Conspiracy of Fools (87 page)

Ryan Siurek, an Enron accountant, glanced across the table at Kaminski, looking annoyed. “Kimberly,” he said, “give us a few minutes. We’ll get back to you.”

Siurek pushed a button on the speakerphone and disconnected the call.

There was no holding back anymore. Kaminski stood and walked to the whiteboard. Scribbling pictures and numbers as he spoke, he explained how the deals within the Raptors were filled with contradictions, shifting risk back and forth to no end, giving discounts for no purpose.

He turned to look at the group. “Something,” he said, “is drastically wrong here.”

Later that day, John Stewart was speaking to Nancy Temple from the Andersen legal department.

“What documents should we keep on all this?” Stewart asked. “Historically, we keep everything.”

Temple asked how many records existed. Plenty, Stewart said.

“We’ve got three or four buckets of e-mails,” he said. In addition, there were flowcharts, memos put together to justify certain decisions, and then lots of records of the back-and-forth debate over the last couple of weeks.

Andersen had a policy on document retention, Temple said. He should keep the original Duncan memos and final drafts. But everything else should be destroyed, including the e-mails. That’s what the policy required.

“I
need
the earlier draft versions of memos,” Stewart protested. “I need it for my own files, because it captures the work that the PSG did on this.”

It couldn’t be done, Temple said. “Andersen has a policy,” she said. “You should follow it.”

The next morning, Kaminski declared war. He had spent the night tossing in bed before deciding to make a clear break. He prepared an e-mail for Scardino at Andersen.

Questions could not be answered, he typed, until his team was given access to all of the underlying documents. He spelled out his concerns about
the stock-price discounts and the vanishing hedge restrictions. It was basic, he wrote. No one could have their cake and eat it, too.

The following day, Kaminski burst into Rick Buy’s office. If his career at Enron was going to go down in flames, he planned to make a lot of noise on the way.

“Listen, Rick,” he said as he stormed in. “We have discovered a very serious problem with the Raptors.”

Buy looked up from his desk, a pained expression on his face. He was tired of hearing all of the complaints about the Raptors.

Kaminski plunged ahead. “I am not going to sign off on anything related to the Raptors,” he said. “And I don’t care if I’m fired for it.”

Buy raised a hand. “Whoa, wait a minute, I don’t think you’ll be fired,” he replied quickly. “Now that Skilling’s gone, we have a different mantra at Enron.”

He looked Kaminski in the eye. “We’re expected to be honest,” he said.

The break between Kaminski’s group and Enron Global Finance worsened with each passing hour. By October 3, he had instructed every analyst to refuse any assignments from the division unless they were provided in writing.

At the same time, Kaminski began to suspect a cover-up had begun. Analysts noticed that messages were disappearing from their Microsoft Outlook mailboxes. They had no idea how it was being done, but Kaminski wouldn’t stand for it.

He went to speak to his team. “Everyone!” he said. “I want you to start forwarding your personal messages to private e-mail accounts!” If anyone was trying to hide the truth, he would do his best to stop it.

That morning at eleven, Kaminski and two of his analysts, Shanbhogue and Bharati, responded to a written request from the finance group for help. They met in a conference room on the nineteenth floor. When Kaminski and his staffers arrived, five finance executives were waiting.

Kaminski started speaking as soon as he stepped in. “I am very uncomfortable with what is going on,” he said.

Ryan Siurek answered. “Vince, you aren’t the only one. That’s why we’re unwinding the Raptors.”

But before they went further, Siurek said, they needed to talk about Kaminski’s e-mail to Andersen. The message really made waves around Enron. No one but Causey was supposed to communicate directly with the accounting firm.

“Okay, fine,” Kaminski said. “If this is the procedure, I won’t send any more messages to Andersen.”

He pointed a finger across the table. “But I want you to know that what is going on is unacceptable. You guys made me look stupid and dishonest at the same time.”

