Conspiracy of Fools (86 page)

“And what do you think we ought to do?” Fastow asked.

The answer was clear. “We ought to talk about them.”

Fastow’s voice almost exploded through the phone.

“Are you crazy!” he bellowed. “That is the
dumbest
thing I’ve ever heard. I told you, it’s a slippery slope!”

Palmer held the phone away from his ear as Fastow screamed. “Well, Andy,” he said, “we’ve disclosed them, you’re not in them anymore. We should explain them.”

Fastow’s rage built up. “It’s complicated, they won’t understand, they’ll write terrible stories, and I don’t want to go into detail about LJM.”

“Why not?” Palmer shot back.
What is Fastow’s problem?

“Slippery slope, Mark!” Fastow shouted, whistling on each s. “We’re not going there!” Fastow shouted a few more words, then fell silent.

But only for a second.

“I cannot believe,” Fastow finally yelled, “that Enron has a PR guy who would come up with a strategy that is
this stupid!
I will
not
speak to
The Wall Street Journal!”

Before Palmer could respond, Fastow hung up.

Palmer turned to fill in his boss, Steve Kean, who sat just a few feet away. Before he could say a word, Kean’s phone rang. Palmer saw on the caller ID that it was Fastow.

“Oh,” Palmer said, “Fastow’s going to yell at you about this LJM thing.”

Kean answered. Fastow instantly lit into him.

———

Later that same day, Palmer was back on the line with the
Journal
, trying to broker some sort of compromise.

“Guys, you need to help me,” Palmer said. “They’d like a better sense of what you want to talk about.”

It would help, he suggested, if they sent prepared questions, so that Enron could understand what the reporters wanted. The reporters didn’t like the idea, but agreed.

Lay had a chance to slow his sales of Enron stock. He had just received ten million dollars from Enron, a bonus for returning as CEO. With the stock price still falling, Lay kept being hit with demands for cash from his banks, which he met by drawing down on his credit line at Enron. Now, with his new load of money, he had something to forestall future sales. So on September 21, two days after receiving another demand from Bank of America, Lay turned over the entire ten million dollars to the bank.

It was a onetime opportunity. All he could do from there was hold on to his Enron stock and wait for a rebound.

On the morning of September 22, a Saturday, Stephen Cutler was pushing his infant son in a baby carriage down a dirt path. Cutler, a forty-year-old lawyer, was acting director of the SEC’s enforcement division and had been with the agency for two years, starting under Levitt. But these days, he was getting accustomed to the new boss, Harvey Pitt.

Pitt had been confirmed in August and had swept into the agency like a whirlwind. He had taken charge of its response to the September 11 attacks, working to get the markets reopened quickly. Days before, he had given the green light to an enforcement initiative known as a 21(a) report, providing guidelines to companies on the cooperation expected by the SEC if executives discover wrongdoing. But today that was far from Cutler’s mind as he walked in the September breeze with his new son.

A buzz sounded. It was Cutler’s BlackBerry, his portable communications system. He pushed the stroller to the side of the path and pulled out the device. It was an e-mail from Harvey Pitt, labeled “Draft 21a”

“Here, I’ve taken a crack at drafting this,” the message read. Below that, a first version of an extended report, listing all the steps of cooperation required from companies. Cutler read the document in astonishment. It was good, very good. But this was
the chairman
knocking out a preliminary report. That was what staff was for. If Cutler had done it,
his
staff would have thought he was crazy.

Decidedly, Cutler thought, Pitt was cut from a different cloth than Levitt.

———

Accountants crowded the fourth-floor office of Michael Odom, an Andersen practice director in Houston. The mood in the room was tense as the accountants on the Enron engagement team spoke by speakerphone with PSG members in Chicago, debating the accounting used for the Raptors.

There was a knock at the door. It was Carl Bass, the accountant booted months before from dealings with Enron.

“What can I do for you guys?” Bass asked.

Bass had been summoned to the meeting on John Stewart’s insistence. Not only was Bass one of Andersen’s smartest accountants; he had also been intimately involved in many of Enron’s transactions—often protesting them. His views were among those misrepresented in Duncan’s memos.

