Conspiracy of Fools (82 page)

What?
Had Emshwiller heard that right? Was all this stuff about “personal reasons” out the window? Had Skilling thrown in the towel because of
the stock price?

“What was that, Mr. Skilling?” Emshwiller asked.

The employees at Enron owned lots of shares, Skilling said. They were worried, always asking him about the direction of the price. He found it very frustrating.

“Are you saying that you don’t think you would have quit if the stock price had stayed up?”

Skilling was silent for several seconds.

“I guess so,” he finally mumbled.

Minutes later, Emshwiller burst into his boss’s office. “You’re not going to believe what Skilling just told me!”

That son of a bitch
.

Mark Koenig, Enron’s director of investor relations, heard that same night about
The Wall Street Journal’s
interview with Skilling. The news infuriated him.

They had discussed this resignation for days, pressing Skilling for an explanation.
What’s the reason, Jeff? What’s the reason?
And every time, the same answer.
Just personal, nothing to do with Enron. Kids, exhaustion
.

Then, one day later, when everyone had already walked the gangplank of Skilling’s story, the son of a bitch
changed
it! The stock price was
all about
Enron. If that was his problem, why didn’t he just say so in the first place? Why wait until everybody at the company had made jackasses out of themselves by parroting his line?

Koenig glanced at Lay. The two were on an Enron jet along with a handful of other executives, including Fastow and Whalley. They had just spent a day with analysts in New York and were on their way to Boston to meet with investors there. The idea was to calm the market, to let the Street know that no surprises were coming. Then Skilling turns around and dumps one big, fat surprise in everybody’s lap.

“Ken, Jeff’s comments are really going to undercut everything we said yesterday,” Koenig fumed.

Lay shared Koenig’s unhappiness, but there wasn’t much to say. Koenig set his jaw. “What is the
matter
with him?” he seethed.

———

The marketplace chatter about Enron was terrible. Steve Kean, Lay’s chief of staff and top government relations executive, had heard a lot of it, and thought the criticism was too close to the truth. Lay needed to reposition Enron, explain that he recognized its problems and was planning to fix them.

With Lay on the road meeting with institutional investors, Kean composed an e-mail designed to explain the challenges that he thought Enron faced in the marketplace.

He began by reiterating his faith in the company. “I believe everything we have been saying,” he typed. “We are making great money, we are growing, we are addressing our issues and we have all our capabilities intact.”

Still, Kean typed, Enron was having difficulties because of its soured reputation in the marketplace.

“We’re faced with too many bad, but true (or at least plausible) allegations that we have to deal with every time we try to tell our story,” he typed.

They ran the gamut. Too much aggressive accounting, impenetrable financial reporting, hyping of unproven businesses. On top of that, Enron was believed to have a mercenary culture that drove away talented people. Worse, Kean wrote, it had gained a reputation for hiding problems until they became very big. The company needed to stop spinning, to make business decisions based on the economics of a deal rather than a desire to hit earnings or avoid a write-down. None of this meant there was a problem in investor relations or the accounting group, he wrote; they were the finest in the industry. But to improve its reputation, Kean wrote, Enron needed to reassess itself.

He sent the e-mail. If the top brass addressed these issues head-on, he thought, Enron could set itself right.

The Fastow partnerships were in play, that Palmer knew. Once Emshwiller started asking questions about them, it was only a matter of time until he came back looking for more. Not that there were any secrets to uncover, Palmer reflected. After all, Fastow had sold his interest, and his dealings were disclosed. Probably the way to handle the reporter’s suspicions, Palmer figured, was to be up front about everything.

He called Fastow, asking him to speak with a
Journal
reporter about the LJM funds. Fastow audibly stiffened.

“I
don’t
want to talk about LJM,” he said. “It’s a slippery slope, Mark. We’ll answer this question, then they’ll just have another one. It’s a slippery slope.”

Fastow was overreacting, Palmer thought. Yeah, like the whole world was suddenly going to be so interested in a bunch of Enron off-books partnerships.

———

The
Journal
wasn’t going away. With Skilling having muddied up the water in his interview, the paper was going full bore to find out what was really going on inside of Enron.

