The Best American Crime Writing (37 page)

Jan finally had to agree to an onerous custody situation; she could visit Kay four weekends a year and have her for summer vacations and alternating holidays. They were allowed to talk on the phone once a week for fifteen minutes. Jan always spoke to her daughter as if she were an adult. “I am going to fight for you, but it is going to be very expensive,” she told her. “You know how much I love you, and I will do everything in my power to get you back.” (Robert Avery rejects Jan’s version of events.)

Avery moved to Houston in order to be closer to her daughter. Through friends at Arthur Andersen, she started working part-time at Enron. She became married to her job, spending long hours working on the tax aspects of the multiplying partnerships—there would be about 3,000 by the time the company imploded. She was often sharp with her colleagues, quick to assert herself: “I am the only person who can work on that deal. I know how they work,” she would say. Her bonuses depended on the earnings value of the deals she structured. The more money I make, she thought, the sooner I can afford the legal fees to fight for Kay.

When Jan Avery arrived at Enron, she already possessed an understanding of the arrogance of the company’s culture. Of all the energy companies she knew, only Enron didn’t deal with businesses owned by women. “I could never get them to give me the time of day,” she told me. “And they controlled the best pipelines.” By 1993, Ken Lay had established his system of rivalries. Forrest
Hoglund ran the oil and gas division, Stan Horton was in place at the staid and traditional pipeline company, Jeff Skilling had arrived to set up a trading operation, and Rich Kinder, the chief operating officer, kept a brake on the financials, discouraging Lay’s grandiose schemes with a droll Texas remark, “Let’s not drink our own whiskey, Ken.” From time to time Kinder would lose his temper. “Goddamn it, how can we be doing all this?” He was uncomfortable with the rapid expansion, and Lay would say teasingly, “I’ll die with a lot of friends, and Rich will have all the money.”

And then there was Rebecca Mark, a young banker who in 1982 moved to what would become, in 1985, Enron’s treasury department. With her blond hair and gold earrings, she looked like a Texas sun queen. Her mentor at the time was John Wing, a West Point graduate and canny negotiator, whom she reported to. She and Wing went to work opening power plants, but her division was partially sold to help cover the debt incurred by the rogue-trading scandal. In 1988 she took time off, bundled up her toddler twin boys, and entered Harvard Business School. She negotiated the contracts for a power plant for Enron outside Boston, and after she earned her MBA she returned to the company full-time. Soon she was setting up power plants and pipelines in England, India, and the Philippines. Mark would ultimately spar with Jeff Skilling, who had been a Baker Scholar at Harvard Business School and a consultant at McKinsey & Company before joining Enron. “Jeff may have been the single best student I ever had, and he did not suffer fools,” said Chip Bupp, a professor of Skilling’s at Harvard. Bupp likened Skilling’s personality to the icy capability of Robert McNamara, President Kennedy’s secretary of defense.

Skilling thrived on confrontation and had a perfect command of the minutiae of deals. In interviews he could stun financial writers with his grasp of details, but that same superiority made corporate
meetings enervating for his colleagues. His vision was messianic. Skilling kept a sign on his desk: I.R.I.S., which stood for “First they Ignore you, then Ridicule you, then Imitate you, and then Steal your idea.” From the beginning, colleagues say, Skilling’s pattern was to scapegoat others without leaving a trail that could lead back to him. In meetings that Ken Lay chaired, Skilling was often silent, letting Lay believe that he was completely in control. But at other times Skilling could be very volatile. He was divorced, and his office was a shrine to his children; on long plane rides with colleagues he might spend hours talking about them. He would often blurt out astonishing remarks in public—he once, famously, called a stock analyst an asshole during a conference call—and the public relations staff worried each time he gave an interview.

Andrew Fastow, a Skilling protégé, was recruited early on in Skilling’s first fiefdom, Enron Capital & Trade. As Skilling consolidated his power, he and Fastow allegedly designed the partnerships that were constructed to hide losses and maximize profits. Testifying before Congress, tax lawyer Jordan Mintz recalled sending a memo and leaving messages for Skilling asking him to sign off on crucial legal documents. Skilling testified that he had no memory of that. Last December,
The New York Times
had Skilling saying that the partnerships were Fastow’s idea. Bupp, who remained close to Skilling, is now confounded. “I can’t believe he did not know what was going on, yet I can’t believe Jeff would lie … [The partnerships are] a clear black-and-white conflict of interest. Holy smokes!”

