Read The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron Online
Authors: Bethany McLean,Peter Elkind
Enron is well on its way to becoming the most intensively dissected company in the history of American business. This book is published as that process continues, with investigations and litigation that will surely drag on for years. Because our aim has been to chronicle the company’s rise and fall—amazing and scandalous indeed—we have deliberately ended our narrative with Enron’s filing of the largest bankruptcy case in U.S. history. We leave it to others to describe the resulting investigations and trials, as well as the jockeying over Enron’s spoiling remains.
Enron’s story is a sprawling tale, and, during the 16 months of intensive reporting that produced this book, it has taken us down many trails. A good portion of our work involved poring through a mountain of public and private documents involving Enron and the colorful cast of players—executives, bankers, auditors, lawyers, investors, and analysts—who appear in these pages. We have reviewed divorce records, executive calendars, personnel files, court records, depositions, personal e-mails, letters, consultants’ studies, internal memos and presentations, board minutes, SEC filings, congressional testimony, and dozens of reports from Wall Street analysts. This massive written record, much of it contemporaneous with what we describe, has provided an extraordinary window into events involving Enron.
Ultimately, though, this is a story about people. We believe we have gained considerable insight into the thinking and behavior of virtually every major character in this book. We have conducted hundreds of interviews with people who worked at every level of the company, from the fiftieth-floor executive suite to the board of directors to the secretarial pool, in addition to scores of others who worked outside Enron. Yet for an assortment of understandable reasons—in some cases, involving the continuing criminal investigations; in other cases, involving the stigma that results from any association with Enron—many of those who spoke to us insisted on talking on “background” only. Under this arrangement, the information provided was on the record—we could use it freely—but we could not identify the source by name. This allowed many sources who would otherwise have been constrained to speak openly to us. On occasion, with those who saw themselves as likely government targets, facing possible surveillance, our arrangements assumed a cloak-and-dagger quality, with clandestine meetings arranged through coded messages. A few other individuals discussed events in great detail but only through trusted personal surrogates. The result is a book that relies, in considerable part, on unnamed sources.
We are exceedingly grateful for the cooperation, trust, and patience of all those (both named and unnamed) who spoke with us—in more than a few cases, a dozen times or more. Their participation in this project was an act of faith, and their insight has been invaluable.
• • •
This book was made possible through the support of
Fortune
magazine. The idea for it took hold shortly after Enron filed for bankruptcy, when we realized that there was an extraordinary and compelling business narrative in the company’s collapse and that we wanted to tell that story. We also realized something else: piecing together the fall of Enron was going to be an unusually challenging reporting task. For the reasons discussed above, many of the principals were hardly in a position to talk publicly about their experience. Enron’s financial machinations were also complicated, requiring considerable time and effort to understand—and then to explain.
What made our work manageable was the active involvement of Joseph Nocera, editorial director for the magazine. He served as impresario for this project, guiding us as we did our reporting, then acting as editor extraordinaire once we started writing. He is a true partner in the creation of this book. We are grateful to his wife, Julie Rose, too, who lived through the challenging times of this endeavor along with the rest of us.
Rik Kirkland,
Fortune
’s managing editor, allowed us to dedicate a year and a half to this project and never wavered from his strong and vocal support. Jeff Birnbaum tapped into his wealth of Washington sources, landing key interviews and pulling together the Washington angles to the Enron story. Colleagues Carol Loomis, Carrie Welch, Laury Frieber, Pattie Sellers, Tim Smith, David Rynecki, David Kirkpatrick, and John Helyar were generous with their advice and wisdom. Brian O’Reilly shared the extensive interviews he conducted with Enron executives for his story, “The Power Merchants,” published in
Fortune
’s April 17, 2000, issue. We received valuable reporting aid from former
Fortune
reporter Suzanne Koudsi. The Time Inc. Business Research Center, especially Doris Burke and Patricia Neering, provided fabulous research help. Arlene Lewis Bascom kept track of the book’s finances. Alix Colow pulled together the photos. Former Assistant Managing Editor James Impoco edited the original Enron story in
Fortune
written by coauthor McLean and was there with an encouraging word when we most needed it. Time Inc. editor in chief Norman Pearlstine and editorial director John Huey gave their blessing to this project. We hope the result justifies so much faith in us from so many.
