Conspiracy of Fools (91 page)

Enron could no longer give vague answers, like directing analysts back to the footnotes. There needed to be more information, Fleischer said.

“David, I appreciate that,” Lay responded. “Certainly, as I also said earlier, there are limitations with what we can or should talk about with LJM in particular or related-party transactions in general because of both lawsuits, potential lawsuits as well as the SEC inquiry.”

No! God, no!

Skilling wanted to reach through the phone and shake Lay. He sets up an analysts’ call, and then says he can’t talk about the most pressing issue!

Skilling couldn’t listen anymore. He walked away from the call, pacing the floor of his kitchen. This couldn’t continue. Somebody had to take charge. Lay wasn’t up to it.

He had to go back. Enron needed him.

Skilling dropped onto a white couch in the breakfast area near his kitchen and reached for the phone, dialing Lay’s office. He told Lay’s secretary to have him call as soon as he could.

“We’re trying to provide information,” Lay continued. “We’re not trying to conceal anything. We’re not hiding anything.”

Duncan shifted in his seat. This was bad. This plan to settle the market with a conference call had turned into a disaster.

And there was nothing he could do to stop it.

The call continued for another few minutes. As Lay wrapped it up, he promised that the company would keep in contact, and set up another conference call for sometime in the near future.

“So again, thanks for participating in this call,” he said. “And thanks for the questions.”

Mark Koenig pushed the button on the speakerphone, disconnecting the line. Most of the people in the room stood up. Lay, still in his seat, looked at them.

“How did that go?” he asked.

There was silence. They all knew the truth. “Well,” Causey said finally, “I don’t think we hurt ourselves.”

Not another word was said. Everyone left the room.

A disaster. A total, complete disaster.

Duncan shut down the Webcast. His colleagues agreed. Enron had fumbled the ball spectacularly. Duncan huddled with his partners. Eleven days before, he had seen an e-mail from Nancy Temple telling the team to get in compliance with the document policy and shred what was no longer needed. This seemed like a good time to reiterate her instructions.

“We should all work now on getting in compliance with the policy,” Duncan told his colleagues. “And I would like each of you to go out and communicate the need to get in compliance with the engagement personnel you work with.”

Perhaps, one partner suggested, Duncan should gather the troops and let them know. He agreed, and told his secretary to arrange a full meeting at 1:30 in conference room 37C1. That would get the files in order fast.

The phone rang in Skilling’s house. It was Lay, just off the analysts’ call. The two wasted no time on small talk.

“Ken, you’ve got to bring me back!” Skilling implored.

“
What?”
Lay couldn’t believe what he was hearing.

“You’ve got to bring me back,” Skilling repeated. “For the outside world, I think I have some credibility, and they’re not going to believe someone would jump into the frying pan if they thought there was anything wrong.”

It would send a good signal to the marketplace, Skilling continued, and from there, they could go to New York, make the rounds with the banks, and calm everybody down.

“Ken, it’s a chance,” Skilling said.

Lay pondered that. “Hmm, that’s interesting,” he replied. “Let me think about it.”

———

Later that morning, Lay and his management team crossed Smith Street, headed back to the Hyatt hotel ballroom, site of his celebratory return nine weeks before. This time there were no ovations, no cheering. Just a collection of angry, confused, and bitter employees.

Lay greeted everyone. A chorus of good mornings came back to him. “There it is,” he replied. “We’ve got a packed house again, and we appreciate that.”

In an even tone, Lay commented that in any other circumstance, he would probably have a few words to say about September 11 and the heroes from that terrible day.

“But of course, today we’re going to talk about Enron,” he said, “because just like America is under attack by terrorism, I think we’re under attack.”

He turned the floor over to Greg Whalley, who gave a lengthy description of the performance of the company’s business units. All the numbers sounded great.

Back to Lay. “As you can see, the underlying fundamentals of our business are very strong, indeed the strongest they have ever been,” he said. “But, regrettably, that is not what Wall Street is focusing on.”

