Conspiracy of Fools (7 page)

The signal of support for Andersen was all the other directors needed. Of course the lawsuits weren’t a problem, several said. In fact, one suggested, why take the auditing away from Andersen? With all the difficulties that HNG/InterNorth was facing, why go to the trouble of a switch? Why not rely on Andersen for everything?

Georgiana Sheldon, formerly head of the Federal Energy Regulatory Commission, felt uncomfortable with the suggestion. “Wait,” she said. “I don’t like the idea of giving all the work to Arthur Andersen. I’d be concerned about a possible conflict of interest if the same firm performed both the consulting and the auditing.”

The directors understood. Auditors might need to examine the outcomes of consultants’ strategies. Who would want an adviser grading its own papers?

“I agree,” said Robert Jaedicke, the Stanford Business School dean who served as the committee chair. “I’d be concerned if Andersen was appointed auditor and a transition wasn’t made quickly to another consultant.”

The bantering left Lay uneasy. Once again the board members seemed to be undercutting their managers in favor of their own parochial interests. “I
need to point something out,” he said. “Our CFO made this recommendation to me, and I agreed with it. So it’s the recommendation of the CFO and the CEO that this proposal, as outlined, be accepted.”

The room went silent. Finally, someone took the bait. “I’m concerned about the message we’d send if this committee doesn’t support management,” Renier said.

The dynamic of the discussion was shifting. But Jaedicke asked for a forty-eight-hour recess. Lay walked out frustrated. It was a stupid squabble, one that, if he lost, would once again undercut his authority.

Some battles are just not worth fighting
.

The only way to win, Lay decided, was to adopt the board’s position as his own. He would be victorious in defeat. Two days later, Lay went back to the boardroom to speak with the directors by conference call.

“It is very important at this stage in the company’s history to have unanimity from this committee,” Lay said. “In view of the fact of the virtual equality of the two firms, management has revised its recommendation”

He paused for a moment. “We are now recommending that Arthur Andersen be retained as our independent auditor.”

The directors unanimously agreed. Arthur Andersen was retained as auditor and consultant; Deloitte was abandoned. No one raised the concerns again about the possible problems of Andersen serving in two conflicting roles.

Lay’s defeat on the accounting issue set Bill Strauss to thinking. His reappointment as chairman was supposed to help the company come together. Instead, it was pulling itself apart. Already he thought Lay was spending too much time on internal politics; the man had been given the CEO title but received little of the respect that the job deserved. Something needed to be done, Strauss decided. Everything was put in motion in early February 1986, when Strauss ambled down to Lay’s office.

“Look, Ken, I know these are tough times, and they’re probably not going to get any easier,” Strauss said.

“That’s probably an understatement,” Lay said, chuckling.

“Well, we need to resolve a few things. I need to know your hands are tied to the steering wheel, that you’re here for good.”

One problem, Strauss said, was that Lay’s contract from HNG allowed him to pull the rip cord on a golden parachute up to a year after the company merged. So there was still plenty of time left for Lay to walk away from his job with about three years’ worth of salary and bonus.

“If everybody is going to get behind you, Ken, we need to know there’s
no escape hatch,” Strauss said. “I’d like you to give up your golden parachute, and I’d like to be able to tell the board at the next meeting that you did.”

Lay asked for the weekend to think about it, and talked it over with his wife, Linda. On Monday he returned with the verdict: Strauss could let the directors know he was giving up the pay package.

The board met on February 11, 1986, at an office building in Orlando, Florida. The directors gathered around the table, and Strauss started things off. Lay figured he would open with the announcement about the pay package.

“I have something to tell you,” Strauss began. “I’m going to tell you something that only my wife and I know.”

What?
Strauss’s wife sure wasn’t the only one to know about Lay’s decision. What was going on?

“In the last few weeks I’ve met with each of you individually. I’ve talked to you about what ought to happen at this company. I’ve asked you about the management team, and the problems and all of that”

Strauss looked over at Lay. “I’ve reached the conclusion that I should step down as chairman and Ken should become chairman.”