Emshwiller was teamed up with Rebecca Smith, an energy reporter in Los Angeles. The strongest thread that the two of them had was this stuff about the Fastow partnerships. What were those? Did anyone on Wall Street even understand them?

They set out on their reporting. Maybe, they figured, they could pull together enough string on the partnerships to put out a basic story. Then they could just stand back and see what else came in.

Sherron Watkins was at her desk, hammering out a new memo for Lay. If she was going to sit down with him, she wanted to organize her thoughts first.

There was a Vinson & Elkins lawyer who might be able to help, but Watkins couldn’t remember his name. Well, her friend Kristina Mordaunt, who now worked with Fastow in corporate development, was tight with that firm. Watkins called Mordaunt, asking for the name of the lawyer.

Mordaunt hesitated. “Why do you want to know?”

“I’m going to be meeting with Ken Lay on some issues and might want to recommend him for a project.”

“What issues?”

Watkins invited Mordaunt to drop by her office so she could explain them in person. When her colleague arrived, Watkins handed her the original letter. Mordaunt read it and looked up, scowling. “Why are you doing this?” she said sharply. “Are you trying to bring down the company?”

Nobody seemed to be taking Watkins seriously. Mordaunt greeted her revelations with annoyance and skepticism, urging her to speak with the legal department before seeing Lay. Watkins took the advice and met with Rex Rogers, a top attorney in the general counsel’s office.

Rogers’s reaction was polite but patronizing. Would Watkins really want to take this to Lay? After all, every top expert—Arthur Andersen, Vinson & Elkins, Causey, Fastow—had signed off on these deals. The unspoken message was clear: the big boys knew what they were doing. Who was Watkins—who was anyone—to question their decisions? These were top people. They didn’t make mistakes.

What e-mail was Ryan Siurek talking about?

Siurek, an architect on the Raptors, had been speaking with Andersen accountants
about some technical detail involving $1.2 billion booked as “notes receivable” from the Raptors, or commitments to pay Enron, which related to the company’s agreement to contribute stock to the entities. That had resulted in Enron’s increasing its reported equity by the same amount. Siurek said he had raised the issue during the March restructuring in an e-mail to Patricia Grutzmacher, a member of the Andersen team.

But Grutzmacher had never heard about this, never saw the e-mail, and now was being asked about it. She dug through her old Lotus Notes files. Sure enough, there, in March, was an unopened e-mail from Siurek to her, with copies sent to other accountants on the Andersen team. None of them had ever discussed it with her. She opened it and found the notes-receivable question. She dialed Siurek.

“Ryan, I found that e-mail you were talking about from last March,” she said. “But I never opened it. I never got back to you. This is the first time I’ve ever seen it.”

A second’s hesitation. “Well, when you didn’t get back to me,” Siurek said, “I just assumed you were approving the entry. I figured it was all okay.”

It wasn’t. Enron and Andersen, until recently the financial darlings of Wall Street, were on the verge of discovering a mistake. A $1.2 billion overstatement of Enron’s total equity. One that might have been stopped if an e-mail had been opened.

Ray Bowen had been out of the office for days, returning finally on August 20, eager to learn more details about Skilling’s resignation. The only person who might know, he decided, was Andy Fastow. He made an appointment to see him.

When the time came around for the meeting, Bowen walked in and dropped into the chair in front of Fastow’s desk, skipping all the pleasantries.

“One question, Andy,” Bowen said. “Why did he quit?”

Fastow raised his arms. “Ray, I don’t know. I’m angry with him for quitting on me, but I’m as surprised as you are.” He shook his head. “You know, I love the guy. I wouldn’t be where I am today without him. But I don’t know if he’s got a kid problem or a drug problem. It just doesn’t make any sense to me.”

“What do you think’s going to happen, Andy?” Bowen asked.

“I think Ken will name somebody as president soon.”

“Are you on that list?”

Fastow grimaced. “I don’t
think
so,” he said.

Rick Buy
. Of course. Watkins should call him. He was chief risk officer.
He
would want to know about what she had found. She had worked
with Buy in the past. He wouldn’t stand for cutting corners on the accounting.