One day in 1995, Jan Avery sat in a conference room and watched Andrew Fastow, standing in front of a whiteboard, grapple with how to deal with a coming loss on the books of his group’s investment in an MTBE fuel-additive plant outside Houston. Fastow and Skilling had gambled on the toxic additive used in gasoline, but as a result of a steady attack from the media and environmentalists, the market
for MTBE had virtually disappeared. Fastow exuded anxiety, Avery remembered, raising his voice, barking orders. “We have to be able to come up with something! We have to construct a structure where the loss could be camouflaged.” Most of Enron’s now notorious partnerships were still in the future, but Fastow had already seen the possibilities they offered. There were already roughly three hundred in place. “Losses were never allowed at Enron, even then,” Avery said. “You did not recognize losses.” She remembered that the meeting stretched on for much of the day, and Fastow became increasingly agitated. Avery recalled thinking, This has gone too far.

“We sat there and bounced it around,” she said, while Fastow frantically drew circles representing subsidiary corporations all over the board—partnerships within partnerships—to suggest how to move the loss. Fastow also asked them for ideas on how to maintain the value. “That was our language for hiding a loss. We called it ‘maintaining value,’” Avery said. “I knew that this was something that was ultimately going to drag the company down, because you could not maintain this level of loss. It was hundreds of millions of dollars, never acknowledged on the books.” Isn’t that fraud? I asked. “It was still within the realm of accounting rules, but they were way out in the gray zone. It became criminal when they continued it to such a degree that it put all the shareholders at risk.” Did anyone raise an objection? “All the time. We called it house-of-cards accounting and would openly discuss how crazy it was. In meetings, we were always told the same thing: ‘You have to be able to come up with a solution.’ There was no alternative.”

Fastow’s wife, Lea Weingarten, was in the room; she too worked at Enron, which was not unusual in the culture. Fastow had met Weingarten, the daughter of one of Houston’s prominent Jewish families, when they were at Tufts. The Weingartens’ fortune had come from a chain of grocery stores. Around town the couple was thought of as a study in opposites; Lea Weingarten was low-key, with the casual style of old money Texas.

Enron was hermetic and pulsing with sexuality. Ken Lay had married his secretary; Jeff Skilling had left his wife and taken up with Rebecca Carter, whom he promoted to company secretary and who earned more than $600,000 last year.

People who know Kenneth Lay well insist that his destruction can be understood by looking at his longtime attraction to ruthless, brainy alter egos such as Jeff Skilling and Andrew Fastow, who could act out Lay’s ambitions while he played Mr. Congeniality. The aura of fraud permeated Enron from its inception in 1985, when the legacy and corporate style of Michael Milken were imprinted on Lay and his company. It was Michael Milken and Drexel Burnham that helped raise the $2.3 billion needed for the InterNorth-Houston Natural Gas merger. A little-known fact is that Enron stock was one ingredient of the scandal that brought down Michael Milken and Dennis Levine. Tipped off by a banker at Lazard Frères, Levine and his group of insider traders profiteered on the merger, as James B. Stewart has reported in
Den of Thieves
. They later went to prison.

Lay thrived in a culture of rivalries. He was a man of parts, a winner of awards and member of committees, generous with young associates, serving them himself when they traveled with him on one of the many Enron planes. “All these planes give my CEOs something to aspire to,” Lay said to an ABC news reporter just months before Enron crashed. Inside the company, Lay overlooked, even encouraged, all the vicious infighting that went on. Lay came from a modest background, had a cheerful salesman’s facade, and wore a Mr. Magoo mask of disconnection. He was a Gatsby of the pipelines, a minister’s son from Missouri fueled with the desire for grandiose status. He earned a Ph.D. in economics at the University of Houston, was a navy officer, and clocked time in Washington as an undersecretary in the Department of the Interior.

He was attracted to Houston by the hope of staggering returns in the oil and gas world.

When Lay became allied with Milken in 1985, the junk bond king’s reputation as the genius of inventive financial structures was at its peak. Not long before Drexel Burnham chief executive Frederick Joseph denounced the press for its “outrageous” allegations linking Milken to insider trading and the unsavory affairs of arbitrageur Ivan Boesky, Lay arrived in Beverly Hills in search of the financing he needed to realize his dream. The steady drumbeat of allegations in 1986 concerning Milken’s honesty would have alarmed a more prudent CEO. In a 1987 interview, Milken went as far as to defend his business practices by boasting that he was helping Enron increase the size of its debt offering by an additional $225 million. Lay never cut his ties with Milken, and would later talk about him as a visionary who had been unfairly prosecuted. After Milken got out of jail, Lay invited him to speak at an Enron conference, despite a vocal protest from lawyers inside the company. “Ken always thought Mike was an out-of-the-box thinker who deserved sympathy,” an Enron executive said.

