She sat beside him, stroking his back, murmuring reassurances that Skilling didn’t want to hear. Minutes ticked by, until finally he crushed the pillow. “It’s not going to be okay!” he shouted. “It’s all going down!” He sat up, pushing Carter back as he moved.
“Everything I worked for my whole life is gone, just destroyed! Everything is gone!”
Skilling shook his head, tears streaming down his face. The enormity of it all suddenly crashed down on him.
“You don’t understand what’s going to happen!” he cried in a raspy voice. “Everyone’s going to get hit by this! I’ll never be able to show my face in Houston again! I mean, just the impact on all the people. Everything I’ve worked for is cratering!”
Reaching out to him, Carter muttered some soothing words. Skilling breathed deeply and tried to think. It’s too late. His world was gone, he would be a pariah. Everyone close to him would be caught in the wreckage. Rebecca. He couldn’t marry her. He couldn’t.
Skilling pulled away, a look of terror in his face. He was wide-awake now, wild-eyed and breathing rapidly.
“Rebecca, you need to go,” he said.
“Jeff …,” Carter said, reaching for him again.
Skilling recoiled. “Get the fuck away from me!”
Carter stood, astonished. “What?”
“Get the fuck out of here! Get away from me!”
“Jeff …”
“Leave me alone! I don’t want to see you!”
Carter stared at her fiancé, her eyes welling up. Nothing, not a sound or movement, interrupted the moment.
Grimacing, Skilling stood and flailed his arms. “Get the fuck out! Go back to Houston! I don’t want you here!”
Hesitation. Carter shuddered, then silently turned to leave. The door clicked closed behind her. Skilling stayed motionless for a moment, then crumpled into the bed. He pulled his knees to his chest again, his body shaking.
“Oh, God!” he wailed, crushing a pillow to his face.
———
It was the scandal that seemed to come out of nowhere, the scandal that changed everything. In the fall of 2001, the Enron Corporation—a politically powerful company whose business was only vaguely understood even by its own competitors—imploded, falling so far from its pedestal that its once-respected name transformed in a matter of weeks into shorthand for corporate wrongdoing.
The implications of the Enron debacle were so vast that even years in hindsight, they are still coming into view. It set off what became a cascading collapse in public confidence, sealing the final days of an era of giddy markets and seemingly painless, riskless wealth. Soon Enron appeared to be just the first symptom of a disease that had somehow swept undetected through corporate America, felling giants in its wake from WorldCom to Tyco, from Adelphia to Global Crossing. What emerged was a scandal of scandals, all seemingly interlinked in some mindless spree of corporate greed.
As investors fled the marketplace, terrified of where the next eruption might emerge, trillions of dollars in stock values vanished, translating into untold numbers of second jobs, postponed retirements, lost homes, suspended educations, and shattered dreams.
But nothing was quite what it appeared. The Enron scandal did not burst out, fully grown, from the corporate landscape in a matter of days. Across corporate America, widespread corner cutting, steadily falling standards, and compromised financial discipline had been festering for close to a decade. Warnings about funny numbers, about unrealistic expectations, about the coming pain of economic reality, went unheeded as investors celebrated corporations pursuing reckless or incomprehensible business strategies that helped their stock prices defy the laws of gravity.
It was in that environment, and only that environment, that the Enron debacle could emerge. It was not simply the outgrowth of rampant lawbreaking. The true story was more complex, and certainly more disturbing. For crime at Enron—and, no doubt, there was crime—was just one ingredient in the toxic stew that poisoned the company. Shocking incompetence, unjustified arrogance, compromised ethics, and an utter contempt for the market’s judgment all played decisive roles. Ultimately, it was Enron’s tragedy to be filled with people smart enough to know how to maneuver around the rules, but not wise enough to understand why the rules had been written in the first place.
No single person bore responsibility for the debacle; no single person possibly could. Instead, the shortcomings of a handful of executives—along with a community of bankers, lawyers, and accountants eager to win the company’s fees; a government willing to abide absurdly lax rules; and an investor class more interested in quick wealth than long-term rewards—merged to create an enterprise destined to fail. But in the end, for all the mind-numbing accounting ploys and financial maneuvers that came to light in Enron’s wake, the underlying cause of the collapse was fairly simple: the company spent much of its money on lousy businesses. And the market exacted its revenge.
The repercussions were ugly. Arthur Andersen, the once-revered accounting firm, evaporated overnight as its role in the debacle led to a subsidiary scandal of its own. A President and members of his Administration, already struggling with a new threat to national security, found themselves on the defensive because of their close association with Enron. The new chairman of the Securities and Exchange Commission saw his dream job slip through his fingers amid the recriminations. And members of Congress, reacting to their constituents’ fear and anger, pushed through what proved to be the most dramatic revision since the Great Depression in the laws protecting investors.
This, then, is more than the tale of one company’s fall from grace. It is, at its base, the story of a wrenching period of economic and political tumult as revealed through a single corporate scandal. It is a portrait of an America in upheaval at the turn of the twenty-first century, a country torn between its worship of fast money and its zeal for truth, between greed and high-mindedness, between Wall Street and Main Street. Ultimately, it is the story of the untold damage wreaked by a nation’s folly—a folly that, in time, we are all but certain to see again.
