Conspiracy of Fools (76 page)

“I thought your ideas were very interesting,” Schwarzenegger said. “I’m delighted at least to see that
somebody
is thinking about how to solve this problem.”

Lay nodded. He understood. Everyone, Schwarzenegger included, was tired of the dithering by Gray Davis. “At least we’re trying,” Lay replied.

“Well, I look forward to following your success,” Schwarzenegger said. “I’ll mention a few of your ideas to my friends in Sacramento.”

Back at his home in Houston that weekend, Lay settled down on a couch with a copy of the report from the Cheney task force. Right away, he saw it strongly supported electricity deregulation. Well, no surprise there.

Still, as he dug into the details, Lay felt disappointed. His big push had been for regional transmission organizations, to take the place of the system of state-by-state electric grids. But it just wasn’t there. Lay closed the report. Well, he had known the utilities would fight that issue, and they were always a formidable opponent in Washington. This time they had won.

In a cramped office in the back of the Los Angeles bureau of
The Wall Street Journal
, a fifty-one-year-old reporter named John Emshwiller was on the phone with California’s attorney general, Bill Lockyer. Emshwiller was working on an article about the state’s investigations of power marketers and their lack of success in turning up evidence of wrongdoing.

Tethered to his headset, Emshwiller took notes as Lockyer made clear his frustration in the lack of progress in the inquiries. Emshwiller asked if Lockyer believed there would be criminal prosecutions.

“I don’t have any doubt that there will be civil lawsuits prosecuted by the state,” Lockyer said.

A pause. Lockyer hadn’t answered. “There is nothing I would rather do than nail a high executive,” he continued.

Silence again. “You know what I’d really like to do?” Lockyer asked.

“What?”

“I’m not sure I should really say this.”

Words that have led to breath holding by countless reporters.

“Why not?” Lockyer finally said. “I’d love to personally escort Lay to an eight-by-ten cell that he could share with a tattooed dude who says, ‘Hi, my name is Spike, honey.’ ”

Emshwiller took it all down, almost in disbelief. This was one of those too-good-to-be-true quotes that was automatically guaranteed to be printed in the paper.

Skilling showed no expression as he walked over to his office conference table, where Fastow waited. In recent days, he had taken to cleaning messes
he saw at the company: he had told Lou Pai that it was time to leave; he had shut down a tiny investment business. Rice had already told Skilling his days at Enron were coming to an end, and Baxter was gone. Enron’s old guard was checking out.

Now the only unfinished business of consequence was getting rid of LJM. If Skilling left, he knew Lay would need a full-time CFO. That, coupled with market jitters, made the choice clear: Fastow had to choose—LJM or Enron.

“Andy, I want to tell you something,” Skilling began. “I’ve been growing increasingly uncomfortable with the content of our conversations.”

Fastow blinked. “What do you mean?”

“Our last ten phone calls, all of them in one way or another dealt with LJM. And to be quite honest, I don’t give a shit about LJM. I care about the company.”

It couldn’t continue that way, Skilling said. There was too much noise about LJM. It was hurting Enron.

“Andy, you have to make the call,” he said. “If you want to spend your time working for LJM, you can. Or you can spend your time being the CFO of Enron. But I’d like you to make a decision between the two.”

Fastow had listened intently, watching his boss’s face. There were no emotional clues; his tone had not been combative, just blunt. “I can’t just say I want out, because I’m the managing partner,” Fastow said. “Can you give me a couple of days to think about it?”

Skilling leaned back. “Sure,” he said.

Ken Lay hurried past the large red sculpture of a number 9 in front of the midtown Manhattan office building. He had just come in from Teterboro Airport and was rushing for his eleven o’clock appointment on Fifty-seventh Street with Kohlberg Kravis Roberts & Company—a meeting, he knew, that could well decide his next career.

KKR was tops in leveraged buyouts and owned an array of companies through its investment funds. It won national fame in its successful battle for RJR Nabisco. Now its principals, Henry Kravis and George Roberts, wanted to speak to Lay about taking a role at the firm.

Lay rode to the forty-second floor and was escorted to see Kravis. The two chatted until the arrival of Roberts, who had been discussing the new opportunity with Lay for weeks.

