Conspiracy of Fools (90 page)

“I am in the terrible position of having to disagree with you,” Kaminski said as he looked at Lay.

“Anyone can disagree with me,” Lay replied.

Kaminski turned to face his colleagues. His anger at the side deals, the excuses,
the impropriety
, boiled over.

“What Andy Fastow did was not only improper; it was terminally stupid,” Kaminski began. “What he did is cause a crisis of confidence that could bring the company down. And the only choice that we have is to come clean.”

Kaminski’s face hardened. He thought of Stinson Gibner, who left Enron because of the Raptors. “One of our best employees resigned over this, because he couldn’t take pride in Enron,” he said. “This was my view from the beginning. I told Buy that this idea was so stupid only Andy Fastow could have come up with it.”

The room broke up in laughter. One executive involved in LJM1 interrupted. “Those were hedges!” he yelled.

Kaminski ignored him. He was on a roll. His face reddened, his voice cracked with emotion.
The company had been hedging its investments against its own stock! It was stupidi Enron has been dishonest!
Finally, Whalley placed a hand on Kaminski’s shoulder.

“That’s enough,” he said. With a gentle shove from Whalley, Kaminski started back to his seat. He passed Bowen, who was sitting on the aisle. Bowen looked him in the eye.

“God bless you,” Bowen said.

Later that day, Harvey Pitt stepped up to a podium at the Americana Ballroom in the Loews Miami Beach Hotel, where members of the American Institute of Certified Public Accountants had gathered for their fall meeting.

The previous afternoon, the SEC released the 21(a) report that Pitt had drafted just weeks before, announcing how the agency expected corporations
to cooperate if they discovered wrongdoing. Now he was ready to announce the next stage of his plan: an effort to improve the relationship between the SEC and the accounting industry.

Pitt shuffled his papers, then pulled up the microphone.

“In recent years, the unremarkable notion of an SEC chairman meeting with this group has taken on considerable mental, if not physical, risk. The agency I am privileged to lead has not, of late, always been a kinder and gentler place for accountants, and the audit profession, in turn, has not always had nice things to say about us.”

He pulled himself up straight. “Somewhere along the way, accountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to listen to the profession.”

He looked up. “Those days,” Pitt said, “are ended.”

The crowd of accountants cheered.

The essence of the new effort was cooperation, Pitt said, in hopes that the accountants could approach the agency with questions, and without fears of recrimination.

“Practices that reflect venality and disservice to public investors, however, will not be tolerated,” he said.

But together, he said, the agency and the accounting profession could create an environment where information provided to investors could better reflect reality.

“We may need to reconsider whether our accounting principles provide a realistic picture,” he said. “When rules get in the way of providing clear, reliable information to investors, then it is time to change them.”

The crisis at Enron was not going unnoticed at the upper reaches of Andersen. In Los Angeles, Rich Corgel, a senior partner, contacted a trusted colleague, John Riley, urging him to get involved. There were more conference calls coming, Corgel said, and Riley should be on the line. More important, Houston seemed shaky. The firm wanted Riley there to get a handle on the situation. Riley agreed.

Just after three that afternoon, the directors of Enron gathered in the boardroom, some by conference call, for another emergency meeting. Glisan made a short presentation, saying that demand for the company’s bonds was soft but that Enron still had more liquidity than it needed.

Lay recognized Causey. In the middle of all these troubles, the company had to deal with another issue: the rules had changed for the accounting of certain intangible assets. The arcane revision meant Enron would have to report
a noncash reduction in earnings of $200 million in the first quarter of 2002. But it wasn’t as bad as it could have been, Causey said. The intangible assets acquired in the purchase of Wessex Water by Azurix so many years before did not have to be written down. Causey left the meeting, and Lay turned to the most serious issue.

“I would like to open up a discussion, to see if any members of the board have a recollection of obtaining any information about the financial returns earned by Andy Fastow through the LJM structures,” he said.

It was a roundabout question. In its simplest terms, Lay was asking: anyone ever find out how much cash Fastow was pulling out of these things? No one had.

