Conspiracy of Fools (77 page)

She mumbled a few comments, then headed out. She called her friend at Reliant; nothing was available for at least a month. That left her with either investor relations or spying for Fastow. Unpleasant as the second option might be, at least it would allow her time with her toddler.

Looked like she was heading back to Fastow’s stable.

Near Cannes on the French Riviera, Ken Lay walked out of the exercise room at the Hotel du Cap-Eden-Roc, the internationally acclaimed hot spot for the heavyweights of the corporate and entertainment worlds.

It was the morning of June 2, and Lay had just finished putting in time on the treadmill. As he headed toward the sidewalk, he saw two friends he had brought along on the trip—John Duncan, chairman of the board’s executive committee, and Harry Reasoner, the managing partner of Vinson & Elkins. The two apparently had just finished their morning walk and were sipping juice.

“Well, good morning, you two,” Lay called out.

The men lingered. After fifteen minutes, Lay thought of something. The night before, he had received a message from Skilling. It reminded him of the evidence he had seen of Skilling’s apparent depression. He had been meaning to inform the directors. This was as good a time as any.

“On another matter, John, there’s something I think you ought to know,” Lay said.

“What’s that, Ken?”

“Jeff Skilling really isn’t a happy camper,” he said. “There’s a lot of frustration and stress.”

Reasoner stood by, listening to the conversation. Duncan considered Lay’s words for a moment.

“What do you think he might do?” he asked finally.

“I don’t know,” Lay said. “I probably ought to call Pug on this, too. But I just wanted you to know that he’s not enjoying his job. I’m trying to help, but he’s just having a tough time right now.”

“Do you think everything will be okay?”

Lay shrugged. “When somebody gets unhappy, sometimes they do weird things,” he said.

The negotiations, if they could be called that, to sell LJM2 to Kopper went along swimmingly.

Already Kopper was flush with cash—thanks to Fastow. Just weeks before, Enron’s thirty-five-million-dollar buyout of Chewco finally closed, giving Kopper a ten-million-dollar profit, the payment once blocked by McMahon. Now all Fastow and Kopper needed was a swap. Fastow would give Kopper control of LJM2. In turn, Kopper would hand over the millions that Fastow had secured for him. Plus the $7.3 million distribution from LJM1 that Kopper would receive in a few weeks from selling the Cuiabá stake back to Enron. Oh, and some property he owned in Houston, too. It would take a few weeks, but when the dust cleared, Fastow would be able to pocket another $16.4 million.

The price was a bit on the excessive side, Fastow knew. But if he was going to be forced to walk away from his moneymaker, he wanted cash.

Lots of it.

Vince Kaminski was furious.

Once again he was being forced to put his analysts through the wringer of the Performance Review Committee, the PRC, and the outcomes were inane. These were top minds in their field, but now Kaminski was almost required to designate a portion of them as average or below.

They called it forced rankings. Skilling had sent out an e-mail announcing new requirements for the allowed percentages in each ranking level—just five percent at level one, thirty percent at two, and so on. While he mentioned flexibility, human resources treated the numbers as inviolate. The system was not only unfair, it was illogical. Even if his entire staff consisted of modern-day Einsteins, Kaminski would be forced to brand the performance of most of them as average or worse.

Not surprisingly, the analysts were in open revolt. In written evaluations, they told Kaminski that forced ranking was destroying the company. If everyone did a good job, the only way to move ahead was by undermining a colleague, but analysts needed to work as a team to get the best answers. Rather than sabotaging each other, they verbally attacked Enron and Skilling for pushing an idea without understanding the consequences.

Kaminski sided with them completely and made a stand at the PRC.

“I will not do the forced ranking,” he said. “It’s not in the best interest of the company.”

His defiance was short-lived. If
he
wouldn’t rank his troops, he was told, somebody else would. And Kaminski had no doubt that in the white-hot competition that was the PRC, his analysts would be given short shrift as rival executives jostled to elevate their own people.

He buckled, and ranked his staff. He did try to cheat by stuffing too many
of them into categories one and two. But he was just ordered to try again, until he hit the preset percentages.