In one magazine spread, Lay was portrayed as the wizard of energy, his body a glowing electric power line. As for the Kool-Aid, it was the elixir of money. Young traders just out of school were tantalized with promises of $500,000 in bonuses within a year. The Enron car of choice was a silver Porsche; the parking garage in Houston was full of them. Vice presidents and managers preparing to make a budget presentation in front of Lay, Skilling, and Fastow were told, “Here is your number.” The numbers—always larger than what was feasible to demand on a contract—would have to be reached or, the vice president and managers knew, they could be “re-deployed,” Enron language for being switched to another department, often before being forced out in a vicious biannual performance review. These performance reviews, referred to as “rank and yanks,” were a variation on the old English Star Chamber.
Your picture was displayed, and your colleagues blasted your job performance, knowing that their own advancement depended on your demise. Originators of deals might find that their numbers had been tampered with so that in the performance review their deal structures no longer made sense. “Because of the complexity of the math, it could take you weeks to figure out what had been changed, and by that time your deal was shot down or you were fired,” one former associate recalled. Skilling would be very blunt with vice presidents who questioned these methods:
Change your assumptions. You can always refinance! You can always get the deal done!
In addition, the public relations staff had to keep Lay’s competing division heads from getting too many cover stories in
Fortune
and
Forbes
. “Ken didn’t like it,” one told me. “He wanted the coverage for himself.”

By the mid-nineties, Fastow was the whiz kid of Enron’s financial structuring, always ready with sophisticated accounting arcana such as the “costless collar”—a complex financial instrument which allowed an investor to sell a stock in partnership with a bank at a guaranteed trigger price and yet not have it reported to the SEC. Jan Avery, for one, grew more and more alarmed at the accounting tricks required to support Skilling’s and Fastow’s bookkeeping. She used the term “feeding the monster” to describe the process.

As the Enron tentacles spread, it became increasingly difficult for Fastow and Skilling to disguise their ambitions. The deal structures became more and more byzantine. At the broadband division, which trafficked in the fiber-optic cable used in high-speed Internet connections, trades called “Barney deals”—meaning “I love you, you love me”—were constructed. Enron would sometimes swap control of its fiber lines with those of another company, only to undo the transaction a few days later, so as to create the appearance of volume. Other maneuvers pushed hundreds of millions of
dollars of trading equity around in a circle, a practice employed by such companies as Qwest, Cisco, and Global Crossing, which was headed by Gary Winnick, who had trained at Drexel Burnham. When Global Crossing went bankrupt in January, Winnick was able to walk away with a reported $735 million. At the broadband group, Fastow used the lawyer Kristina Mordaunt, who represented the group in its dealings with the separate partnership of LJM2, which was run by Fastow. In March 2000, Mordaunt was invited into a Fastow venture called Southampton Place. She put down $5,800. She heard a few weeks later that the deal was winding down. Opening her bank statement the next month, she saw a deposit of $1 million. Another friend of Fastow’s, managing director of Enron Global Finance Michael Kopper, would make more than $10 million from a $125,000 investment in Chewco, according to the report released by Enron directors in February.

“There is someone you should talk to,” Alex Conn told Milberg Weiss partner David Walton in a surprise telephone call. Conn, an Austin software entrepreneur, had met Jan Avery when he negotiated with Enron, and he was impressed by her. Several weeks after Enron collapsed, he reached out to the people at Milberg Weiss to let them know what a valuable witness she could be. It was November 2001, and Walton, a Milberg forensic accountant, arranged a conference call with Paul Howes, who is the Milberg partner in charge of day-to-day operations for the Enron investigation. Howes has thick blond hair, a former athlete’s build, and the empathic conversational style of the Southwest; in his years as a Washington-based assistant U.S. attorney, he radiated such useful kindness that he could get drug lords to confess. After his conversation with Avery, in which she talked about her experience at Enron International, which ran the company’s projects overseas, Howes got on a plane to Houston. From then on, in his research reports Avery was
referred to only as “confidential witness.” He had yet to determine whether her information would check out.