We are appreciative of our many colleagues in journalism who broke fresh ground in reporting on Enron, notably
Forbes
’s Toni Mack, who was asking tough questions back in 1993 and was generous with her friendship and counsel a decade later; freelance writer Harry Hurt;
Texas Monthly
’s Mimi Swartz; Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts, and E. A. Torriero of the
Chicago Tribune
, for their excellent four-part series on the fall of Arthur Andersen; Peter Behr and April Witt, for their early five-part series on the demise of Enron in the
Washington Post
; and the
Houston Chronicle
’s Tom Fowler and Mary Flood, who overcame the hometown paper’s coziness with Enron’s hierarchy to dig into the story. University of San Diego law professor and author Frank Partnoy offered early insights into Enron that were very helpful. The work of
Wall Street Journal
reporters Rebecca Smith and John Emshwiller made them players in the Enron tale. In the postbankruptcy period, the
New York Times
, led by Kurt Eichenwald, blanketed the story, covering dozens of angles. We also want to acknowledge the work and generous encouragement of
Times
business writer David Barboza and Washington correspondent Rich Oppel.
Amid much finger pointing in the nation’s capital, several congressional committees did yeoman work. The U.S. Senate’s Permanent Subcommittee on Investigations, through its detailed reports and hearings on Enron’s incestuous relationship with commercial and investment banks, shed considerable light on dark corners of the Enron tale. We are grateful for the assistance of the committee and its staff, including Elise Bean, Robert Roach, and Mary Robertson. The Senate Committee on Governmental Affairs produced enlightening work on the watchdogs that didn’t bark—government regulators, Wall Street analysts, and credit agencies.
Our stalwart agent, Liz Darhansoff, served as a fierce negotiator, sage critic, and fervent advocate. Our editor, Adrian Zackheim, instantly understood how a complex business story could make a gripping tale and was with us all the way. We’d also like to thank Will Weisser, Mark Ippoliti, Alex Gigante, David Hawkins, and Bonnie Soodek.
Finally, we owe our greatest debt to our loved ones.
Bethany’s parents, Helaine and Robert McLean, while far removed from the specifics of Enron, added their wisdom to the age-old human elements of the story. Her sister Claire McLean offered constant words of encouragement and perfect company for the occasional shoe-shopping break. Bethany’s husband, Chris Wilford, kept a glass (or two) of wine waiting long into the night. And Barolo provided a constant reminder of what it really means to be a bulldog.
David Elkind, Ellen Duncan, and Mary Clare Ward aided this project in untold ways. Laura Elkind, Peter’s wife, did double duty, offering insightful editorial suggestions and tending bravely to the home front (Stephen, Landon, George, Adele, and Sam) while enduring long absences and late nights of writing with remarkable patience, support, and grace.
To all of them, we are especially grateful.
—Bethany McLean and Peter Elkind
September 2004
Authors’ Notes and Acknowledgments
CHAPTER
2. “Please Keep Making Us Millions”
Ken Lay
—Founder, chairman, and CEO of Enron.
Jeff Skilling
—President and chief operating officer. Served as CEO from February to August 2001.
Andrew Fastow
—Chief financial officer.
Rebecca Mark
—CEO of Enron International and later of Azurix.
Jim Alexander
—CFO of Enron Global Power and Pipelines (EPP).
John Arnold
—Enron’s young trading superstar.
Ron Astin
—Vinson & Elkins lawyer.
Cliff Baxter
—Jeff Skilling’s chief deal maker and trusted confidant. Briefly served as CEO of Enron North America.
Tim Belden
—West Coast power trader who figured out how to game the California market.
Arthur and Robert Belfer
—father-son Enron directors and New York–based investors.
Louis Borget
—CEO of Enron Oil. Went to jail as a result of Enron Oil scandal.
Ray Bowen
—Enron finance executive. Became treasurer after Ben Glisan was fired.
Ron Burns
—Former CEO of Enron’s pipeline division. Briefly co-CEO with Skilling of Enron Capital and Trade Resources (ECT).
Rick Buy
—Head of Risk Assessment and Control division (RAC).
Rebecca Carter
—Enron’s corporate secretary and Skilling’s second wife.
Rick Causey
—Chief accounting officer.
Margaret Ceconi
—Former GE manager who joined Enron Energy Services (EES). Later tried to blow the whistle.
David Cox
—Enron Broadband Services’ chief deal maker.
Wanda Curry
—Enron accountant who dug up problems at EES.
Dave Delainey
—Executive who took over EES from Lou Pai.
Jim Derrick
—Enron’s general counsel.
Joseph Dilg
—Vinson & Elkins lawyer.
Bill Dodson
—Michael Kopper’s domestic partner.
