Conspiracy of Fools (81 page)

Just down the hallway, Jeff McMahon and Ray Bowen were walking toward the elevator. The meeting had been oddly unsatisfying. They both smelled a rat.

“Unless Skilling is sick, or his kids are sick, this makes no sense,” Bowen said. “He’s bailing on us.”

He took a deep breath. “The guy’s a pussy,” he said.

———

That afternoon, after Enron made the announcement, Lay and Skilling conducted a conference call with analysts and reporters. Their message was unified: Skilling’s decision was purely personal, and the company was fine.

“I can honestly say that I have never felt better about the company,” Lay said.

Skilling agreed. He declined to explain his personal reasons, making vague references to family issues.

“I feel a little bad that anything I do is somehow construed as something related to the company,” he said. “The company is in great shape.”

Back to Lay. “There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues,” he said.

Jordan Mintz didn’t know what to think. Skilling was leaving? Maybe something big was going on. Well, Fastow always held himself out as Skilling’s buddy. He was sure to know the truth behind all the happy talk.

Mintz dialed Fastow’s extension. “Andy, what do you know about this thing with Skilling?” Mintz asked.

Fastow sounded annoyed. He had only just found out himself a short while ago, he told Mintz.

“Well, what’s going on?” Mintz asked.

Fastow snorted derisively. “I don’t know,” he said. “Maybe Jeff and Rebecca just want to go out on the beach so he can buttfuck her all day.”

Mintz hurried off the phone. He was flabbergasted. Skilling’s supposed pal doesn’t know anything—then he deals with it by tossing out a nasty, sophomoric comment?

What, he wondered, was a guy this—
sleazy, immature, what was the word?
—doing as chief financial officer?

Ken Lay’s meeting with Rebecca Carter came that same day. Before he said a word, she knew what was about to happen. The king was dead; most countries didn’t keep the queen around for that much longer—even the prospective queen.

“Rebecca,” Lay intoned, “the board has been discussing the situation, and they are just not comfortable with you remaining in your current position.”

Lay rambled on, saying things about finding her another job in the company, other than corporate secretary. But Carter didn’t want to hear it. She was devastated.

The next day, Watkins was at her computer, typing. She had been stunned by the Skilling announcement. Enron had been his life. But now he was walking
out, right as its last set of big ideas—broadband, retail, water—had flopped, with no new brainstorms in the wings. The Raptors were a disaster—no, a
scandal
—and had to be unwound.

Well, so be it. Enron had to take its lumps, admit its losses. She had decided to write to Lay to let him know everything she had discovered.

“Dear Mr. Lay,” she typed. “Has Enron become a risky place to work? For those of us who didn’t get rich in the last few years, can we afford to stay?”

Skilling’s resignation would raise questions, she wrote, and investors would pull apart Enron’s finances.

“I am incredibly nervous,” she wrote, “that we will implode in a wave of accounting scandals.”

Watkins finished her letter in less than an hour. She decided she wasn’t ready to reveal her name to Lay. So she put the anonymous letter in an unmarked envelope and asked her secretary to deliver it to the box for employee questions. Then she placed another copy in an envelope and addressed it to her friend Jeff McMahon, so that she could hear his opinion. She signed her name on the envelope.

Later that afternoon, McMahon was digging through his in-box when he noticed a typed letter. His secretary, apparently, had removed it from the envelope. He picked the pages up and started to read.

Why am I getting a copy of this?
It was addressed to Lay. He scanned to the bottom of the page. No signature. He read through it a couple of times. McMahon didn’t know much about the Raptors or another deal it mentioned, Condor, but he was taken aback by the ferocity of the attack on their accounting. Andersen was all over them! McMahon would have thought that they would be bulletproof. But what amused him most was how the letter went after Fastow’s premier deals. His old nemesis was sure to blow a gasket when he heard.

Where did it come from? McMahon called Bill Brown, described the letter, then read it to him.

“Wow,” Brown said. “This is all Fastow. Is it true?”

“I don’t know anything about these things,” McMahon replied. “Raptor was the biggest secret around.
Nobody
got to know how it was structured.”