No one spoke; no one moved.

“This company needs one leader and one leader only,” Strauss continued. “There has to be no doubt about that. So, effective right now, I resign as chairman, I resign from the board, and I am going back to Omaha.”

Strauss walked out—no good-byes, no handshakes. In that moment Lay understood Strauss’s request from the week before; he had tied Lay’s hands to the steering wheel before jumping out of the car. It was the ultimate rebuke to the board; the company had only one driver now, and the board could either support him or crash.

The directors sat in silence, until finally one of them spoke up. “I nominate Ken Lay as chairman.”

The vote was immediate and unanimous. Lay assumed total control. Before the year was out, his own supporters had a majority on the board—enough to succeed in moving the headquarters to Houston. But the tumult that surrounded the creation of his company was far from over.

“Enteron.” The decision seemed final. HNG/InterNorth would abandon its awkward name and be rechristened “Enteron.” It would be the strongest signal of the company’s emergence into the new Lay era. On February 19, 1986, eight days into Lay’s chairmanship, the company announced that the new name would be put to a shareholder vote in April.

The name had been proposed by Lippincott & Margulies, a pricey New
York consulting firm that had spent three months and millions of dollars on the project. It derived from an analysis of the company’s business—“En” for “energy,” “ter” for “international” and “InterNorth,” and “on” because it sounded cool. After thinking it up, the consultants had checked around the world to be sure no other company was using the name and that it did not have some vulgar meaning in another language.

Problem was, no one bothered to check
Webster’s
. “Enteron” is also a word for the digestive tube running from the mouth to the anus—particularly unfortunate, given that Lay’s company produced natural gas. Within days of the announcement, the soon-to-be Enteron was a laughingstock.

It all came to a head one Saturday as Lay and his two top advisers—Mick Seidl, his president, and Rich Kinder, his general counsel—jogged three miles in Houston’s Memorial Park, debating what to do. Seidl and Kinder believed that the issue would blow over in little time; Lay was equally adamant that the new name had to go.

Two days later, Lay contacted the naming consultants, informing them that either they needed to figure out a new name quickly or it would stay HNG/InterNorth. Somehow, the work that took three months for the first name was repeated in little more than a week. Lay liked the new suggestion immediately; the shareholders overwhelmingly approved it.

HNG/InterNorth would from then on be known as Enron, a name that in its first days was already on its way to being bound up in scandal.

———

The limousine eased along the sidewalk outside the New York airport, stopping where David Woytek and two other auditors were waiting. It was days after the big showdown in Houston over the secret bank accounts, and Woytek and his colleagues—including John Beard and Carolyn Kee, an Arthur Andersen partner—had come to New York to conduct the inspection of the trading unit that Lay ordered. They loaded their luggage and climbed in the limo—provided by Borget, the unit’s head—which took them to the offices at the Mount Pleasant Corporate Center. But they were forbidden to enter without being announced, and once they were inside, Borget ordered them not to speak to his traders.

“I don’t want you stirring them up and making me lose people,” Borget told them.

For three days, the auditors played cat and mouse, with Borget and Mastroeni providing the bare minimum of the records they requested. Finally, on the third day, Woytek had had enough. He flagged down Borget.

“What’s the matter?” Borget asked.

“We want to see the backup for these trades,” Woytek replied, holding up some trading records.

“What do you mean?”

“The telexes, the wire transfers. All of these trades had to create a paper trail. We want to see it.”

Borget tightened. “Okay, we’ll get it for you.”

The records never arrived. Instead, Borget phoned Houston to complain about the auditors’ disruptions. A few hours later, Mick Seidl, Enron’s president, called Woytek.

“You guys need to pack up and come home,” Seidl said.

“What? Why?”

“Borget is getting upset, the traders are getting upset. You need to pull out. We’re going to turn this over to Arthur Andersen instead.”