BOOK ONE
THE
WINE OF
ASPIRATION
CHAPTER 1
THE TWO MEN PUSHED through the glass-and-chrome doors of the Enron building and hurried down the polished granite steps outside. Across the street, a white fountain resembling a mammoth three-tiered wedding cake bubbled in the brilliant winter morning. The sounds of splashing receded as the men crossed Smith Street, a main artery for downtown Houston. Rounding a corner, the older man, David Woytek, glanced at his watch. Fifteen minutes to go. Fifteen minutes, he felt sure, till all hell broke loose.
Without a word, he picked up the pace, followed in step by John Beard, a colleague from Enron’s internal-audit department. On that morning, February 2, 1987, the two were eager to meet with Ken Lay, to finally prove that two of his underlings had cheated his company. Beard carried the damning evidence—bank records showing millions of dollars siphoned from Enron into personal accounts, transactions so suspicious that the bank itself raised a red flag to Woytek. But, most delicious of all, the executives under investigation—Louis Borget and Thomas Mastroeni, two top officers in Enron’s oil-trading unit in Valhalla, New York—would be at the meeting, defending themselves with what Woytek and Beard were certain would be a tangle of lies.
The proof was strong, but the auditors knew it would need to be. Borget was Enron’s earnings Svengali, a man whose business reliably brought in tens of millions of dollars in badly needed annual profits. He and Mastroeni, his top finance executive, were rumored to consort with the rulers of Saudi Arabia and Kuwait, contacts everyone believed gave them strong knowledge about the inner workings of OPEC, the Arab petroleum cartel. Taking them down would mean losing their connections and dismantling their profit machine at a time when Enron was struggling.
But Woytek and Beard believed Lay would have no choice; their case was ironclad. Mastroeni had opened an Enron corporate acc
ount at Eastern Savings Bank, listing himself and Borget as the signers. But neither had bothered to tell Enron about the account, and it was not recorded in the company’s books. Millions in corporate cash had been wired there, about half of which ended up in Mastroeni’s personal accounts. The dealings had all the earmarks of some multimillion-dollar scam, with Enron as the mark.
Woytek and Beard turned onto Dallas Street, two blocks from their destination, Enron’s other offices at the Houston Natural Gas building. The streets of downtown seemed almost abandoned that morning, with only a smattering of cars around, a reminder that the years-long oil bust was still wreaking its havoc on Houston.
The two auditors walked into the lobby, taking the elevator to the sixteenth floor. There, a receptionist directed them to the office of Mick Seidl, Enron’s president. Lay had borrowed the office for the morning meeting while Seidl was on the road.
They arrived in the doorway of the large, wood-paneled office. Borget and Mastroeni were already inside, deep in discussion with John Harding and Steve Sulentic, the home office’s nominal supervisors of the oil unit. When the auditors walked in, the conversation stopped.
“Hey,” Harding said. “Good to see you.”
There were handshakes all around. Borget picked up a thick stack of documents and slid them across the table.
“This is a memo with everything you need to know about these transactions,” he said. “All the relevant banking records and other material are attached.”
“Thanks,” Woytek replied. “We’ll look through it.”
Beard picked up the documents and left Seidl’s office, following Woytek to an unoccupied secretary’s desk. He set the documents down, leaning over as he read them. “CONFIDENTIAL,” the first page blared. “Memo for the File.”
Step by step, the memo described how the transactions came about. In one paragraph it mentioned some attached bank statements. Beard thumbed through the pages and found the records. He studied them for an instant.
Wait a minute.
He scanned the records again, fearful he had made some mistake. No, there was no doubt. He glanced over at Woytek.
“Dave, come here,” he said. “Take a look at these.”
Woytek strolled over and skimmed through the statements. They were from Eastern Savings Bank, in the name of the oil-trading division. Nothing seemed surprising; the discovery of that account had set off the investigation. With an almost imperceptible shrug, Woytek looked at Beard, waiting to hear what he was missing.
“These are the same statements we already have from the bank,” Beard said. “But this copy has been altered.”
“You’ve gotta be kidding me. Show me our copy.”
Beard fished through his briefcase, pulling out an almost-identical set of the statements. Woytek laid the pages side by side with the records from Borget.
Unbelievable. The statements were from the same account on the same date, but the numbers were different. The original records showed hundreds of thousands of dollars sloshing in and out. In this new copy, those transactions had simply disappeared. Woytek held Borget’s records up to the light. No lines. No shadows. No telltale signs anywhere of an alteration. Somebody had put a lot of effort into this.
Woytek chuckled. These traders were planning to defend themselves to Lay—using dummied-up records? This meeting was going to be even more interesting than he had thought.
“Well,” he said, looking up, “that settles it. Those two are gonna be fired today.”
As the two auditors spoke, they saw Lay and Rich Kinder, Enron’s general counsel, walking toward Seidl’s office. Woytek and Beard gathered up their papers and stood to greet them. Everyone immediately followed Lay into the office and took a seat around the conference table.
