Conspiracy of Fools (84 page)

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Lay made it official. He selected Greg Whalley as the company’s president, giving him the post that Skilling had filled for so many years. Lay didn’t necessarily consider Whalley to be the
best
person for the job, but at the moment, as someone who commanded the respect of the energy-trading desk, he was the right choice.

On the day of his selection, Whalley received a call from Lay, who said he had something that he wanted to ask about.

“Do you know Sherron Watkins?” he asked.

Never heard of
her. “No,” Whalley said.

Lay described the letter and the allegations it contained. He had met with Watkins to talk it all through.

“Now, Sherron says that she talked about this with Jeff McMahon,” Lay said. “And Andy thinks that McMahon is behind all this, in some sort of power play for his job.”

Fastow had lied to McMahon. After promising to drop his conspiracy theory, he had instead told it to Lay in an effort to debunk Watkins’s statements.

It all sounded a little too Machiavellian for Whalley’s taste. “I’ll talk to Jeff about it,” he said.

The next day, after hearing from Whalley, McMahon was fuming at Watkins. Why was she dragging him into this, saying he would back her up?
He didn’t know anything about it!
What the hell was she talking to Lay about
him
for? It was just going to confirm Fastow’s conspiracy theory. He called her repeatedly, leaving increasingly livid voice mails. Finally, Watkins called back, and he tore into her.

Why was she telling Lay that he supported her? He hadn’t been treasurer for eighteen months; he didn’t know anything about the Raptors. Watkins apologized, saying that Lay must have misunderstood her. McMahon would have none of it.

“This is
your
thing,” he snapped. “Leave me out of it.”

John Emshwiller was examining a document from LJM2. The call from the former Enron executive had been a godsend; here was someone who not only knew the inner workings of Enron but had records to boot: an offering memorandum for LJM2, something used to persuade private investors to sink their money into the fund.

Emshwiller read a page that listed the biographies of executives involved in LJM2, and stopped at Michael Kopper. He had heard a lot about Kopper;
he was portrayed as Fastow’s alter ego. And here was a load of information about the man’s background. This was a great document.

Emshwiller’s eyes lit on a single phrase in the biography. It said that Kopper “manages the general partner of Chewco, an investment fund with approximately $400 million in capital commitments.”

Chewco?
No one had ever mentioned Chewco to Emshwiller before. As described in the offering document, Chewco was set up to purchase company assets from Enron. The document, in the finance department’s typical sloppiness, was wrong. Chewco purchased nothing from Enron; it had bought its interest in JEDI from the California state pension fund, Calpers. But Emshwiller had no way of knowing that. He called his colleague Rebecca Smith and described what he had found.

“Sounds like Chewco is similar to LJM,” she said.

The message on August 30 came from Fastow’s secretary and was delivered to Watkins’s secretary. The Enron CFO wanted both of them—Watkins
and
her secretary—out of the building within eight hours.

He had finally learned that Watkins was the anonymous letter writer, and was now bent on destroying her career. He phoned Cindy Olson in human resources, demanding that Watkins be fired and her computer seized. Olson left a message for Watkins to come by. Watkins arrived shortly and sat down, full of dread.

“Andy is not behaving appropriately,” Olson said.

Watkins still had a job, but they needed to get her out of Fastow’s group. Soon she had the new boss she wanted: Olson herself.

Mark Palmer could feel it coming. In the days since that “Heard on the Street” column, Emshwiller and Smith had called, pressing with questions about LJM. It was almost as if they had suddenly gained access to new information about the funds. Something big was in the works at the
Journal
.

And still Fastow didn’t want to talk about it.

Dilg and Hendrick, the Vinson & Elkins lawyers investigating the Raptors, had been interviewing everybody. They had even had a session with Fastow, where he suggested that Watkins was just acting on behalf of somebody out for his job. Now, on August 30, they were meeting with Jeff McMahon, who had been rumored to be a big LJM critic.

“LJM presented an inherent conflict,” McMahon said. “I was very vocal with Fastow and Skilling about that.”