Bass took a seat as someone explained the situation. A schedule of assets and liabilities was passed to him. He reviewed it quickly, and his eyes fixed at a number on the first page.
A loss of $993 million
.

His mouth gaped.
A billion dollars?
Enron had a billion dollars’ worth of unrecognized losses? Wait a minute! Another number. An equity charge of $1.2 billion. They had overstated shareholders’ equity. How did that happen?

He looked at Duncan, whose face was crinkled with stress. “What is this equity charge about?” Bass asked.

Duncan waved a hand. “Don’t worry about that. It’s not material. It was just a mistake.”

Not material
. That was the argument being pushed by Enron and now embraced by Duncan.

Listening intently to the accountants’ recital of events, it didn’t take long for Bass to realize that Duncan and his crew had ignored his advice months before. And now their cockiness had come back to bite them.

Bass spoke up. “Look, you guys, just so we’re clear here,” he said. “What you did is exactly what I told you not to do back in December when you called me on this.”

The room was silent for a moment. “Yeah,” Duncan said softly. “I know you had some views on this.”

Days later, on September 25, Bass fought disgust as he reviewed the Raptor memos. Repeatedly, Duncan had misrepresented his advice, saying Bass had concurred with ideas that he had opposed tooth and nail.

Bass started typing an e-mail. He was going to expose every error he had found.

That day, Mark Palmer received the list of questions from
The Wall Street Journal
. Each was more aggressive than the last, shots across the bow signaling
the reporters’ unwillingness to keep wasting time playing footsie with the company’s executives.

Did Enron know the general partner of LJM2 had a profit participation in the partnership that would earn him millions of dollars? … Were LJM2 investors promised they would receive special access to Enron investment opportunities, including the purchase of company assets?

Palmer winced. The company couldn’t just ignore this. He needed to get past Fastow and push Lay to make a decision about how to deal with this.

At about 9:15 the next morning, Ken Lay ambled into a communications room on the forty-seventh floor of the Enron building. He was there for a session of “E-Speak,” an opportunity for employees to ask him questions over the Internet.

A typist who would record his responses was there, and a number of questions had already come in. Lay settled into a chair, waiting for 9:30, when the first answers were scheduled to be posted. Minutes later, it was time to begin.

“Good morning,” Lay said. The typist wrote his words and the questions poured in. Anxiety jumped off the screen. So many people had sunk their savings in Enron stock that a near rebellion was taking place as the price tumbled. In response to their fear, Lay went into his full booster mode.

“My personal belief is that Enron stock is an incredible bargain at current prices,” he said. “And we will look back a couple of years from now and see the great opportunity that we have.”

Employees should spread the good word, he said. The company was sound, its balance sheet strong, its liquidity never better. When asked why more senior executives weren’t buying stock, Lay assured the questioner that plenty were, including himself. He mentioned nothing of his tens of millions of dollars in stock sales to the company to help meet his margin calls.

Lay’s soothing words were exactly what the troops needed to hear. Everything would be fine.

September 28, 2001, the day that would forever change Nancy Temple’s life, began normally enough for her.

Temple was a young lawyer in Arthur Andersen’s Chicago office, having joined the previous year from the law firm Sidley & Austin. This morning her supervisor, Donald Dreyfus, came by to talk about a new assignment.

“There’s going to be a conference call at one o’clock today to deal with some accounting issues for Enron’s third quarter,” Dreyfus said. “I’d like you to sit in on it.”

Apparently, the team handling the Enron account was in deep
disagreement with the Professional Standards Group. There had been some accounting issues that could result in either a restatement of Enron’s performance from the first quarter or big charges in the third. Either way, the news would be bad, and Andersen might have problems. It made sense for the legal team to start becoming part of the discussions.

“Sure,” Temple said. “I’ll be there.”

She thought nothing of it. Until that moment she hadn’t even known Enron was an Andersen client.

