFO.”

———

At about that same time, Kopper was preparing the final paperwork for the Swap Sub buyout. NewCo had been formally named Southampton Place, after the well-heeled neighborhood where Fastow and Kopper both lived. Now the partnership agreement for investors was ready to go.

Kopper brought the document around for everyone to sign and collected checks. Mordaunt and Glisan invested $5,816 each; the others put up far less.

Among the investors was another partnership, called Southampton K, which retained a sizable percentage of Southampton. It was the secret front company for the Greenwich NatWest bankers. Under their agreement, the bankers would get an option to own all of Southampton K for $250,000; they had until May to decide if they wanted to make the purchase. It seemed like a clever subterfuge; the bankers could argue that they were not actual owners of the entity buying Swap Sub until weeks after it was purchased.

The deal was all but finished two days later.

Southampton now owned Swap Sub, which held the Rhythms hedge, Enron stock, and a few million in cash. Under a letter signed by Causey, Enron agreed to cancel the hedge and pay Southampton thirty million dollars for the stock. Ten million would go to CSFB. One million to Greenwich NatWest. And the lion’s share—nineteen million dollars—to the Southampton owners. The LJM1 investors, and Enron itself, would be cheated.

Still, the damage was worse than it appeared. Since the stock was never supposed to be hedged, LJM1 had purchased it at a discount to the market price, a discount that was still in place. But in figuring what he was owed, Fastow calculated the value of the shares at full market price. Causey and his staff didn’t blink before agreeing to cough up the clearly inflated amount.

After his vacation, Skilling returned to the office on the morning of Wednesday, March 29. There was plenty to catch up on, and soon he had an update from Joe Sutton about his conversations with McMahon and Fastow.

Sutton considered the relationship between the two irreparable. Beyond that, he thought there were some issues regarding the LJM deals. Skilling needed to take a more active role in overseeing the negotiation process with LJM, Sutton said. Skilling said that was a fine idea.

There was another thing, Sutton said, on this issue of compensation. McMahon seemed certain Fastow was making a killing, but Fastow insisted that he wasn’t. If McMahon was right, the conflict could be larger than Enron imagined.

“You know,” Skilling replied, “Andy’s assured me, too, that he’s not making a lot of money here.”

He thought about it for a second. “Tell you what,” Skilling said. “I’ll look into that, too. I’ll find out.”

Sutton headed back to his office. As far as he was concerned, his role in this squabble was over.

That same afternoon, the three months were almost up. Almost ninety days before, in the end-of-the-year rush, LJM2 had invested thirty million dollars to purchase an interest in the Polish power plant. The company had reported sixteen million dollars in profits from the sale, but under terms that would only allow LJM2 to keep the investment until the end of March. Now the day of reversals had arrived.

Enron and an affiliated entity bought out LJM2’s interest in the Polish plant for $31.9 million. Fastow’s fund had received a rate of return on its short-term investment of almost 25 percent.

The sixteen million dollars in profits, in economic truth, did not exist.

The next day, March 30, Skilling approached Fastow’s secretary for an unscheduled appointment. Fastow was at his desk, reviewing a spreadsheet. Skilling knocked.

“Hey, Jeff,” Fastow said. “Come on in.”

Skilling sat in front of Fastow’s desk. The two talked about Skilling’s vacation and a few business matters.

“Listen, Andy,” Skilling finally said. “I’ve got a problem. I need to talk to you.”

“Yeah?”

“Jeff McMahon came to see me the other day. And he’s kind of concerned about his compensation.”

“I don’t know why.”

“He’s worried about his dealing with you. He says he’s been feeling pressured on deals with LJM. He’s concerned how he’ll be dealt with by the PRC.”

“He shouldn’t be.”

“I know. The PRC is fair. But if there’s anything going on that makes him feel concerned, that’s not right. Because that’s not the way the system works.”

Fastow’s face was blank. “Okay, well, I’ll talk to him about that and straighten that out.”

A lot of the concern seemed to center on Fastow’s LJM profits, Skilling said. Fastow agreed to give Skilling the details, just to reassure him.

“Thanks,” Skilling said. “One other thing.”

McMahon had raised some issues about getting LJM2 off the finance
floor, things like that. That needed to be handled somehow. No problem, Fastow said. He’d been planning to do something about that soon, anyway.

“Great,” Skilling said. “So you’ll talk to McMahon, make sure everything’s okay?”

Fastow nodded. “I’ll talk to him.”

Hours later, just past 1:30, a black sedan from Avanti Limousines & Transportation sped down the Hardy Toll Road in Houston. In the back, McMahon was relaxing. He had just returned from Austin, where he had hosted a golf game at the Barton Creek resort with Enron’s second-tier banks. Exhausted, he was debating whether to head home or drop by the office. His cell phone rang. It was his secretary.

“Andy wants to speak with you right away,” she said. “Let me put you through to Bridget.”

The phone clicked onto hold, and music began to play.

Guess Skilling and Fastow finally talked
.

“Jeff?” It was Fastow’s secretary.

“Yeah, Bridget.”

“Andy wants to see you right away.”