He mentioned the time Fastow called him at home to complain about his people negotiating too hard, as well as the concerns bankers had expressed about whether their continued relationship with Enron depended on doing business with LJM.

“But listen,” he said, “I have no problem with Andy’s motive or intent with LJM. My problem is on appearances.”

In fact, McMahon said, LJM had been pretty good.

“There were a lot of LJM deals that were very beneficial to Enron,” he told the lawyers. “Without it, a lot of them wouldn’t have gotten done.”

The sky over Santa Fe was perfectly clear as the Enron corporate plane lifted off on its way back to Houston. On board was Greg Whalley, the newly named president, along with Vince Kaminski. Whalley had been wrapping up some final business before starting his new duties and now was relaxing on board as he contemplated his plans.

“You know what,” he told Kaminski. “This quarter is still on Skilling, but next quarter is on me. So I’m going to recognize all the losses we can this quarter.”

Kaminski didn’t like the idea. It was a typical trader’s mind-set—dump the problems on the last guy, move on clean. But it might not work well.

“That’s a risky move,” Kaminski said. “You don’t know how the markets would react to that. It could go badly.”

Whalley shook his head. “I talked to Glisan. He told me not to worry about it, because it’s a noncash event.”

Kaminski worried that the markets might not distinguish between a cash and a noncash loss. This could be the kind of shock that Kevin Kindall had been warning about. But before he could say anything, Whalley glanced out the window.

“Wow, this is great weather!” he exclaimed. “The best weather for skydiving!”

The Woodlands is an enclave north of Houston that is home to executives with paychecks that don’t qualify them for River Oaks. In its suburban setting, the sounds of the city can be forgotten and the tensions of the workday swept away. It was, Lay decided, a lovely spot to hold a retreat for his managers, to give them a place to cast off the gloom occasioned by Skilling’s resignation.

They gathered for two days in the first week of September at the Woodlands Resort and Conference Center. The meetings started early in the morning, with the executives gathered around a U-shaped table. In preparation, Enron had polled its employees—in what was dubbed the “Lay It on
the Line” survey—about their concerns. What came back was anxiety—about aggressiveness, about accounting, about everything that in the past had defined Enron.

Steve Kean and Mark Palmer made the first formal presentation. They saw it as the best chance to shake the managers out of their lethargy. Bad news was raining down on the company—California, India, and now LJM. And yet the executive leadership of Enron was sitting on its hands. That had to change. Kean stood and faced the group.

“We’ve got enemies,” he said. “They’re looking for dirt. We’ve got dirt. They’ve found it. And that’s a problem.” He recited Enron’s many woes.

“Now we’ve got something here we can’t even get to the bottom of,” he said. The word wasn’t mentioned, but Kean was referring to LJM. Fastow sat in his seat silently.

Palmer took over. “Which means that this is a company entering into a crisis,” he said. For any kind of crisis management, Palmer said, there were three As—acknowledge, apologize, and act. The company had to acknowledge there was a problem, apologize for whatever it had done to cause it, and then present its plan of action to fix it.

At that, the room exploded. “We’re not apologizing for anything!” John Lavorato, a top trader, roared.

“Absolutely not!” chimed in another senior executive, Dave Delainey. “There’s nothing wrong with Enron. We don’t owe anyone an apology for anything!”

Palmer shot them a look. “Well,” he said, “will you acknowledge that we’ve got a crisis?”

Delainey folded his arms. “What do we have to acknowledge?”

Palmer threw up his hands. “Dave! The stock is dropping like a rock. No one trusts what we say, with things now at the point that people who don’t like us are leaking information they think will be damaging to us.
The Wall Street Journal
wants to write a story about us.
And we’re not cooperating with them!”

The room erupted, with everyone speaking at once. At one point, someone mentioned the concerns expressed in the employee survey about Enron’s accounting. Suddenly, a hand slammed down on the table. Everyone turned to see Causey, red-faced, bringing his arm up to slap the table again.

“I take that personally!” he snapped as he stood to speak. “Reasonable minds may come to different conclusions, but our accounting works!”