Woytek couldn’t believe it.
Borget’s got them hoodwinked again
. But he knew there was no fighting a direct order. “Fine,” he said. “We’ll come back”

The investigation in Valhalla was turned over to Carolyn Kee, who summoned a number of young Andersen auditors to help her dig through the paperwork. Still, Woytek and his team had rifled through enough records to know things in oil trading were bad. For one thing, Borget had sold a company car for seventy-eight hundred dollars and stolen the proceeds, depositing them in the Eastern Savings account.

And then there was M. Yass, a broker from another firm identified as part of the profit shifting. About $106,000 from the bank account had been converted into cash and supposedly paid to Yass, a man described by Borget as a Lebanese national working with Southwest Oil & Commodities. But the auditors were convinced that Yass was a ghost, a creation of the traders’ imagination, invented for the purpose of shifting money around. Even his name—Woytek figured it stood for “My Ass”—suggested that the traders were thumbing their noses at Houston.

The team had tried to track down Yass and Southwest Oil. Beard hired a private investigations firm called Intertect to check the backgrounds of Borget and Mastroeni, and to locate Yass, Southwest Oil, and the other companies that supposedly helped in the profit-shifting scheme.

The report arrived at Enron in the second week of February. Southwest Oil, Isla Petroleum, and Petropol Energy did not exist. The telex numbers for them provided by Borget and Mastroeni were bogus. Worst of all, the report said, Mastroeni, the unit’s top finance executive, had been personally sued by banks for using fraudulent documents to obtain loans.

Woytek took the devastating report up the line, hurrying over to the office of Keith Kern, Enron’s chief financial officer. He gave Kern a copy, laying out everything the private investigators had uncovered.

“Why did we hire these people?” Kern asked, “We don’t need to be doing this. Arthur Andersen is up there; they’re looking into everything.”

Kern tossed the report on his desk.

“I want you guys to drop it.”

At four o’clock on the afternoon of April 29, Enron’s audit committee gathered in the boardroom of the new Houston headquarters. For an hour the directors heard about the company’s internal-audit work for 1986. They could not have been more pleased; after months of tumult, it sounded as if Enron’s controls were finally falling into place.

“I think you would agree that this is a remarkable turnaround in a very short period of time,” Robert Jaedicke, the committee chairman, said during a presentation from accountants with Arthur Andersen.

“Absolutely, yes,” replied Jack Tompkins, an Andersen partner. “I would agree with that.”

Once all the happy talk was out of the way, the directors turned to the matter of Enron Oil. Andersen had submitted its final report a week earlier, loading it with caveats about their inability to determine whether crimes had been committed. The report was breathtaking in what it failed to reveal—nothing about Mastroeni’s past problems with fraud, or the nonexistent trading partners, or the forged documents. It
did
caution that the potential losses in the oil-trading business seemed far larger than the directors believed, but that point went by with little comment.

Instead, Mick Seidl held up the report as evidence that the swirl of suspicions about the goings-on in oil trading could be dispelled. “While there appear to have been some errors in judgment, there are no indications that anything was done for personal gain,” he said.

The directors asked questions signaling deep discomfort with Mastroeni. Lay listened, disturbed by the direction of the discussion. Before the meeting, Borget had called him personally, pleading to save Mastroeni’s job. The unit wouldn’t work without him, Borget had said, and Lay took the warnings seriously. It was clear to him that he needed to make a decisive move to avert an action by the directors. He began to speak.

“I hear your concerns, and I understand them. But I’ve made the decision. I’ve got to put my CEO hat on and do what is in the best interest of Enron. We cannot afford to be disrupting our trading operations unnecessarily. It is too important to our financial performance.”

Lay’s tone was resolute. “I’ve decided we’re not firing anyone. But we will
make changes. We will keep Tom Mastroeni on the payroll, but he will be relieved of his financial responsibilities. We’re going to name a new chief financial officer for the unit and move that person up there to take control. And all of the banking and financial activities will report through Houston from now on. That’s my decision.”

Ron Roskens, one of the directors, was the first to respond. “Well, I have to tell you, this bothers me.”

Other directors agreed, but Lay held firm. None of the directors seemed willing to start up the sort of battle that had infected Enron in the years before. So, with their reservations clear, the committee voted to back Lay.