“Can you tell me what it’s about?”

“No, but he needs to see you ASAP.”

McMahon sighed. Getting fired could wait. “Bridget, I’ve been out of town for two days, and I’m almost home,” he lied. In fact, he was ten minutes from the office.

“So,” he continued, “I’m going to have to turn around and go back through rush hour to get back downtown. Any chance we can do this tomorrow?”

“I’ll check.” Hold music again.

McMahon glanced at the driver. “You probably ought to slow down. I don’t know where I’m going yet.”

The music stopped. “Can you do tomorrow at 7:30?”

McMahon sighed. “Yeah,” he said. “I’ll be there.”

At about that moment, Greg Whalley was in Skilling’s office, making his pitch. Skilling listened to the proposal with growing interest. Maybe this was a way to solve this stupid battle between Enron’s top financial officers.

The next morning, Fastow templed his fingers beneath his chin as he stared across his desk at McMahon.

“I’m not sure you and I can work together anymore,” he said calmly.

“Sorry to hear that, Andy,” McMahon replied. “Why?”

Fastow’s eyes grew intense. “First thing you should understand, Jeff,” he snapped. “You say something to Skilling, you might as well be saying it to me.”

“That’s exactly what I did assume, Andy.”

Fastow ignored him. “Skilling told me everything. He told me about the conversation you had with him.” McMahon nodded. Okay.

“I
never
put pressure on you to do a deal that wasn’t in Enron’s best interest,” Fastow railed. “Never!”

Wow
. Fastow’s information
was
good. “That’s not true, Andy,” he said. “You and I had conversations many times about paying you excessive fees that we pushed back on.”

Fastow waved a hand. “That’s just business.”

“Well, I feel it’s pressure,” McMahon said.

“Come on,” Fastow shot back. “Any time I didn’t do something that was right, you could go right to Skilling.”

McMahon blinked.
Was this guy delusional?

“Yeah, exactly,” he said. “And this is what happens when I go to Skilling. We’re having this conversation. I mean, that was a great avenue to take.”

McMahon raised the issue of LJM2’s location on the finance floor. “I told you,” Fastow replied, “I’m going to fix those things. You just have to trust me.”

Fastow was like a little boy, pushing off some chore with promises to do it later. “All I can tell you, Andy,” McMahon said, “is that I’m extremely unhappy. This whole thing is affecting my work and my personal life.”

Fastow said nothing.

“There are ways to fix it,” McMahon said. “I’ve told them to you; I’ve told them to Jeff. But it doesn’t appear that anything’s moving toward that end.”

A pause. “I just don’t know if we can work together anymore,” Fastow finally said. “I just don’t know.”

The two stared at each other in silence.

Hours later, Causey—followed by Glisan and Fastow—walked into Skilling’s office to talk about Project Raptor, the effort to hedge Enron’s merchant investments. Causey’s smile said it all; they had reached a breakthrough.

“We’ve really been working on this hedging idea,” Causey said. “And I think we’ve got something that works.”

Glisan took over. With charts and graphs, he laid out the premise of Project Raptor. Skilling recognized it as a variation on the Rhythms hedge. It sounded pretty clever to him.

Skilling nodded and stood. “This is looking good,” he said. “Keep me up to date.”

Everyone left the room, and Skilling checked his schedule. He had a meeting set up with McMahon in a few minutes; with luck, they’d sort out that quarrel between McMahon and Fastow. He walked out into the hall.

McMahon glanced at his watch. Three minutes until his meeting with Skilling. Suddenly, out of the blue, Whalley popped into his office.

“Hey,” Whalley said, “I’m here to hit you up again. I really want you to think about this job.”

McMahon shook his head.
This guy just won’t let up
.

“Look, Greg, I can’t right now. I’ve got a meeting with Skilling in a couple of minutes, and I’ve got to go.”

As if on cue, Skilling strode in. “Okay,” he said. “Are we meeting here?”

Huh?
McMahon looked from Skilling to Whalley. Wasn’t this going to be about Fastow and LJM? “We can meet here if you want,” McMahon said tentatively.

Whalley sat. “I set up this meeting, and I want to have it here.”

“You set up this meeting?” McMahon asked.

“Yup. With you, me, and Skilling, so I can tell you why you should take this job.”

The discussion went down the familiar path, with Whalley lobbying hard and McMahon voicing reservations.

Skilling jumped in. “Look, this is going to work out. Greg’ll do a great job, you’ll do a great job.”

He stood. “Jeff, look, I really need you to do this,” he said. “But I’ve got to go. You guys work it out.”

With that, Skilling hurried out the door.

McMahon thought about it over a sleepless weekend. By Monday, he had decided. The new job would get him out of the Fastow mess. Maybe it would open up new opportunities. He told Whalley he would start as soon as possible.

Then, the best part. McMahon visited with Fastow and let him know he was stepping down as treasurer.

Fastow was delighted. “Sounds like a good idea. You should take it. It’s a more important job than treasurer.”

McMahon nodded. “Look, I don’t want to leave you in the lurch,” he said. “So I’ve got three names for you, any one of whom is ready to step in to fill my role.”