The challenges they faced, Lay said, needed to be seen in context. It wasn’t as though Enron was a stranger to tough times. There was the oil-trading scandal in the 1980s that almost brought the company down, he said. There was the J-Block contract, which could have cost billions. “In each and every case, the company has come back,” he said. “And it has come back stronger than it was before.”

He knew, Lay said, that the stock-price drop was causing pain for employees, raising concerns about paying for children’s educations and meeting mortgage payments.

“For that I am incredibly sorry,” Lay said. “But we’re going to get it back.”

Of course, Lay acknowledged, everyone wanted to know about LJM. While the board recognized that Fastow’s role placed him in a conflict, the company had instituted more than enough controls to ensure that shareholders were protected.

“I have reconfirmed over the past few days,” Lay said, “that these controls and procedures have been adhered to.”

And despite everything the employees may have read, Lay said, there was no reason for anyone to have concern about Fastow’s involvement in the LJM funds. “I and the board are also sure that Andy has operated in the most ethical and appropriate manner possible,” Lay said.

Now, Lay said, all Enron employees were facing a test.

“Will we measure up to the challenge, or will we not?” he asked. “True character is born in times of crisis. We need to show our character as an organization.”

He looked straight at the audience. “I will say this also,” he said. “I am here until the board throws me out, or until we restore Enron to its greatness.” The crowd applauded.

The employees had been invited to ask questions anonymously on note cards. Most of the queries had to do with Enron’s business prospects. Different members of the management team stepped forward to reply to the questions that fell within their area of expertise.

Lay glanced at a card and read it to himself. Then he took his turn at the microphone. “A lot of these I think I’m going to have to handle,” he said. “Like this one.”

He held the card up in front of his face.

“I would like to know if you are on crack,” he read.

The crowd laughed. Lay looked up. “I’ll come back to the answer,” he said. More laughs.

“If so,” he continued, “that would explain a lot. If not, you may want to start because it’s going to be a long time before we trust you again.” The crowd laughed again.

“I think that’s not a very happy employee,” Lay said. “I’m sure a lot of you have some hatred.”

He paused. “No, I’m not on crack,” he announced.

Harvey Pitt was angry.

That morning,
The Washington Post
had reported on his Miami speech. But it played up his regrets about the SEC’s reputation for not being a kinder, gentler place for accountants. The article made it seem as though he were kowtowing to the accounting industry.

But those remarks had been about
process
, not regulatory zeal, Pitt fumed. He had specifically said the agency was going to be aggressive in combating malfeasance! Pitt was speaking about another matter with Steve Cutler, his director of enforcement, and mentioned the
Post
article.

“How,” Pitt complained, “could someone write about what I said at the beginning of the speech without taking note of everything I said afterward!”

Cutler listened, annoyed. The people in enforcement hadn’t known the speech was coming; if they had, they could have warned Pitt that he was about to leap into political hot water.

“Harvey, even if you believe what you said, you can’t say it,” Cutler replied.

“But it was taken out of context!” Pitt complained. “The rest of the speech explained what I meant.”

Cutler looked at him patiently. “Harvey, in Washington you don’t get to utter the second sentence,” he said. “So you can’t say the first when you’re chairman of the SEC.”

Once Duncan’s instructions had gone out to the full team, the slow trickle of document destruction that had begun a week before suddenly became a flood.

And Duncan didn’t limit his orders to Houston. That day he called Andersen accountants in London and Portland who worked on Enron matters, letting them know to start complying with the firm’s document policy.

In London, partners shredded volumes of documents related to Enron. But not in Portland. Given all the turmoil at Enron, the accountants there thought the idea of shredding records was crazy. They held on to everything.

The fax from Bank of America arrived that same day. Lay’s decision in September to use his ten-million-dollar bonus to pay down debt had held off margin calls for a while. Now, with Enron’s share price collapsing, the banks were nipping at his heels again, demanding cash.

In the fax, the bank said he had two days to meet the demands or it would take action. Lay and his advisers decided to pay back the Enron loan he had been carrying with company stock, then borrow from the line again, and use the cash to meet the margin call.