John Duncan
—Enron director and chairman of the board’s executive committee. Gave Lay his first job as CEO.
Jim Fallon
—Trading executive who took over Broadband after Ken Rice left.
Lea Fastow
—Andy Fastow’s wife and former assistant treasurer at Enron.
Mark Frevert
—Longtime Enron executive. Became vice chairman in the last months.
Ben Glisan
—Fastow’s structured-finance accounting whiz. Became Enron
treasurer.
Wendy Gramm
—Enron director and former chairman of the Commodities Futures Trading Commission. Wife of U.S. Senator Phil Gramm of Texas.
Rod Gray
—Rebecca Mark aide. Worked at both Enron International and Azurix.
Mark Haedicke
—General counsel, Enron North America.
Gary Hamel
—Management guru who touted Enron.
Kevin Hannon
—Former Bankers Trust employee who became Ken Rice’s deputy at Enron North America and Enron Broadband.
John Harding and Steve Sulentic
—Louis Borget’s direct superiors at Enron during Enron Oil scandal.
Joe Hirko
—Former Portland General CFO who served as co-CEO of Enron Broadband with Rice.
Forrest Hoglund
—CEO of Enron Oil and Gas.
Kevin Howard
—Enron Broadband finance executive who worked on Project Braveheart.
Ron Hulme
—Lead McKinsey & Company partner on the Enron account.
Robert Jaedicke
—Enron director, and chairman of the audit committee. Former dean of the Stanford Graduate School of Business.
Vince Kaminski
—Head of Enron’s Research Group. In-house skeptic of Fastow’s deals.
Bob Kelly
—John Wing deputy.
Rich Kinder
—President and chief operating officer before Skilling. Left to start Kinder Morgan.
Louise Kitchen
—Trading executive who implemented idea for Enron Online.
Mark Koenig
—Enron’s head of investor relations.
Michael Kopper
—Fastow’s top deputy and investor in Chewco partnership. Later left Enron to run Fastow’s LJM partnerships.
Mike Krautz
—Enron Broadband finance executive who worked on Project Braveheart.
John Lavorato
—Greg Whalley deputy. Later became head of trading in North America.
Judith Lay
—Lay’s first wife.
Linda Lay
—Lay’s former secretary and second wife.
Mark Lay
—Lay’s son, who worked for the company and later joined a company that did business with Enron.
Robyn Lay
—Lay’s stepdaughter, who once had an Enron jet deliver her bed to Monaco.
Sharon Lay
—Lay’s sister, whose Houston travel agency got most of its business from Enron.
Charles LeMaistre
—Enron director and chairman of board compensation committee. Former president of the University of Texas M. D. Anderson Cancer Center.
Kathy Lynn
—Worked for Fastow at Global Finance. Later employed by Fastow’s LJM partnerships. Investor in Fastow deal.
Kevin McConville
—Head of Enron’s Industrial Group. Every deal his group made went sour.
William McLucas
—Wilmer, Cutler & Pickering lawyer, special counsel to
Enron.
Jeff McMahon
—Enron’s corporate treasurer until replaced by Glisan. Became CFO after Fastow was fired.
Nancy McNeil
—Lay’s secretary and Kinder’s second wife.
Amanda Martin
—Enron executive who later joined Azurix.
Thomas Mastroeni
—Treasurer of Enron Oil under Borget. Pled guilty in the Enron Oil scandal.
R. Davis Maxey
—Masterminded Enron tax-avoidance schemes.
Jordan Mintz
—General counsel for Fastow’s Global Finance division. Pressured Fastow to give up the partnerships.
Kristina Mordaunt
—In-house lawyer, served as general counsel of Global Finance and Broadband division. Made $1 million on a $5,800 investment in one of Fastow’s deals.
Mike Muckleroy
—Executive who bailed out the company during the Enron Oil scandal.
Cindy Olson
—Head of human resources.
Lou Pai
—Skilling lieutenant who headed early trading operation. Later CEO
of EES.
Mark Palmer
—Enron’s head of corporate communications.
Ken Rice
—Key member of Skilling’s inner circle. CEO of Enron Wholesale and, later, Enron Broadband Services.
Richard Sanders
—Head of litigation for Enron North America.
Mick Seidl
—Enron president during Enron Oil scandal.
John Sherriff
—Whalley deputy and head of Enron Europe.
Susan Skilling
—Jeff Skilling’s first wife.
Joe Sutton
—Rebecca Mark’s longtime deputy. Took over Enron International after she left.
