Conspiracy of Fools (75 page)

“All right,” he said soothingly. “I’ll find out what’s going on.”

Minutes later, Skilling was back in his office, on the phone with Rebecca Carter. He was bowled over by Lay’s reaction. He had seemed genuinely astonished by Skilling’s complaints about the board being out to undermine him.

“I don’t think Ken was involved in anything,” Skilling said. “He seemed surprised, like he didn’t know there was anything going on.”

Maybe the resignation could wait.

———

Lay got back to Skilling that same day, coming down to his office with the news. “Look,” he said, “I’ve called Pug, I’ve called John. I can tell you that there is no lack of confidence whatever in you.”

“What about this VAR stuff?”

Lay shrugged. “It didn’t seem to be a big issue.”

Skilling considered that. “Okay,” he said.

Skilling and Carter were back on the deck again that night. Lay might be talented at putting a good face on things, Skilling said, but he really seemed to be telling the truth. Maybe, he told Carter, he could figure out a way to hang on. At least for a little longer.

In a small office on a side street in Cambridge, Massachusetts, Mark Roberts was reviewing a confidential financial report he had prepared. Roberts ran his own independent investment-research firm called the Off Wall Street Consulting Group, which scouted out investment opportunities for his sophisticated clients. And the idea in this next report, he thought, was close to a sure thing: Enron’s stock price was headed for an even bigger fall.

To Roberts, the stock market was a fashion show, with Enron just the latest supermodel parading around. Analysts were taken in by the glamour and the lights, but weren’t doing the hard digging. Until now. Roberts and his staff had pored through financial statements, and what they found wasn’t pretty. Cash flow in particular was a problem. Roberts had found two billion dollars in collateral posted by California traders that Enron had counted as cash from operations in 2000—money that was beginning to flow out of the door as energy prices stabilized.

Then there were those related-party transactions. Enron was doing business with funds managed by a senior officer—a huge red flag. No Wall Street analyst seemed to know the details. But Roberts thought it was clear that a lot of questionable transactions had been conducted with these funds, all to manage and boost Enron’s earnings.

Roberts finished his review. The report was scathing but deserved. In a few days, this would go out to his clients. Then, he knew, plenty of people would finally start questioning Enron about these bizarre LJM deals.

Cliff Baxter was gone. He had packed up his things, bid his colleagues farewell, and walked out of Enron for the last time. Now somebody needed to take over the job of selling Enron assets. Looking around the company, Skilling could think of only one person for the task—Andy Fastow. Skilling summoned him to his office to let him know the news.

“Look, somebody needs to take over for Cliff,” he said. “You’re the guy. It’s your job over the next few years to get rid of these assets we want to sell.”

Fastow was thrilled. “That’s great, Jeff,” he said. “Cliff’s done a real shitty job at this. We should’ve gotten rid of some of this stuffa long time ago. I’m really going to do a much better job at it.”

This again
. Fastow seemed to never stop selling himself.

Ken Lay was in Austin on May 2 to chair a meeting of the Governor’s Business Council when he received word that his stepson, Beau Herrold, needed to speak with him.

Calls from Herrold were coming at a fast clip. With Enron’s stock price falling, banks that lent Lay tens of millions of dollars against the value of his shares were getting itchy. They wanted him to pay down the debt, either by selling shares or by coming up with cash. For a while, they had been doing that by borrowing from Enron’s short-term loan program, often pulling out the maximum of four million dollars at a time. Then Lay would hold on to the stock, hoping the price would go up. If it didn’t, he would pay back the Enron loan with stock, then borrow again when needed.

Today was no different. Bank of America this time, Herrold said. “The credit line is running real tight, and the bankers need us to pay some of it down,” he said.

“Okay,” Lay said. “How much?”

Herrold laid out the amount that was owed.

“Fine,” Lay said. “Let’s use the revolver and pull down that amount.” Herrold promised to take care of it.

Holy shit
.

Jordan Mintz was at his desk, thumbing through copies of the old approval sheets required for LJM transactions. It had taken six months to locate all of them, and what he saw was as bad as he had feared. The board had been told by Fastow the year before that Skilling was approving the deals. That was never formally required, but
that’s what they were told was happening
. And it wasn’t. Not once.