“Where did you get it?”

“It’s in my in-box. Is there a copy in your in-box?”

Brown checked. Nothing. The call ended, and McMahon walked down the hall to Ray Bowen’s office. “Ray,” he said, thrusting the letter out, “read this.”

It wouldn’t take long for word of this mystery letter to seep through the company.

Later, McMahon’s phone rang. It was Sherron Watkins.

“Did you get my memo?” she asked starkly.

“What memo?”

“The one I wrote to Lay.”

McMahon’s mouth dropped. “That was
your
memo?”

Watkins’s letter arrived that day in human resources and was sorted onto a stack of other notes from employees. But this one seemed serious and, since it was addressed to Lay, was delivered to his office that afternoon.

Lay puzzled over it. The language struck him as inflammatory—
wave of accounting scandals?
—and there were these suggestions Enron would have huge losses from the Raptors. It seemed wrongheaded. Enron was better than ever. Skilling said so. Fastow said so. Everybody said so.

Still, he couldn’t ignore the allegations. This was exactly the kind of thing he should give to Jim Derrick, Enron’s general counsel. He would know what to do.

Derrick didn’t know what to make of the letter, either. The allegations were serious, but he wasn’t in a position to decide whether they were right. He snapped up a pen and wrote “FYI” at the top of the first page of the letter. Then he scribbled the names of a few in-house lawyers, plus Fastow’s and Causey’s. They would know how to deal with this. Probably even had the answer at their fingertips.

The letter annoyed Causey. Some
nobody
wanted to look smarter about the Raptors than the lawyers and accountants who had reviewed and approved them? That was pretty nervy.

Still, he had to address the question, along with another about Andersen that had been forwarded to him. Both were submitted for the all-employee meeting the next day, but he didn’t think the Raptor concerns should be discussed there. He began typing a response. He addressed the Andersen question first. Then he got to the anonymous letter.

“NOTE: I would not read this question,” he typed.

If management did wish to allude to it, Causey wrote, the answer should be vague, saying simply that a question had arisen about Enron’s structured transactions and the use of its own stock in those deals. Then they should dismiss
it with a few words about how this stock was reflected in the calculations of earnings per share.

Watkins’s letter asked nothing about earnings per share. Rather, it spelled out how Enron had recognized half a billion dollars in profits that weren’t there.

Causey was sidestepping the question.

The employee meeting the next morning, August 16, had the frenzied atmosphere of a high-school pep rally. It was held in the Imperial Ballroom at the Hyatt Regency just down the block from Enron. Lay bounded in, dressed in shirtsleeves, waving at the applauding crowd.

“Well,” he enthused, “I’m delighted to be back.”

Lay described his excitement about the future, brushing aside whatever problems Enron was facing—in India, in California—as bumps in the road. There were some issues he knew about, he said. Since the announcement of Skilling’s resignation, he had heard rumblings that Enron had strayed off the narrow path.

“Our values have slipped,” Lay said. “But we’re going to work on that. We’re going to restore them.” Another chorus of applause.

Then the kicker. Things had been tough, Lay said, but now Enron was ready to turn a corner. In anticipation, he said, the company was giving all employees a onetime options grant, equal to five percent of their base salary.

“We want you,” he said, “to enjoy the ride back up!”

Sitting close to the stage, Watkins listened to Lay’s rousing speech with growing discomfort. Lay didn’t even suggest that an accounting problem might be brewing. The anonymous letter had apparently missed its target.

As he wrapped up, Lay mentioned that his door was open to anyone with concerns. Just make an appointment, he said, through Cindy Olson from the human-resources group.

Soon the meeting was over and Watkins crossed the street with the crowds of employees heading back to Enron’s office building. Climbing on the elevator, she pushed the button for sixteen, Cindy Olson’s floor.

It took more than an hour, but Olson finally appeared. The two sat down at a small conference table, and Watkins brought out a copy of her letter, saying that she had sent this to Lay anonymously. Olson slowly read it.

She glanced up, looking ill at ease. “I’ll tell you,” she said, “Ken gravitates toward good news. It’s one of his greatest strengths and greatest weaknesses.”