One victim of the process was Kevin Kindall, whose yearlong inquiry had uncovered the threats posed by the Fastow partnerships. Vital work, but other, more senior analysts had been involved in pricing splashy, moneymaking deals. No matter how important Kindall’s effort, the truth was, it couldn’t even get a budget. His rank was forced down.

Kindall didn’t take the news well. “Vince, I did not deserve this,” he said. “My work did not deserve this.”

“I tried, Kevin,” Kaminski replied. “I know this is unfair. But there was nothing I could do.”

Wearily, he described how the process worked, recounting his attempts to thwart it. But Kindall wasn’t interested in the system’s mechanics, only its results.

“If Enron doesn’t operate in a way that can recognize my contribution,” he said, “then I need to move on.”

Kaminski tried to persuade his young charge to change his mind, but to no avail. Kindall resigned.

The person who had discovered the true nature of the financial threats that would ultimately destroy Enron was gone, his contribution dismissed as irrelevant to the company’s continued success.

The mood was electric on June 12 among the technology executives gathered in a Las Vegas auditorium. Vivek Ranadivé, CEO of Tibco Software, approached the stage to introduce the day’s featured speaker, Jeff Skilling.

The company was honored to have Skilling there, Ranadivé said. “Enron is being hailed as America’s most innovative company,” he said, “And Jeff Skilling has been declared the number-one CEO in the entire country.”

Skilling bounded onto the stage, dressed in an open shirt and a sports coat. He launched into a lengthy speech, telling his audience that the Internet had only begun to show its usefulness for business. It would transform industry, he said, and Enron’s future would be found there.

“We couldn’t do what we’re doing now without the technology of the Internet,” he said.

The questions after his speech touched mostly on technology matters. But one broached a different subject.

“Can you give us your thoughts about the power crisis in California?” an audience member asked. “And tell us what you think the state could have done differently?”

Skilling smiled. He thought of the attorney general’s comment a few
weeks before about taking Lay to a prison cell to be raped. Maybe it was time to shove back. “Oh, I can’t help myself,” he said. “You know what the difference is between the state of California and the
Titanic?”

The crowd laughed. Skilling glanced away. “I know I’m going to regret this,” he said, almost to himself.

He looked back at the crowd. “At least when the
Titanic
went down, the lights were on,” he said.

The crowd roared.

The SEC reached its final decision: the quality of Andersen’s accounting violated the fundamental principles of the profession. Despite protests from Andersen’s top lawyers, the firm would have to be sanctioned and charged with civil fraud. At least that way, SEC investigators hoped, Andersen would learn its lesson, and other accounting firms would know that they had to straighten up. The nation’s securities regulators never wanted to see another case like Waste Management again.

The violations at Waste Management, an Andersen client whose financial restatement years earlier helped spur Arthur Levitt’s “numbers game” speech, had horrified agency investigators. Andersen accountants had known about violations, but year after year failed to stop them. Now the SEC told Andersen it could settle the case or fight it out in court. Andersen, after much grumbling, took the deal.

On June 16, Gary Goolsby, a senior Andersen partner in Houston, reviewed a two-page consent form, essentially the firm’s agreement to settle. Goolsby, the partner who months before informed Carl Bass of his removal from Enron accounting issues, had been chosen to sign the documents.

In recent days, Goolsby had spoken repeatedly with Tom Newkirk, the SEC lawyer handling the Waste Mangement case, assuring him that Andersen had learned its lesson. The firm would mend its ways, Goolsby promised.

He glanced through a second document, called the final judgment. On the second page he saw that the firm was forbidden, by a permanent injunction, to deceive anyone in the future. It all seemed pretty boilerplate. Goolsby signed the consent. Andersen was now on notice. If it played fast and loose with the rules again, the consequences would be stiff.

That same week, federal energy regulators bowed to political reality. The California electricity shortage was not going to end on its own, not as long as traders could go state to state around the West playing games with prices. So price caps were extended to all western states. That clampdown, coupled with rising supplies, finally ended the crisis, more than a year after it began.