An executive with corporate finance spoke up. “We understand, Vince,” he said. “But we need your help now. We have made a commercial decision to unwind the Raptors and pay Kopper and LJM a certain amount of money. And we want your help to calculate the numbers, so we can back into that amount.” The total amount, thirty-five million dollars, wasn’t mentioned.

Were these people insane? “How on earth can you justify paying
anything
to Kopper?” Kaminski said. “The Raptors are underwater!”

Well, the executive said, Raptor II had some positive value.

“And how is that? Not the last time
I
looked.”

There had been a deal between Causey and Fastow, the finance executives explained. Back in May, the two had agreed to remove certain poorly performing assets from the hedges. So now Raptor II was worth more. The result was that Kopper, as the new general partner of LJM2, was owed money.

Kaminski threw up his hands.
It’s a hedge until it loses money! Then Enron takes it back!
“This looks better and better!” he shouted. “Two insiders make a verbal agreement to benefit another insider!”

Kaminski could not contain his disgust; he stormed out. Siurek ran behind, begging him to return. Kaminski walked back in and stared at the finance executives.

“Listen, I want to make this very clear,” he said. “We’re not doing any work for you unless we see all the legal documents.” He glared at the men.

“But I guarantee you,” he growled, “I see something in those documents I don’t like, I scream loud and clear.”

Kaminski left the room, followed by Shanbhogue and Bharati. They were shaken. Shanbhogue sidled up to Kaminski.

“There’s only one phrase to describe what they are doing,” he said. “They’re siphoning off company funds.”

The Morial Convention Center in New Orleans, just walking distance from the French Quarter, was buzzing with activity on the morning of October 5. Andersen partners from all over had arrived in town for their first meeting under their new chief executive, Joseph Berardino.

Since taking over earlier in the year, Berardino had signaled his plans to reshape the firm and, for this meeting, wanted to rekindle its spirit. His speech would feature a dramatic stunt; in answer to a rhetorical question
about who would lead Andersen into the future, the back wall of the stage would turn, becoming a line of mirrors that showed the reflection of the audience.

That would follow a video celebrating the best of Andersen’s best, the partners who represented everything good about the firm. People like David Duncan, whose Enron work would be featured. Berardino had just notified Duncan that he had been selected for the CEO’s advisory council, designed to help plot strategy; there was no better signal that Duncan was the type of partner others at the firm should emulate.

Berardino was hanging around the convention center, sipping coffee and talking shop with his partners. An Andersen official approached him, saying he had news.

“There’s an issue down at Enron,” the official said. “We’ve got people on the ground with the team, but it’s going to be real hard, and we have some real hard decisions to make in the third quarter. We may need your help.”

Fine
. “Let me know what I can do,” Berardino said. But he wasn’t worried. Their team at Enron was top-notch.

Enron had finally calmed down. In early October, when the board arrived in Houston for the quarterly meeting, the company seemed poised to turn a corner.

In meeting after meeting, the news was upbeat. At the audit committee, Causey presented a list of charges the company would take against its third-quarter earnings—all nonrecurring events, he told the directors. David Duncan chimed in, assuring the assembled directors that the accounting associated with the Raptor losses was appropriate.

The audit committee heard about Sherron Watkins as well. Dilg and Hendrick presented the results of their investigation succinctly: While there was discomfort about the perceived pressure on employees created by the Fastow related-party transactions, the lawyers reported, everything about the deals appeared to be on the up-and-up.

“Our firm does not feel that any further investigation is necessary,” Dilg said.

The directors asked a number of questions, then instructed the company managers to thank Watkins for coming forward. Everything seemed under control.

The news out of the finance committee was equally upbeat. Fastow announced that Enron’s liquidity—the cash available or accessible for operations—was significantly above the minimum levels required by the board.

“We have tested our liquidity for the possibility of very negative market events,” Fastow said. “And even in such instances, it remains adequate.”

Enron had already been through a big test in the aftermath of September 11, after all. Now, listening to Fastow’s assurances, the directors felt confident this company could withstand whatever the world threw at it.

The meeting of the full board was a celebration of Enron and its potential. Bankers from Goldman made their presentation about the threats from the low stock price. The directors agreed to consider takeover defenses, to ensure Enron would not be at risk from a lowball hostile bid.