She dialed Buy’s office, only to find he was on vacation. She left a message, asking him to call as soon as he could. He got back to her later that day.

“Rick, there’s something very serious I need to talk to you about,” Watkins said. She launched into a detailed description of the problems she had dredged up.

“I’ve got everything written up. I’ve gone back and done some longer memos on this,” she said. “Would you like to see all of my materials?” She heard a deep sigh. “No,” Buy said, sounding deflated. “I’d rather not.”

Watkins pressed ahead. Everywhere she turned, she heard the same tune: the entities were fine, because Andersen had signed off on them. Maybe so, but the real question was, did Andersen understand the mess it had approved? Watkins, a former Andersen accountant herself, decided to seek out Jim Hecker, an Andersen partner and an old friend from her days at the firm’s Houston office.

“Jim, it’s Sherron! How are you?”

Hecker settled in his chair. The call had come out of the blue, and as Watkins made small talk about the job market and Skilling’s resignation, Hecker waited for her to come to the point.

The conversation hit a momentary lull.

“Jim,” Watkins said, “do you know much about Enron’s recent structured transactions?”

Hecker had never done any work for Enron, but Watkins’s questions, and the details she had uncovered, worried him. Andersen had survived its walk through fire with the Waste Management case. The last thing it needed now was another scandal. Senior partners needed to know about this. And the Andersen team on the Enron account, too.

For a week Jim Derrick, Enron’s general counsel, hadn’t done much about the anonymous letter’s allegations. He’d kicked it back to the executives who had created the Raptors to ask if
they
had any second thoughts; they didn’t.

But by identifying herself as the memo’s author, Watkins had inadvertently created a real legal issue. An employee had raised allegations against her
boss
. If they made a mistake, Enron could be sued.

Derrick spoke with a deputy general counsel, Sharon Butcher, and asked
her to contact Vinson & Elkins to get some advice on the legal ramifications of the situation. Butcher telephoned Carl Jordan, an employment lawyer at the firm, and briefed him. Then she got to the question.

“Sherron Watkins works with corporate and ultimately reports to Fastow,” she said. “What do we do with her?”

And suppose Enron decided to fire Watkins or demote her to a do-nothing job? What, Butcher wanted to know, were the dangers to the company?

Well, Skilling figured, it had been a week. Maybe now was a good time to drop back in at Enron. His brother Mark was in town to talk about helping manage Jeff’s finances. It would be nice to give him the Enron grand tour.

They drove downtown, with Skilling eager for the visit. Probably, he figured, there would be lots of backslapping, with people congratulating him for striking out on a new life. In no time, the brothers were walking the halls at Enron, but the reaction was far from what Skilling had anticipated. People grew quiet as he approached, didn’t say hello until he did. He had expected almost a hero’s welcome, but instead he was getting the cold shoulder. Apparently, all anybody cared about was learning the reason he had left.

How many times did he have to explain this? What the hell was the matter with everybody?

Jeff McMahon was driving home. He had heard from Cindy Olson that day that Watkins had come forward, and learned that she was now scheduled to speak directly with Lay about her concerns. McMahon was pleased and figured he might help her out.

He punched the main number for Enron into his car speakerphone and asked for Lay’s office. McMahon listened to the recorded voice of Lay’s assistant, Rosalee Fleming, instructing callers to leave a message.

That’s bogus
. He hated it when executives didn’t record their own voicemail message. It was just too
regal
.

The line beeped. “Ken, it’s Jeff McMahon,” he said, giving his job title. He figured there was a good chance Lay might not know who he was.

He explained that he had heard about the Watkins letter and knew she was scheduled to meet with him soon.

“As a matter of background, I’ve known Sherron for twenty years and find her to be pretty credible,” he said. He gave a quick rundown of his relationship with her.

“So, probably you’re wondering why I’m leaving this message,” McMahon continued. “I just wanted you to know that she’s not some lunatic-fringe
employee. She’s knowledgeable enough to be concerned about these issues. So I’d just ask that you take her seriously.”