He looked at everyone around the table. “Our accounting is not aggressive!” he said. “Our accounting is complex. We do complicated transactions, and that makes it hard for people to understand. But I take it personally when you guys criticize it.”

Causey was working himself into a lather. He almost seemed on the verge of tears. “I will stake my entire career on the fact that our accounting works,” he blared.

The room went silent. No one wanted to challenge Causey. The man seemed so sincere. But in no time another point came up. Lots of employees seemed concerned about the quality of Enron’s balance sheet, that the company might be overextended. Companies needed strong balance sheets to grow, to prosper. Too much debt could put a company in a financial bind, even push it into bankruptcy.

Fastow broke in. “The balance sheet of Enron,” he said, “has never been stronger.”

There was nothing to worry about, Fastow said. Nothing to hide. Everything at Enron was exactly as it appeared.

It was late in the evening days later when the BMW slowly rolled toward a garbage Dumpster hidden far out of view. Kopper, in the driver’s seat, pulled to a stop. He stepped out of the car into the nighttime air.

Things were coming apart. The Vinson & Elkins investigation. The
Journal
article. All the questions about LJM2. Fastow and Kopper were both becoming unnerved.

The two had made a decision. For years, Kopper had tracked their side deals, keeping score in files on his laptop computer. With that data, the two could know who had made how many millions, which of them was ahead. It had been a wonderful way to ensure they both got their fair share.

All that information was right there, on the laptop, waiting for someone to find it. At Fastow’s instruction, Kopper had already deleted information on the computers at work; he had destroyed a home computer that held other damaging details. Now they were down to this. The laptop, the score-card. The ultimate proof that they had been working in concert, planning their crimes for years, doing everything they could to enrich themselves.

It had to go. They both agreed.

Kopper reached into his car, removed the laptop, and walked toward the Dumpster. He stood alone in silence, then brought back his arm as he readied the throw. The laptop landed inside, disappearing forever amid piles of garbage.

GREG WHALLEY ARRIVED AT
the office on the morning of September 10 for his first full day at headquarters as Enron’s president. Since his selection by Lay, he had been on the road—in London, California, Santa Fe—wrapping up business, but now he was eager to plunge into his new job.

Getting a fix on accounting and finance was a priority. Whalley had heard rumblings that an accounting error in the Raptors had resulted in a huge overstatement in shareholder equity. Then there were rumors of other problems with some of the financial deals Enron had done in recent years.

Whalley arranged to meet with Causey and Glisan. Causey quickly homed in on one particular problem.

“We have a couple of issues because of the decline in New Power Company’s stock price,” he said.

New Power was Enron’s residential-energy company with an Internet sales program. It had gone public the previous October, just as the air was starting to seep out of the dot-com bubble. Enron executives thought that they had locked in the value of the company’s stake by hedging it with the third Raptor, which itself was nonsensically capitalized with New Power stock. But with New Power’s stock price knocked to the curb, the Raptor hedge wasn’t holding. It simply didn’t have enough assets to be reasonably described as a true hedge. Enron might have to take a write-off if something wasn’t done.

“There are ways we can recapitalize it,” Causey said. “We have a number of options …”

Whalley raised a hand. “Whoa,” he said. “Wait a minute. Is the value lost or isn’t it?”

There was a pause. The value was pretty much gone, Glisan said, but there

were alternatives to taking a loss.

Whalley made a face. “Guys, if it’s gone, it’s gone,” he said. “Write it off.” It was a simple, economically rational decision. But in making it, Whalley

had inadvertently pulled out a main support beam in what would prove to be a financial house of cards.

———

Early the next morning in Chicago, John Stewart was listening to the voices on his speakerphone. Stewart, Andersen’s top accounting expert, had been brought in to speak with the Enron team, once again about the Raptors.

On the line were the two partners who knew Enron best—David Duncan, calling from Houston, and his predecessor on the account, Stephen Goddard, who was visiting New York.

“Enron is interested in unwinding at least one of the Raptors,” Duncan said. “They’re looking to us to give them an opinion on it.”