Kravis took the lead. “I know you and George have been talking about our plans,” he began. What KKR wanted, Kravis said, was a council of five or so wise men—corporate chiefs who had proven their mettle on the business battlefield—to advise on strategy.

“You can be as active as you want to be,” he said. “You can give us a little bit of time, you can give us a lot of time, you can give us all of your time.” A flexible commitment. That sounded good.

“And,” Kravis continued, “we’ll certainly set it up to be very rewarding for you financially.”

Work as much or as little as he wanted and be paid well either way? Why, Lay could be involved in an array of KKR companies, doing different things every day. He would have responsibility, but none of the administrative duties that were part and parcel of being chief executive.

Only six months remained until Skilling took over as Enron’s chairman. Lay had been trying to find his next act, but nothing had grabbed him. This place did. KKR, he thought, would be a great place to hang his hat.

“…   who says, ‘Hi, my name is Spike, honey.’ ”

Tim Belden, Enron’s top energy trader in Portland, reread Lockyer’s quote in that morning’s
Journal
, dumbstruck. The state attorney general was boasting that he wanted Ken Lay
raped in prison?
This was crazy.

Worse, it was scary. Belden knew there was something out there for investigators to find—the secret trading strategies. Already the firm had been hit with subpoenas from California, and an investigating committee in the legislature was demanding reams of documents. About the only thing keeping the dirty details secret was the legal wall that Enron had erected around its trading operations.

But how long could that last? For the first time Belden wondered if he might need to hire his own criminal lawyer, just to protect himself.

It had taken a few weeks, but Mintz finally completed his memo for Skilling about the missing signatures on the LJM approval sheets. He had written it in longhand, being cautious in his wording to make sure that he showed appropriate deference to the top boss.

The memo, only three paragraphs long, laid out the sheets’ purpose, mentioning that there was a line for Skilling’s signature that had apparently been missed. The sheets from 2000 had all been collected, he said, and were ready for him to officially give his approval for the deals.

“To that end,” Mintz wrote, “I will arrange to get on your schedule to assist you in this regard; alternatively, I can send such approval sheets to you as a package and you can sign them at your convenience.”

Once the memo was typed up, Mintz signed it and carried it back out to his secretary. “Darlene, can you put this in a P&C envelope and take it up to Jeff’s office?”

She fetched one of Enron’s “personal and confidential” envelopes and slid in the document. Neither knew that in hours, Skilling would leave the office for days. At best, he wouldn’t pick up the memo for a week.
^*

Fastow was out of options. He couldn’t back partly out of LJM and keep Skilling happy. It had to be all or nothing.

He had asked the lawyers to examine whether he could hold a
small
interest—say, less than ten percent—in the general partners of the LJM funds and avoid disclosure. The answer was no. In fact, their position was changing. Even if he held only a small interest, the market probably should know his compensation, they now said.

It was obvious what he had to do. He needed Kopper to come to the rescue once again. They had been working together on their side deals for almost four years. Kopper knew everything; he was the one keeping track of their comparative financial winnings on his laptop. He had bailed Fastow out before, on RADR. There was nobody else Fastow would trust to take over LJM2, and certainly nobody else likely to quietly cut him in on profits in the future.

That was decided. Fastow would sell his interest in the LJM funds to his buddy Kopper.

At 3:30 on May 24, Mintz breezed into Fastow’s office. That day, he had gotten word Fastow needed to talk, and this was the first time their schedules had both been open.

“Hey, Andy,” Mintz said cheerily. “How’s it going?”

Fastow, standing at his desk, nodded in the direction of the small conference table. “Sit down,” he said.

Mintz took a chair as Fastow picked up a small pad of paper and joined him. Then the words rushed out.

“I’m gonna sell LJM,” Fastow said.

What?
Had Mintz heard correctly?

“Really?” he replied calmly.

Fastow nodded. “Yeah, I’ve got to get out,” he said. He explained how everyone had ruled he would have to disclose his stake in the funds, no matter how small it was.

“Well, is that right?” Mintz replied. What, he wanted to know, were the lawyers saying?

“I don’t care,” Fastow replied. “Skilling thinks the time has come for me to move on. So fine.”

