Conspiracy of Fools (62 page)

The letter was routed to the general counsel, Jim Derrick, and a copy was then forwarded to Skilling. Most of the allegations struck Skilling as penny-ante. But one, deep in the letter, made him sit up and take notice.

The Maharashtra State Electricity Board, the body contractually obligated to purchase power from Enron’s Dabhol plant, couldn’t pay its bill. And Enron’s office in India, the letter said, was helping the board finagle the numbers to hide the problem.

This couldn’t be right
. Dabhol was still only generating power from stage one, the least expensive part. Stage two, the piece that would drive Dabhol’s costs into the billions, hadn’t begun. If Maharashtra couldn’t afford to pay for the available electricity now, how could Enron start generating even more?

Skilling dashed out of the office. Causey had been looking at the Dabhol numbers for Project Summer. Maybe he could shed some light on this.

“It’s not possible,” Causey said. “Their numbers don’t show that.”

A failure to pay bills, he said, would show up in the books from India as accounts receivable—essentially, money owed the plant. But these numbers weren’t building up.

Skilling sighed in relief. “Okay,” he said. “Maybe there isn’t a problem here.”

He headed back to his office, but his reprieve didn’t last. He couldn’t quite shake the suspicion that something was seriously wrong in Dabhol.

Ken Lay loved Enron stock. For years he had invested in almost nothing but the company’s shares, watching happily as his net worth multiplied with the rising stock price. But by 2000, things had begun to change.

Beau Herrold, Lay’s stepson, had been brought in months before to join the team managing the family investments, and soon he and the other advisers were pushing Lay to expand his portfolio by selling Enron shares and buying other stocks. Lay always refused.

“Why sell a stock when you feel strongly it’s going to continue on up?” Lay asked Herrold.

Herrold and the other advisers didn’t give up, and Lay eventually relented a little. He wouldn’t
sell
his Enron shares, but he would pledge them as collateral for bank loans. Then Herrold could use the borrowed money to purchase other investments. Lay saw no real risk; he felt confident that the banks could be repaid in the future with the growth in value from Enron shares. The borrowing started in earnest.

On the evening of September 2, the Saturday of Labor Day weekend, Andy and Lea Fastow were dining at Tony’s with two friends, Michael Metz and his wife, Clare Casademont. Other diners shot furtive glances at the four attractive young professionals; Casademont was well known in town, a former local news anchor who had left the station when she moved to London with Metz, an international oil trader.

As the four chatted over drinks, Fastow noticed a group of people making their way to a second, smaller dining room. It was Jordan Mintz, an Enron tax lawyer, accompanied by his wife, Lauren, and her family, all there celebrating the eightieth birthday of Lauren’s father.

Fastow caught Mintz’s eye and signaled for him to come over. After settling the rest of the family, Mintz and his wife walked to Fastow’s table. The three couples made some small talk.

“Listen, Jordan,” Fastow said. “When you’re back in the office on Tuesday, make an appointment to see me. I have something important I want to discuss with you.”

Mintz knew not to ask details. “Okay, I will.”

As the Mintzes headed back to their table, Lauren tilted her head toward her husband. “What was that about?” she whispered.

Mintz was sure he knew. The previous year, Fastow had approached him about becoming the finance division’s top lawyer, only to snatch the offer away when Enron’s general counsel, Jim Derrick, pushed another candidate, Scott Sefton. But word was out that Fastow was unhappy with Sefton. This couldn’t be a coincidence.

“I think,” Mintz replied, “it’s about the global-finance job again.”

The following Tuesday, Fastow was sitting behind his desk, sipping on a bottled water as he spoke to Mintz.

“Derrick sold me down the river on Sefton,” he said. “I’m getting rid of him. And I think you’re the right person for this job.”

“Well, Andy, what’s Jim going to say?”

“Derrick’s out of the loop on this,” Fastow replied casually. The task had been delegated to the deputy general counsel, Rob Walls, a lawyer Mintz knew well.

Fastow told Mintz to speak with Walls, and wished him luck. This time everything worked out. Walls called days later with the news that Mintz had been selected as the finance group’s new general counsel, starting October. Mintz was ecstatic. This was a dream opportunity.

His enthusiasm wouldn’t last through his first day.