The time had come for the answer, the directors agreed. Two directors, John Duncan and Mickey LeMaistre, were appointed to call Fastow and simply ask him.

The cream of Houston society gathered that night at the annual fund-raiser for the Holocaust Museum. A number of public figures mingled in the crowd, but in particular the dinner was honoring Salomon Smith Barney, which, when pressed by Fastow, had made a six-figure contribution. Fastow even kicked in some money of his own.

As dinner proceeded, Ken Lay was asked to say a few words. He stood before the crowd. “Obviously, we’re delighted that Smith Barney stepped up and made the contribution they made,” he said.

He turned and saw Fastow watching him. “But the person who really made this happen is Andy Fastow,” he said. “So I think we ought to recognize Andy’s contribution and see if he’d like to make a few comments.”

The crowd applauded, and Fastow stood. He thanked Lay and joined in on congratulating Smith Barney. “We hope they’ll keep making these kinds of contributions,” he said. “Certainly, we’ll keep encouraging them to do it.”

There was some polite laughter. Fastow glanced toward Lay. “I would be remiss if I didn’t acknowledge Ken and Linda Lay. Ken and Linda have become role models for Lea and me. Certainly, they are role models for the community. But they’re also our personal role models.”

The Lays had given so much to the community, Fastow said, creating so many reasons to admire them. “Lea’s and my hope is that we can do just a small percentage of what they have done for our community. It’s through their inspiration that we’ve set up our own family foundation.”

The Fastow Family Foundation. The
entity stuffed with all the stolen money from the Southampton scam.

“We’re trying to get that foundation more fully funded,” Fastow said. “We
want to be very active in the community, give something back, just as the Lays have. We want to follow in the footsteps of our role models.”

He gestured toward Lay. “So, Ken and Linda, thank you for the example you have set for us, and for Houston.”

The crowd applauded. Lay felt slightly uncomfortable; he had never been quite so publicly slobbered on.

The e-mail that went out to Enron’s thousands of employees that night at ten seemed like standard fare, a brief explanation about a change in company benefits.

“October 26 is fast approaching!” the e-mail began.

As everyone had already been told, the corporate savings plan was about to switch administrators, the e-mail said. So employees had just four days left to make changes in their retirement plans. The lockdown would stay in place, it said, until November 20. Whatever everyone held as of Friday would be what they owned for the month—including employees who invested almost exclusively in Enron stock.

The e-mail ended on a chipper note. “Enron benefits,” it read.
“Keeping pace with your lifestyle
.”

As he drove to the office the next morning before eight, David Duncan called his secretary, Shannon Adlong, from his cell phone. Enron was about to announce the SEC’s informal inquiry and had scheduled an analysts’ call. Duncan asked Adlong to pull up the Enron Webcast on his computer so it would be ready when he arrived.

Minutes later, he was in the office. He summoned other accountants on the team—Deb Cash, Tom Bauer, Kimberly Scardino, among others—to join him and closed the door.

Shouts were echoing down the fiftieth-floor hallways of the Enron building. Fastow was yelling at Ron Astin, the Vinson & Elkins partner who had worked with him for years.

“I never wanted to do LJM!” Fastow screamed. “The board directed me to! It was Enron’s idea, not mine!”

“Andy!” Astin shouted back. “We can’t say that!”

Fastow argued, but Astin stood firm. “Andy, I don’t represent you!” the lawyer shouted. “I represent Enron!”

For a second, Fastow glared at Astin. Then he turned on his heel and stormed away, toward a conference room off Lay’s office where the analysts’ call was about to occur.

———

At home in Houston, Jeff Skilling was dialing into the Enron conference call. He had been witnessing the unfolding chaos from afar and feared Lay might not be up to the challenge. He could only hope that he was wrong.

“This is Ken Lay. Thanks for joining us today.”

The small conference room where Lay was sitting was packed. To one side sat Fastow, his jaw locked in anger. Causey and Glisan hovered nearby. Across the room, Astin was in a chair, staring at a briefcase on his lap. Palmer leaned on a wall near a tiny refrigerator, drinking a soda.