Ray Bowen headed up to Whalley’s office to discuss the warning about Fastow he had given his boss in a voice mail the previous week. Whalley got right to the point.

“Do you have specific facts that Andy did something wrong?” he asked.

No, Bowen said. “I just know he’s a bad guy.”

Whalley pressed in. He wanted Bowen to think. There must be something Bowen knew that he could use.

“I just think he’s gaming the system,” Bowen replied.

Whalley tossed up his hands. “Let me tell you, Ray, I’ve been speaking with the board, and they’re not going to do anything about Andy unless we’ve got specific facts.”

He brought a hand up to his head. “They love him,” Whalley said. “They just absolutely love him.”

The two sat in silence for a moment. Whalley stood.

“Okay, get out,” he said.

———

At a management committee meeting that afternoon, Lay brought up the proposal for Skilling’s return. To his amazement, Skilling’s acolytes, the people whose businesses he nourished, vehemently opposed the idea.

It was Skilling’s idea to leave, they argued. And why?
Because he was tired?
Too damn bad.

“He made his decision and caused us a lot of heartache and pain,” Dave Delainey said. “It’s just a bad idea. We’ve got a team. We’ll work through this.”

Whalley agreed. “I think it’s going to confuse the market about who’s really running the company,” he said.

Lay just didn’t understand it. How could these people be so disloyal to the man who made their careers?

The conference call late that afternoon with Fastow was meticulously planned. Two directors, John Duncan and Mickey LeMaistre, had been selected to represent the board. Jim Derrick, the general counsel, had composed a script to make sure they asked the right questions. That way, the directors could finally learn how much money they had awarded Fastow by allowing him to form the LJM funds.

LeMaistre was in Colorado, Duncan in Houston; Derrick ran the call, connecting them to Fastow. LeMaistre glanced down at a copy of Derrick’s script and began to read.

“Andy,” he recited, “because of the current controversy surrounding LJM1 and LJM2, we believe it would be helpful for the board to have a general understanding of the amount of your investment and your return on investment in the LJM entities.”

He posed the question: how much had Fastow made on each fund, including everything—salary, fees, profits from the investment? There was no wiggle room.

Fastow’s tone was matter-of-fact. He’d made twenty-three million dollars on LJM1, he said. And another twenty-two million on LJM2. All told, forty-five million. LeMaistre felt his heart drop.

“Incredible,” he scribbled on his script.

And untrue. Fastow’s real take would later be found to be at least fifteen million dollars higher, making the total in excess of sixty million. All for two years of work on a job he had promised would take no more than three hours a week.

It couldn’t be seen. It couldn’t be heard. But on that day, October 23, the financial underpinnings of Enron were snapping apart. The first person to catch
wind of the problem was an executive named Tim Despain. Enron’s short-term loans in the commercial-paper market weren’t rolling over. Institutions were taking the cash from maturing loans and not buying new paper. This was what had happened weeks before, after September 11. But that had been a market problem. This was more serious; it was an Enron problem.

Later, more bad news. Glisan had been working with some of Enron’s bankers, trying to secure a loan. There were no takers. So long as Fastow was CFO, they told him, the banks would have no faith that Enron was a worthy credit risk. The news devastated Glisan. He hurried to tell Fastow.

Pug Winokur, head of the finance committee, was screaming at Greg Whalley. They had been speaking about the crisis at the company, and Whalley had suggested that perhaps it was time for Fastow to go.

“Andy Fastow is going to continue as CFO of Enron until the board says otherwise!” Winokur yelled.

Whalley’s response was calm. “Don’t misunderstand this, Pug,” he said. “This isn’t about me. Sure, get the board in to talk about this.”

But there wasn’t much of a choice. “The banks,” Whalley said, “are already screaming ‘Anybody but Andy.’ ”

For hours, Fastow and Glisan worked with the finance team, struggling to find a way out of the latest problem. But the markets, the bankers, everyone was steadfast. No one trusted Enron—or Fastow—with the money anymore.