The next morning, Fastow and Causey got together at nine. It was, Fastow told Kopper, a meeting to discuss an agreement dubbed Global Galactic.

If LJM2 was going to keep buying Enron’s assets—helping ensure its ability to meet its earnings—then Fastow wanted the company committed to repurchasing the ones he really didn’t want, at a preset profit.

There were plenty of assets to discuss: the investment in the Nigerian barges, now owned by LJM2 since its purchase of the stake from Merrill Lynch; the stake in Cuiabá; deal after deal. As far as Fastow was concerned, with an agreement in place, he would be guaranteed not to suffer any losses.

Fastow put it all in writing, listing each asset, the repurchase price, and the predetermined profit that LJM2 stood to make. It was an agreement that, Fastow knew, proved Enron’s “sales” to LJM2 were a sham. The company bore the risk of ownership; no matter what happened to the asset values, LJM2 would profit. Any losses would be Enron’s. The “equity investments” from LJM2 were nothing more than disguised loans.

The document would prove to be what the government considered the smoking gun, the proof LJM2 was at the center of a web of illegal schemes. It would remain undiscovered by investigators until years after the company’s collapse.

———

The news coverage of the California energy crisis was relentlessly bad. Mutterings about market manipulations by out-of-state energy companies were growing louder. That was enough for Richard Sanders, chief litigation manager for Enron’s wholesale division; he could almost smell the lawsuits coming. In early September, Sanders visited his boss, Mark Haedicke, the division’s general counsel.

“I think it might be a good idea for us to go see what’s going on out there,” Sanders said. “To see what we can do to head off the litigation.”

Haedicke agreed. He authorized hiring an array of specialists from several firms. If there was anything to worry about, an army of lawyers would find it.

That same day in Portland, Christian Yoder, Enron’s top lawyer on the trading desk, received a call from Haedicke in Houston to fill him in on the decision. “Do you know any attorneys who are really expert and up-to-date on California trading and California issues?” Haedicke asked.

“No,” Yoder replied. “It’s kind of an unknown area.”

Yoder agreed to look around. He thought of Stoel Rives, a renowned Portland firm, which suggested Stephen Hall, a bright third-year associate. Yoder interviewed Hall and agreed he was the right man for the job. The two lawyers became friendly, which helped in future years, when they both emerged as key witnesses in the storm of scandal.

Mark Haedicke sat down with Stuart Zisman not long after receiving his letter on the legal perils of Raptor I.

“I want to thank you for your candor,” Haedicke began. “But I do have some issues.”

Zisman’s language, he continued, was inflammatory and opinionated. Not what Haedicke wanted to see. For example, he said, Zisman had described Raptor as “cleverly designed.” That seemed almost snide and really had no place in this kind of legal memo, Haedicke said.

The meeting lasted less than fifteen minutes. Haedicke never mentioned Zisman’s warnings about possible earnings manipulation. Word choice—that was the problem.

Cliff Baxter was on the phone with Badr El-Din, hearing more about kidney failure than he wanted to know. Sheikh Zayed needed to give the final sign-off before Project Summer could be closed, Badr El-Din said. But the sheikh had experienced complications and was in no condition to consider such a complex deal.

“I don’t dare go in while his family is there, tending to his care,” Badr El-Din said. “We will have to wait.”

Anxiety gnawed at Baxter. Delay on a transaction this large was a bad omen. And sure enough, efforts to jump-start the process faltered. UBS tracked down one of the sheikh’s family members in Spain and asked him to fly to the Emirates to get
somebody
to sign. Endless other calls were placed—to Spain, to the UAE, to Cleveland. Repeatedly, there were promises signatures were coming. They never did.

On September 8, Baxter dropped by Skilling’s office and slumped into a chair. “This isn’t working, Jeff,” Baxter said. “Every day that goes by, this starts receding. There’s going to be second thoughts.”

Skilling nodded. This was bad.

The SEC’s proposal to split accounting and consulting had stirred up a hornet’s nest on Capitol Hill. Day after day, outraged letters and phone calls arrived at Arthur Levitt’s office from Congress. When pressed on the problem, though, many objectors displayed an unfamiliarity with the issues bordering on ignorance; some seemed not to know the difference between a balance sheet and a balance beam.