Like almost everyone in the room, Whalley looked uncomfortable. He didn’t want to be here. They couldn’t say what the SEC was doing, which was the main thing that the world wanted to know. This could only go badly. But Lay had insisted he attend. After all, he
was
president. Lay introduced the participants, then began his presentation.

That’s my cue
, Whalley thought. Lay could hardly stop the call to inform the analysts that his number two was walking out. Whalley stood and, without a word, left the room.

Enron was disappointed in its stock price, Lay said, particularly with its business going so well. But he and his messengers were prepared to speak with investors as often as they needed.

“There has been a lot of recent attention to the transactions Enron previously entered into with LJM. Let me reiterate a couple of things. We clearly heard investor concerns earlier this year, and Andy Fastow, Enron’s chief financial officer, ceased all affiliations with LJM”

Lay went through all the issues: the SEC investigation; an explanation for the failure to disclose the $1.2 billion equity reduction in the press release; the reasons for the reduction—ones that said nothing about the accounting error. Then he turned the call over to Fastow, who put the company’s liquidity position at $1.5 billion.

Lay took the floor again. “And with those brief comments,” he said, “we would welcome your questions.”

David Duncan rested his chin in his hand as he listened. Everyone in his office was silent. So far, things seemed to be going pretty well. No major problems.

Their tone was aggressive. But for the first few minutes at least, the questioners threw mostly softballs. Then Curt Launer, an analyst from Credit Suisse
First Boston, was recognized. What, he asked, would the 2000 earnings have been without the partnership transactions?

Lay glanced at Fastow, who didn’t move a muscle.
Nothing
. Lay motioned to Causey. “Rick Causey, chief accounting officer,” he said.

Causey told Launer that he should just review the footnotes from the past to figure out the earnings—the same ones that no one had ever been able to decipher. As Causey spoke, Lay shot a cold look at Fastow.

Minutes later, the operator announced a new questioner.

“We’ll next hear from Richard Grubman with Highfield Capital,” she said. A collective pall fell over the room.

Grubman
. The short seller. The one Skilling had called an asshole months before. This was going to be tough.

Grubman sketched out some numbers he had calculated about the financing of Azurix. By his reckoning, he said, Enron may have to provide one billion dollars to support the structure. Had it taken reserves against that liability?

Causey fielded the question, arguing that Azurix had more than sufficient assets to handle its obligations. Grubman fired back, declaring that the value wasn’t there.

“Richard, let me intercede here for a minute,” Lay interrupted. Wessex was the remaining asset of Azurix, he said. Outside auditors had reviewed the company and concluded there was no need for a write-down of its value.

“I know you want to drive the stock price down,” Lay said, “and you’ve done a good job of doing that, but I think that’s that. Let’s move on to the next question.”

Skilling allowed himself a moment of quiet satisfaction. This was the guy who had provoked his blowup. And Lay wasn’t doing much better with him.

Good
, he thought.
You’re losing your temper, too
.

“That’s pointless!” Grubman shot back.

Lay scowled. “Let’s go to the next question, Richard. You’re monopolizing the conference. We’ve got a lot of people out there with real, serious questions.”

Standing by the refrigerator, Palmer winced.
That just sounds defensive. This
was the wrong approach.

“I would appreciate an answer,” Grubman said.

“I think,” Lay replied, “in fact, we’ve answered the question, but you won’t accept our answer. Let’s move on.”

———

Duncan’s anxiety grew. Things were falling apart. He could see on his computer screen that Enron’s stock price, which had been climbing in the first few minutes of the call, was starting to reverse course.

The pummeling kept coming. There were questions on the partnerships and LJM. Rather than tackle them head-on, Lay stayed defensive, talking about the controls. Finally, David Fleischer from Goldman Sachs came on the line.

“The company’s credibility is being severely questioned, and there is really a need for much more disclosure,” he said. “There is an appearance that you’re hiding something or that you just don’t want to …”

He hesitated. “That maybe there’s something beneath the surface going on that is less than—that may be questionable.”