The only way to really get action would be to sit down with Lay face-to-face. Would Watkins, she asked, be willing to do that?

“Absolutely,” Watkins replied.

In the Los Angeles offices of
The Wall Street Journal
, John Emshwiller was on a couch, chewing sugarless gum. He hadn’t been around the day of the Skilling resignation, but now his boss, Jonathan Friedland, wanted him to jump in.

“We need a second-day story on the Skilling departure,” Friedland said.

Emshwiller wasn’t happy with the assignment. Corporate resignations are choreographed affairs. Enron had selected its dance step and wasn’t likely to change it now. Plus, Emshwiller didn’t know many people there. This wasn’t a company that he covered day to day.

“I might not be able to get much today,” he warned.

Friedland’s phone rang. “Do what you can,” he said before grabbing the receiver.

It couldn’t be put off any longer. Lay was back at Enron—for how long, no one knew. The job offer with KKR wouldn’t, and shouldn’t, wait for him. He had to decline. From his office, Lay telephoned George Roberts.

“George,” he began, “I’m sure you’ve seen the news.”

Skilling was home, putting together a list on a pad of quadrille paper. He had blown out of the office immediately after the announcement, leaving the packing to his secretary, Sherri Sera. Now, he was plotting his new life.

Finances. Office. Estate Planning
. Those needed to be organized. His brother Mark would help him out there.

Reputation
. Make sure his departure hadn’t damaged his image with the business world.

Family
. Spend more time with his kids, arrange some trips with them.
Health
. Obvious.
Community
. Reach out into Houston, play a bigger role in the city.

There were plenty of details needed, but that was basically it. A business plan, just without a business.

It was section eight, called “Related Party Transactions,” that got John Emshwiller’s juices flowing.

After being assigned to follow the Skilling resignation, Emshwiller had put in a request for an interview, then scrounged up a copy of Enron’s most recent SEC filing in search of any nuggets.

What he found startled him. Words about some partnerships run by an
unidentified “senior officer.” Arcane stuff, maybe, but the numbers were huge. Enron reported more than $240 million in revenues in the first six months of the year from its dealings with them.

One fact struck Emshwiller in particular. This anonymous senior officer, the filing said, had just sold his financial interest in the partnerships. Now, it said, the partnerships were no longer related to Enron.

The senior officer had just sold his interest, Skilling had just resigned. The connection seemed obvious.

Could Enron have actually allowed Jeff Skilling to run partnerships that were doing massive business with the company? Now
that
, Emshwiller thought, would be a great story.

Emshwiller was back on the phone with Mark Palmer. With no better explanation for Skilling’s resignation, he said, the
Journal
was going to dig through everything it could find. Right now he was focusing on these partnerships. Were those run by Skilling?

“No, that’s not Skilling,” Palmer replied, almost nonchalantly. “That’s Andy Fastow.”

A pause. “Who’s Andy Fastow?” Emshwiller asked.

The message was slipped to Skilling later that day. A
Journal
reporter was pushing for an explanation of his departure and now was rooting around, looking for anything he could find. Probably best just to give the paper a call.

Emshwiller was at his desk when the phone rang. “Hi,” a soft voice said. “It’s Jeff Skilling.”

It was a startling moment. Emshwiller had been on the hunt, and suddenly the quarry just walked in and lay down on the floor, waiting for him to fire. So he did: why was Skilling quitting his job?

“It’s all pretty mundane,” Skilling replied. He’d worked hard and accomplished a lot but now had the freedom to move on. His voice was distant, almost depressed.

He had been ruminating about it for a while, Skilling went on, but had wanted to stay on at the company until the California situation eased up. Then, he took the conversation in a new direction.

“The stock price has been very disappointing to me,” Skilling said. “The stock is less than half of what it was six months ago. I put a lot of pressure on myself. I felt I must not be communicating well enough.”

Skilling rambled as Emshwiller took it down. India. California. Expense cuts. The good shape of Enron.

“Had the stock price not done what it did …” He paused. “I don’t think I would have felt the pressure to leave if the stock price had stayed up.”