Mintz scheduled an emergency meeting with Causey and Buy. He wasn’t prepared to confront Enron’s chief executive without some advice. At ten on May 7, he went upstairs to Causey’s office to tell them what he had found.

“We need to get Jeff’s signature on these,” Mintz said. “But how do I do that? I’ve never really worked with Jeff before. Do I send a bunch at a time?”

There was another possibility, Mintz suggested. With all the issues surrounding LJM, maybe he could just sit down with Skilling and talk. Buy hated that idea.

“Send Jeff a memo about getting his signature,” he said. “But remember, Jeff is very fond of Andy Fastow.”

He looked Mintz in the eye. “Don’t stick your neck out on this,” he said.

The call from the White House personnel office came the next day to Harvey Pitt at the Fried, Frank law firm.

“Congratulations, we have good news for you,” the White House official said. “The President has decided to nominate you to serve as the next chairman of the Securities and Exchange Commission.”

The formal announcement would come, the official said, at the regular White House press briefing. Pitt thanked the caller and hung up. He was never asked if he would accept the job. Everyone knew that he would.

The next morning, Jordan Mintz stood in line at a Starbucks on West Gray Street with a folded copy of
The New York Times
under his arm. He ordered a tall red-eye, then carried the steaming drink to one of the tables outside. Sitting down, he unfolded the paper and skimmed the front page. His eyes drifted to an article on the left side.

“White House Picks Chairman of S.E.C.,” the headline read. Mintz set the paper down, studying the article.

“The Bush Administration has chosen Harvey L. Pitt, a prominent corporate lawyer, to be the next chairman of the Securities and Exchange Commission.”

Harvey Pitt. Mintz knew the name—a well-respected, top-flight securities lawyer. Worked at Fried, Frank.

Suddenly an epiphany.
Fried, Frank
. If it was good enough to have Harvey Pitt, it was sure to have other experienced securities specialists. Mintz even knew somebody there, a buddy from college. Fried, Frank was sure to give an unbiased view of the whole LJM situation.

Mintz stood, carrying his coffee to the car. He needed to get to Enron and call Fried, Frank’s Washington office. By day’s end, Fried, Frank would be putting the formalities in motion to finalize its retention to launch an examination of LJM. It would take about a month, but then Mintz would have an independent analysis of whether the sloppy, halfhearted procedures designed to deal with the conflicts in Enron were as bad as he thought.

———

Why are they doing this? It’s just inappropriate
.

Lay read those words with irritation. He had been flipping through news articles about Enron, provided to him each week by a clipping service, when he came across something from May 9 by
TheStreet.com
, a news Web site.

The article was all about a new research report by some outfit in Cambridge called Off Wall Street. Apparently, the recent report, which Lay had never seen, attacked Enron for declining profitability and rising debt.

But according to this article, the sharpest criticism was reserved for the dealings with Fastow’s funds. The piece quoted some Wall Street analyst—anonymously, Lay noted—slamming the propriety of the arrangement. Lay set down the clipping. How could anyone criticize LJM?

This was scrubbed and reviewed by the accountants, the lawyers, everybody. And they’re trying to make it look like we’re doing something shady
.

Lay’s annoyance grew. If only everyone knew about all the top-notch protections built into the process, they would never criticize LJM. Enron’s managers had thought of everything. There was no reason to worry.

Fastow was ready to tell his staff about his new responsibilities. This was the big time, a chance to push more deals and make a whole lot more money. People like Mark Metts, the deal maker on the wind-company sale, had blocked him in the past. Back then, Metts worked for Baxter. Now he would work for Fastow. It was all too delicious.

Fastow summoned a few close advisers to his office and almost danced a jig as he let them in on the big secret.

“There will be an announcement coming out about me becoming head of corporate development,” he began. “This is exactly what Jeff wants because we’re just gonna move assets off our balance sheet.”

Mintz was horrified. With all the conflicts that already existed, now Skilling was making Fastow the top asset seller—
when he was already a top asset buyer?