Then came the business presentations. Dave Delainey, head of Enron Energy Services, told the board that the retail division was putting in a great performance. The elements were in place, he said, for increased growth and profitability. The same held true for the wholesale division. Its head, John Lavorato, reported steadily increasing earnings, with volumes growing significantly.

Good news all around, the directors muttered happily. They had survived the Skilling resignation; they had survived September 11. Enron’s future looked pretty bright.

That same week in Chicago, risk-management executives at Andersen ran Enron’s financial figures through FIDO, a fraud-detection software. A staffer checked the results.

A red alert. Enron’s financial statements filed the previous June set off a fraud warning. One of the executives running the test, Mark Zajac, wrote up an e-mail on October 9 to Duncan and two of his superiors, alerting them. It was always possible that this was a fluke, generated by legitimate business activity. But still, Zajac cautioned, the accountants needed to heed the warning.

“It is imperative that you evaluate the results carefully and objectively before reaching any conclusion,” Zajac wrote, “because of the significant adverse impact of failing to detect a material financial statement fraud.”

Kaminski had been out of the office for a few days, recruiting potential analysts from Berkeley. With him out of the way, the finance division struck. Executives descended, asking analysts to sign off on the numbers for the unwinding of the Raptors, including the thirty-five million dollars to LJM2. When mid-level analysts refused, the executives went down the chain to the associates.

But each time, the analysts sent the request to Shanbhogue, Kaminski’s
second in command. He killed every attempt. No approvals, he repeated, until Kaminski saw all the legal documents. He never would.

Members of Andersen’s Houston office were listening to Michael Odom, a practice director. It was the morning of October 10, and Odom was letting everyone know that they needed to be careful with their paperwork.

Andersen had a policy, he said, requiring the destruction of records that weren’t needed for the finished audit files. It worked well, he said, and auditors in Houston needed to be sure they were in compliance.

“We’ve had several cases where we’ve produced documents in litigation recently where we found a lot of stuff that we shouldn’t have retained,” he said.

Of course, once the firm was sued, Odom said, nobody could destroy documents anymore. “But if it’s destroyed in the course of the normal policy and litigation is filed the next day, that’s great,” Odom said. “We’ve followed our policy, and whatever there was that might have been of interest to somebody, uh, is gone.”

The next day, John Stewart saw Nancy Temple walking down a hall at headquarters. He stopped her.

“Nancy,” he said, “I have to tell you, I am still very uncomfortable with deleting the e-mails and destroying the draft documents in the Enron situation. It is the type of material that I very well could need in the future.”

“Tell you what, John,” Temple replied. “Why don’t you get a set of the documents you want to keep, and I’ll hold them for you. But otherwise, comply with the policy and dispose of the other material.”

Stewart wasn’t happy about the idea. But he agreed.

Temple was at the office early the next morning, October 12. With all of this discussion about documents, it was apparent that few in the firm understood Andersen’s retention policy. Whatever they could dispose of had to go. The team working on the Enron account in particular had to understand that.

She typed an e-mail to Odom. “Mike,” she wrote. “It might be useful to consider reminding the engagement team of our documentation and retention policy. It will be helpful to make sure that we have complied with the policy.”

Temple included a link to the policy, contained on Andersen’s internal Web site. Then, at 8:53, she hit “send.”

———

That same day at Enron, top management was completing its draft earnings release for the third quarter.

There was some debate about what else to include. Of course, there was the matter of the $1.2 billion reduction in shareholder equity, caused by the accounting error. Causey argued it had no place in the press release; the announcement was about earnings, and the equity reduction was a balance-sheet issue. It should, he said, be released with Enron’s quarterly SEC filing in a few weeks.

There was some debate, and a compromise was struck. They wouldn’t disclose the equity reduction in the press release, but would mention it on the analysts’ call. Besides, there was going to be plenty to absorb in the earnings release itself. Enron would be announcing a huge loss, largely as a result of shutting down the Raptors.