Still, Levitt respected a handful of the staunchest opponents—like Phil Gramm, a Republican senator from Texas. Gramm, whose wife, Wendy, served as an Enron director, believed the rigors of the marketplace, not the dictates of the government, should guide American business. That left him philosophically opposed to the Levitt plan. But Gramm was also infused with an abiding sense of fair play and wanted the proposal to die on the merits, not political gamesmanship. He secretly appointed himself Levitt’s congressional spy, monitoring his colleagues’ intrigues.

Levitt was in his office one day when Gramm called with news. “Arthur,” he said, “thought you’d like to know that Shelby is after you.”

Shelby
. Richard Shelby, a Republican senator from Alabama. “How so?” Levitt asked.

“He’s putting together an appropriations rider. Something to bar the SEC from spending any of its budget implementing this proposed rule of yours.”

Levitt thanked Gramm and hung up furious. It was a typical Washington power play. If politicians couldn’t win on the issues, they’d attack the budget. Levitt decided to fight back, finding the home number for Senator Trent Lott, the majority leader. Lott had the power to squelch Shelby’s shenanigans; Levitt hoped to appeal to the senator’s sense of fairness. Lott was gracious when he came on the line.

“Trent, this is too important an issue to be sabotaged in the dead of night
with some appropriations rider,” Levitt pleaded. “No matter what you think about the issue, the process should be aboveboard.”

There was plenty of support for what he was proposing, Levitt said. A number of newspapers and magazines, including
The New York Times, The Washington Post
, and
Business Week
, had endorsed adoption of the rule.

“Well, Arthur,” Lott drawled, “I’m not familiar with what you’re proposing to do, but if those liberal publications are in favor of it, then I’m against it.”

Levitt hung up, shaken. Political power was aligning against his proposal. Somehow, ensuring that
public
accountants represented the interests of the
public
was too controversial for Congress. The members’ ties to the industry, Levitt figured, were too strong. If he continued down this path, Congress could cripple the SEC’s budget. He had no choice. He had to compromise.

Cliff Baxter spoke to Skilling shortly after noon on September 14. His voice was calm, his manner decisive. Still no progress on Project Summer, he said. Just more promises that soon signatures would arrive.

“I don’t like this,” Baxter said. “It feels wrong.”

“What do you want to do?” Skilling replied.

Baxter showed no emotion. “I think we ought to terminate the offer.”

What?
“Why do that, Cliff?” Skilling asked sharply.

“We’ve got to do something,” Baxter replied. “We’ve got to make them focused. We’ll give them a period of time to sign, or tell them we’re going to terminate the deal. If something’s going to happen, that’ll make it happen.”

Skilling took a deep breath. It sounded like an all-or-nothing bet. Still, he trusted Baxter’s instincts.

“Okay,” Skilling said. “Do it.”

The deadline passed the following Monday, September 18. No response. Baxter, looking worn down, dropped by Skilling’s office with the news. “Got nothing, Jeff,” he said. “Looks like Project Summer is dead.”

Oh, God
. Skilling had invested so much emotional energy in this deal, hoping it would solve all of his problems. He rubbed a hand over his face, then looked at Baxter.

“Okay, so that’s that,” he said. “We’ve got to gear up again. Start over. Sell it in pieces if we have to.”

Baxter nodded. Skilling headed down to talk to Lay. There were a lot of things to do. And one of the first was to sit down with Joe Sutton and tell him to get out of Enron.

———

That same day in Dallas, Causey led an entourage of Enron executives down a fiftieth-floor hallway in Renaissance Tower. They found room 5050, the Dallas bureau of
The Wall Street Journal
, and stopped at a receptionist’s desk, asking to see a reporter named Jonathan Weil.

A lawyer by training, Weil was a self-taught financial sleuth who, months before, had received a tip about the accounting at some energy-trading companies, including Enron and its top rival, Dynegy. Weil, a reporter for the regional section called Texas Journal, had dug into the records, realizing that the companies depended on mark-to-market accounting—loaded with plenty of assumptions—to report spectacular earnings. He had called to get responses, then suddenly today, two days before publication, someone at Enron phoned back to say Causey was on the way to Dallas to speak with him.

The Enron team made their way into the bureau’s newsroom. Weil was at his desk and heard someone asking for him. He gathered his notes and stood. After introducing himself, he led the group to a nearby conference room.