The words were music to Ken Lay’s ears: Enron stock was terribly undervalued. He was on the phone with Robert Hurst, vice chairman of Goldman Sachs, who was delivering the news that his top investment bankers had been studying Enron and were alarmed at the stock’s market price.

“We are very concerned,” Hurst said, “that Enron is in danger of being targeted for a hostile-takeover attempt by someone trying to buy it on the cheap.”

Lay agreed to meet with the Goldman bankers and listen to their proposals for takeover defenses. Maybe, he figured, they might even have ideas for how to get the price back up.

Vince Kaminski was at his desk when two of his top analysts, Vasant Shanbhogue and Rakesh Bharati, appeared in the doorway. Both men seemed upset as they walked in.

“We have something very important to tell you,” Shanbhogue said.

The two had been working for days on the Raptors. Once Enron decided to shut them down, Kaminski had been asked to calculate some values, and had assigned Shanbhogue and Bharati to the task. The job also gave Kaminski’s group its first opportunity to see the full picture of the Raptors, and something terrible had emerged.

“What’s the problem?” Kaminski asked.

Shanbhogue nodded to his colleague. “Rakesh has discovered that the restrictions against hedging and the hedges of Enron stock reside in the same vehicles.”

The room went silent. Kaminski’s face flushed as he asked to hear more of the details.

This couldn’t be
. Enron had sold stock at a discount to the Raptors because they were restricted from hedging.
But then the company turned around and agreed to hedge the shares for the Raptors?
The Raptors would pay Enron for losses in its merchant investments only after Enron paid the Raptors for losses in its Enron stock.

In essence, LJM was getting a huge ownership stake in Enron through the Raptors, then pushing any losses it incurred back onto the company. It was as if a man bought insurance on his house from his wife, with her backing up the obligation through the money in their joint bank account. It did nothing. It was meaningless.

Kaminski stayed silent for a full minute. His world, his career, just fell away.
This company … is criminal. They
were lying to investors. They were playing a shell game, hiding losses to make themselves look successful.

I have to fight this to the bitter end
, Kaminski thought.
This is the end of my employment with Enron
.

“We have to deal with this,” Kaminski said. “We have to talk to these people right away.”

“All right, then,” Lay said. “What are the choices?”

Sitting across from him were Mark Palmer and Andy Fastow. Palmer had requested the meeting to come up with a response to the
Journal
. Fastow’s strategy—
stop returning their calls! ignore them!
—was definitely out of the PR Suicide Playbook. From the questions, this piece was going to be devastating. The paper couldn’t be ignored.

Palmer spelled out the situation. “Ken, Andy says these things are too complicated. He says by the nature of their questions, the reporters don’t want to know what the purpose was, they just want to beat up on us.”

Palmer spoke for several minutes, with Fastow silent throughout most of the discussion. Finally, Fastow leaned forward. “Ken,” he said, “if you want me to talk about LJM, I’ll do that, if that’s what you think is best.”

Palmer glanced at Fastow, wanting to wring his neck. All the screaming, and now—
oh, whatever you want, Ken
. It was like something out of a movie, with Fastow in the role of the obsequious yes-man. Lay considered the situation.

“It goes against every bone in my body,” he said. “But if the best thing is not to go into detail because they don’t want to hear the truth, then we’ll give them a written statement.”

That was the decision. Enron would not offer up Fastow—or anybody else—to answer the
Journal
’s questions.

Kaminski stared at the speakerphone in the center of the table, struggling with his anger. At his insistence, he had been brought in on a discussion with accountants from Andersen and Enron who were involved in the Raptors. And he was letting them know that he believed, in the early days, they had deceived his analysts by withholding information.

Kimberly Scardino, an Andersen accountant, asked for the analysts’
opinions about a valuation issue. Kaminski wasn’t about to get drawn into this again.

“We cannot answer your question,” he said. “We don’t know the facts. We haven’t seen the legal documents.”

The line had been drawn. Kaminski was telling the accountants that he would no longer trust them, that he had to review everything—
everything
—to be sure his team’s answers were not going to be used for illicit purposes.