Fastow broke into a wide grin. “We’re just gonna sell a
shitload
of assets to LJM,” he beamed.

Everyone listened, tight-lipped. None of them had imagined that Enron could actually find a way to make such a horrible situation so much worse. But unknown to any of the executives in that room, Fastow was wrong. There would be no flood of sales. The once-impregnable walls that surrounded and protected the LJM funds at Enron were about to come crashing down.

AS NIGHT FELL IN
Miami Beach, the seventeen-story tower of the Loews Hotel glowed a brilliant white, illuminated by an array of spotlights. On the sidewalk at the tower’s base stood Andy Fastow, clad in jeans and a light sweater and wearing a mobile-phone headset. He looked distracted as he listened to a harangue from Jeff Skilling.

It was May 17, 2001, the day that President Bush announced the release of the final report of Cheney’s Energy Task Force. The proposed policies—from electricity deregulation to streamlining rules for building power plants—struck investors as a boon for industry, driving up stock prices for almost every energy company.

But not for Enron. On a day that the company should have been preening, its stock was the industry laggard, dropping almost three dollars to close at $52.20. Skilling heard the news while on a couples retreat with Rebecca Carter in Napa Valley, and since then, he had been calling around, trying to figure out what was going wrong. His director of investor relations, Mark Koenig, told him that the market was buzzing with fears about Enron. Some had to do with concerns that India planned to cancel the Dabhol power contract. But there was something else, Koenig said: in the wake of the Off Wall Street report, a growing skittishness about Enron’s dealings with the LJM funds.

Skilling hunted down Fastow, who was in Florida meeting with executives from Enron’s top banks. When Fastow’s phone rang, he was outside the hotel, waiting for a chartered bus that was taking everyone to dinner.

“Andy, do you know our stock lost more than $2.80 today?” Skilling asked icily the moment Fastow answered. “Worst performance in the industry.”

Fastow was stunned. He already knew about the release of the task-force plan. “I don’t understand that,” he said. “That is just really frustrating.”

Jordan Mintz emerged from the hotel, looking for the bus. He saw Fastow and sidled up to him. Fastow shook his head. “On the phone with Skilling,” he said softly.

Skilling’s voice droned on through the headset. “Listen, Andy,” he said,
“I’ve been hearing a lot of concern from the investment community about the company and about LJM. There’s just a lot of noise about this.”

Not quite true; he’d heard it from Koenig. But Fastow couldn’t blow it off as just something Koenig made up if Skilling took the credit for divining this bit of market gossip.

Fastow shifted his feet. “Well, I don’t understand why,” he said. “There’s nothing wrong with it.”

“Andy,” Skilling said, “perception is reality. If it’s having a bad impact on the stock, it’s not worth it.”

A minute later, Fastow hung up, looking troubled.

“Everything okay?” Mintz asked.

Fastow nodded. “Yeah, Skilling’s upset about the stock price. Says he’s hearing a lot of noise about LJM.”

As he spoke, the bus arrived. The two executives climbed on board, followed by a troupe of bankers.

At about that same time in Beverly Hills, Ken Lay was sitting in the Magnolia Room at the Peninsula hotel. A wall of French doors coaxed in the late-afternoon sun, spilling shimmers of light across the crowded conference table.

Some of the most influential members of Los Angeles’s political and financial community were there. To one side was Richard Riordan, the city’s mayor. Across the table sat Michael Milken, the disgraced financier turned philanthropist. And on one end was Arnold Schwarzenegger, the movie star who had recently begun dipping his toe in California’s political waters.

The group was there to discuss the continuing crisis in the state’s energy markets. Lay, who was the primary speaker, explained that Enron and Southern California Edison were working together on devising a solution that would require some action by the legislature.

Milken asked a question. “How much progress are you making up in Sacramento?”

“We’re beginning to get support on both sides of the aisle,” Lay replied. “I think if we can get something passed, the Governor will sign it.”

After the meeting broke up, Lay lingered. In a moment, he saw Schwarzenegger approaching. During the meeting, the actor had asked no questions, but now seemed eager for a conversation. The two were introduced and shook hands.