That might have delighted electricity customers, but it troubled Enron investors, who saw California as an opportunity for almost unlimited profits. Now that bonanza was slipping away. Enron’s stock price the day of the announcement hit $43.07 a share, a new fifty-two-week low.

Vince Kaminski could almost feel his heart tearing out. His best analyst, Stinson Gibner, had just come in to let him know that he was leaving Enron, too. It wasn’t a matter of pay or title. It wasn’t the PRC. It wasn’t that there was a better job offer. It was the Raptors.

“I can’t have pride in a company that can do something like Raptor,” Gibner said. “I can’t keep working here.”

Kaminski tried to argue, but his efforts were feeble. It was hard for him to disagree.

The lawyers arrived in Skilling’s office at 9:15 on the morning of June 20 to talk about the continuing ripple effects from the California electricity crisis.

Days earlier, Skilling had received a call from Pacific Gas and Electric, a California utility that had filed for bankruptcy months before. PG&E was reaching out to creditors like Enron, asking for meetings to discuss a proposal to help get it back on its feet. After the call, Skilling had asked Mark Haedicke and Richard Sanders, the two senior Enron lawyers handling the California mess, to come discuss the utility’s request.

Once the lawyers arrived, Skilling decided to raise another issue. He was heading out to California the next day to deliver another speech. Before he left, he wanted to check his facts again. He mentioned his plans and said that his speech was again going to underscore that everything happening in California was a market-driven phenomenon.

He looked from one lawyer to the next. “Enron has got to be clean as the driven snow. So one more time. Are we as clean as the driven snow on this?”

Haedicke nodded. “Yeah. There was some stuff going on last year, but we shut that down.”

What kind of stuff? Skilling asked.

Sanders was surprised. By now—so many months after they had discovered Death Star, Fat Boy, and the other trading strategies—he thought that Haedicke would have
told
Skilling about this.

“Well, there are some allegations of unfair competition and antitrust allegations,” he replied.

Skilling seemed taken aback. “What are the kinds of things we’re being accused of doing?”

Sanders paused. Did Skilling really want to know details? He mentioned
the names and described each one. Some, he said, were problematic because they involved false documents. Others, like one looping power out of state and back in, smelled bad, but legally were probably okay. Still, Sanders said, the lawyers had ordered the tactics stopped as soon as they were discovered.

“Okay,” Skilling said. “So we’re as pure as the driven snow?”

Beau Herrold was desperate. As one of Lay’s investment advisers, he had been scrambling for months to get the family’s finances in order. But every time he felt he was on solid footing, Enron’s stock price dropped, decreasing the value of the assets securing Lay’s loans and triggering more demands for cash from the banks. It was like trying to build a sandcastle at high tide, with new waves coming in every so often, knocking down the latest fortifications.

And Lay wasn’t making things any easier. His belief that Enron’s share price would pop back up was unshakable. As much as possible, Herrold had been tapping everything else—dumping some of Lay’s few other easy-to-sell investments, trying to negotiate better terms with the banks. But still the destructive waves kept coming.

So, on June 20, Herrold decided to check out a more aggressive strategy he had been contemplating. Until now, he had used Lay’s revolving credit line with Enron only occasionally, pulling down four million dollars in cash at a time, then waiting before repaying it with Enron stock in hopes the price would recover in the interim. Instead of doing that every so often, Herrold thought, what if he did it again and again and again, to really pay down some of the debt? Get the sandcastle out of the tide’s reach?

He spoke with lawyers and compensation experts at Enron, asking about limits on the credit line. Scribbling notes as they spoke, Herrold learned he could draw down four million dollars every business day—up to twenty million dollars a week. The only restrictions were that he had to give the company notice, and if Enron stock was used to pay back the loan, Lay had to have held the shares for at least six months.

What about disclosure? Usually when corporate executives sold stock in their own company, they were required to file a document known as a Form 4 to let investors know. Would Lay have to do that each time he paid back the loans with Enron shares? Herrold telephoned Rex Rogers in the general counsel’s office to find out. Rogers assured him that the disclosure requirements on selling shares to the company were far less stringent.