He took a deep breath. “Talk to Ron Astin. Find out what types of disclosures we’ll have to make if I sell.”

He’d take care of it, Mintz promised.

The meeting ended, and Mintz headed to the elevators. He climbed on alone, and the doors closed behind him. A second passed. Mintz clenched his fists and thrust them up in the air.

“Yes!”

Back in his office, Mintz grabbed the phone. He dialed the Fried, Frank firm and asked to be put through to the lawyers working on the analysis of the LJM conflicts.

“Guys,” he said happily, “I’ve got some good news.”

Skilling was at his desk, his face stern. It was 10:30 on the morning of May 29, his first full day after a week out of the office. Fastow sat before him.

“You’ve asked me to think about this issue regarding LJM, and I’ve come to an absolutely clear-cut decision,” Fastow said. “I unequivocally want to be the chief financial officer of Enron.”

Skilling was surprised.

“That’s what I’ve always wanted to be,” Fastow continued. “And from now on, that’s my dream job.”

The transition would take time, he said. He would probably have to travel, to sell the funds’ investors on the idea.

“I talked to Michael Kopper about taking over for me, and I think the investors will be okay with that,” he said. “But one way or the other I’ve made my decision. Within a month, I think I can do it.”

“Okay, Andy,” Skilling said. “Let me know if there’s anything I can do to help.”

They talked for another minute. Fastow sounded almost relieved with the outcome.

For good reason.

That week, Enron was in the final stages of repurchasing the interest in the Cuiabá power plant from LJM1. The agreement to buy back the investment—at a profit to LJM1, of course—had been struck long before.

But this repurchase
had
to be disclosed. LJM1 was a related party, already identified in the filings. Its transactions with Enron couldn’t, under any
interpretation, be kept secret. Anyone looking closely at Enron’s disclosures—and now, it seemed, many investors were—would spot the repurchase. It was going to be awfully hard to explain why assets were moving from Enron to LJM and back again, all at a loss to the company.

Now, maybe no one would have to. The agreement in principle for the Cuiabá buyback had just been signed, with an expectation of closing on May 30, the day after Fastow told Skilling of his intention to sell the LJM funds. Kopper wasn’t a senior Enron officer; LJM technically wouldn’t be a related party once ownership changed hands.

So why not just postpone the buyback? As for the money—well, Fastow could get it by adding his share of the Cuiabá repurchase to the LJM2 sales price. No one—not investors, not directors—would ever have to know about it.

Enron had committed the cash, the deal was ready to go. But now, just for a while, they were going to pretend no deal existed, all so Enron could avoid revealing the truth.

Lunch hour had arrived, and Sherron Watkins—the married name of the former Sherron Smith, the sometimes-salty-tongued executive who formerly oversaw the operations of the JEDI partnership—was heading out. After emerging from the elevator bank, she bumped into her former boss, Andy Fastow, in the lobby. She had long considered Fastow something of a snake, but she was smart enough to know when to make nice. “How’re you doing, Sherron?” Fastow asked.

Watkins shrugged. Not good, she replied. She had been working in Broadband, and it was in a meltdown. Watkins had recently learned her job was being eliminated, and she was scrambling. She didn’t mention it, but she had reached out to a friend at Reliant Energy, hoping for a lead. The only opportunity she found inside Enron was investor relations, but she had a two-year-old and wasn’t looking forward to the hours that job demanded.

Fastow’s eyes lit up. “Come talk to me,” he said. “I think I’ve got something for you.”

She smiled. “Okay, I’ll do that.”

The two parted ways, and Watkins’s smile vanished. Work for Fastow again? She could almost feel her stomach sinking.

Days later, Watkins met with Fastow to discuss his plans. It hadn’t been announced yet, he told her, but he was slated to take over corporate development now that Cliff Baxter was gone. And he needed help.

“You can be my eyes and ears around the building,” he said. “You can even put your name on any deal you find.”

Watkins tried to sound pleased with the offer, but she wasn’t. It was just a new version of the chief-of-staff position he had come up with years before for Shirley Hudler—essentially making her his glorified spy, partly so she could find out what other Enron deal makers were up to.