Beth Tilney
—Enron executive and Lay confidante. Married to Merrill Lynch investment banker Schuyler Tilney.
John Urquhart
—Enron director. Former executive vice president at General Electric.
Lord John Wakeham
—Enron director and former British secretary of state for energy. As government official, approved Teesside.
Pinkney Walker
—economics professor at the University of Missouri. Lay’s first mentor.
Charls Walker
—Enron director and top Washington lobbyist. Pinkney Walker’s brother.
Chris Wasden
—Azurix executive.
Sherron Watkins
—Global Finance executive. Wrote whistle-blowing letter to Ken Lay.
Greg Whalley
—Head of the trading operation in late 1990s. Became president and COO after Skilling resigned.
General Tom White
—Enron international executive. Later Pai’s number two at EES. Became secretary of the army in the George W. Bush administration.
John Wing
—Launched Enron’s international business. Built Teesside.
Herbert (Pug) Winokur
—Enron director, former Pentagon official.
David Woytek
—Enron auditor during Enron Oil scandal.
Anne Yaeger
—Global Finance employee who left to work for the LJM partnerships. Investor in Fastow deal.
THE ACCOUNTANTS
Carl Bass
—member of Andersen’s Professional Standards Group. Chief Enron skeptic in the firm.
Joseph Berardino
—CEO of Arthur Andersen.
David Duncan
—Lead Arthur Andersen partner on the Enron account.
James Hecker
—Andersen partner who penned “Hotel Kenneth-Lay-a.”
John Stewart
—Head of Andersen’s Professional Standards Group.
Nancy Temple
—Andersen lawyer.
WALL STREET AND THE BANKS
Ron Barone
—Analyst for PaineWebber and later UBS Warburg.
Dan Bayly
—Merrill Lynch’s global head of investment banking.
David Bermingham, Giles Darby, and Gary Mulgrew
—NatWest bankers who allegedly conspired with Fastow to steal millions that belonged to the bank.
Jim Chanos
—Short seller who runs the hedge fund Kynikos Associates. Early short seller of Enron stock.
Carol Coale
—Prudential analyst. Viewed as authoritative voice on Enron.
Donato Eassey
—Analyst with Merrill Lynch. Replaced John Olson after he was fired.
Anatol Feygin
—J. P. Morgan Chase analyst.
David Fleischer
—Goldman Sachs analyst.
Robert Furst
—Merrill banker who worked with Schuyler Tilney.
Scott Gieselman
—Goldman Sachs investment banker.
Rick Gordon
—Head of Merrill Lynch’s energy investment banking group.
Richard Gross
—Analyst with Lehman Brothers.
Richard Grubman
—Short seller who runs the hedge fund Highfields Capital Management. Early short seller of Enron stock.
Curt Launer
—Enron-friendly analyst with Donaldson, Lufkin & Jenrette and, later, Credit Suisse First Boston.
James (Jimmy) Lee
—Head of investment banking at Chase Manhattan Bank. Named vice chairman when Chase bought J. P. Morgan.
Andre Meade
—Commerzbank analyst.
Ray Niles
—Analyst with Schroder & Company and later Citigroup.
John Olson
—Analyst with Sanders Morris Harris. Longtime Enron skeptic.
Mark Roberts
—Short seller who operates a firm called Off Wall Street.
Robert Rubin
—Member of the office of the chairman of Citigroup. Former treasury secretary in the Clinton adminstration.
Marc Shapiro
—Vice chairman of finance and risk management at Chase Manhattan Bank. After the merger of J. P. Morgan and Chase, became a vice chairman of J. P. Morgan Chase. Longtime acquaintance of Lay’s.
Schuyler Tilney
—Merrill Lynch investment banker. Firm’s primary contact with Enron and Andrew Fastow.
Rick Walker
—Chase Manhattan (later J. P. Morgan Chase) banker, served as key contact with Enron.
THE JOURNALISTS
Peter Eavis
—Reporter for Thestreet.com.
John Emshwiller and Rebecca Smith
—
Wall Street Journal
reporters who exposed Fastow’s partnerships in October 2001.
Harry Hurt III
—Wrote skeptical 1996 story about Enron for
Fortune
.
Toni Mack
—Wrote skeptical 1993 story about Enron for
Forbes
.
Jonathan Weil
—
Wall Street Journal
reporter who raised question about mark-to-market accounting in September 2000.
THE ACQUIRERS
Chuck Watson
—CEO of Dynegy, Enron’s crosstown rival.
Steve Bergstrom
—President of Dynegy.