After some chitchat, Lay opened things up. “Well, we know why we’re here. So, Lou, why don’t you go ahead?”
Borget handed out copies of the memo with the attached bank records. “As everyone’s aware,” he began, “questions have been raised about some of the trading operation’s financial transactions. We want to go through them so that you know why these were done. I think everyone will be very satisfied with what they hear.”
Borget and Mastroeni took turns laying out the story. Because of their huge profits in 1986, they explained, company managers had asked them to find a way to shift income into 1987, the current year; that way, Enron would have a jump on hitting its profit projections.
“Now, we were told to get that done using whatever legitimate business practice we could,” Borget said, moving his hands as he spoke. “So we set up a system that’s used by lots of other trading companies.”
The idea was to conduct twinned trades that canceled each other out, known as a “book-out” or a “net-out.” So, Mastroeni explained, they tracked down three trading companies—Isla Petroleum, Southwest Oil & Commodities, and Petropol Energy—that wanted to boost their 1986 earnings. Then, that December, Mastroeni and Borget entered into trades that gave profits to the competitors and losses to Enron. The plan was to reverse the trades in 1987, with Enron gaining the profits and the three others getting the losses. All the parties would walk away even and with exactly the results they wanted. The Eastern Savings account had been opened as a precaution, Mastroeni explained, to hold the money until the trades were completed. But since it was in the company’s name, Mastroeni said, he had transferred the money to personal accounts, ready to be returned to Enron once the 1987 trades were conducted.
“How many other transactions have you guys done off the books?” Woytek asked.
“This is it,” Mastroeni replied.
As the traders’ words tumbled out, Woytek breathed deeply. This is the stupidest thing I’ve ever heard.
Sulentic broke in, looking Lay in the eye. “This was all just a misunderstanding, Ken. Lou and Tom really believed they were acting in Enron’s interest. I say we accept that mistakes were made, do what needs to be done to correct them, and move on to a profitable 1987.”
Lay nodded grimly, seeming lost in thought. “This is obviously not the type of thing we want to have happen,” he said finally. “I understand what you were trying to do, but this is not the way to accomplish that.”
Everything would be undone, Lay ordered. The transactions must be reversed and the off-books bank account shut down. And there would be other consequences. New controls, new oversight. This would not happen again.
Lay sat back. “Does anybody else have anything?”
“Well,” Woytek said, “I have a couple of problems”
There was a short discussion about taxes and when the income would be reported. Heads nodded all around; they agreed Enron would report all of its 1986 profits in that year and pay the taxes. Woytek glanced at the traders. By raising such a tangential issue first, he seemed to have lowered their guard. They looked relaxed, confident.
Time to move in for the kill.
He held up the banking records from the memo. “But the real problem I have is that these bank statements you guys brought here today have been altered.”
Woytek pulled out the second set of statements, describing the discrepancies. All the while, he stared at the traders, looking in their eyes for a flicker of shame or embarrassment. None. Just pure, controlled fury.
“Now, wait a minute!” Borget snapped.
“I can explain that,” Mastroeni interrupted.
There was this trader, Mastroeni said, who had been fired at the end of 1985. After Enron paid out its bonuses for the year, the trader had hired a lawyer, threatening to sue the company if he didn’t receive a bonus.
“There was so much going on at Enron at the time we didn’t want to start a new political problem internally,” Mastroeni said. “So we set up a closeout transaction for him and paid him a $250,000 bonus. But that was it.”
“So why alter the records?” Woytek asked.
Borget scowled. “We just didn’t want to cloud up this meeting with this stuff about bonuses. It has
nothing to do with what we’re talking about. So we just took it out.”
The back-and-forth continued for several minutes. Lay just watched, expressionless as he listened. Woytek wrapped up his interrogation and sat back, ready for the hammer to drop.
Lay clasped his hands on the table. “Well,” he said finally. “Okay.”
Oh, shit, Woytek thought. These guys had just presented forged documents, and they’re going to get away with it?
“I just don’t want this to happen again,” Lay continued. “If something like this comes up again, call us. We can handle this bonus situation. But these profits have got to be reported properly.”
The meeting ended, and the traders, somehow, had survived. Everyone began filing out.
“Dave, John, stay behind a minute.”
The two auditors looked back at Lay, who was signaling for them to return to the conference table. They took their seats; Lay stayed silent until the office door closed.
“Okay,” Lay said. “Go to Valhalla and look through their records. If I find out Borget is trading on inside information, on tips he’s getting from somebody in OPEC, I’ll make sure he never works in the industry again.”
Woytek and Beard nodded, taking notes.
“So, John,” Lay continued, “you go ahead and get that going, and Dave and I will run through some details.”
Beard gathered his papers and strode out of the room. Lay leaned in, his eyes boring in on Woytek.
“I want you to go up there and take your top people,” Lay said. “Make sure every penny of this money is returned to the company, even this bonus Borget was talking about. I want all of it back. And I want you to go today, now.”
“All right,” Woytek replied. “We’re on it”
Both men stood, and Lay escorted Woytek to the door. He felt confident that his message had been heard. He wasn’t going to stand by and be played for a fool. Besides, the trading unit had always struck him as a little wild and woolly; maybe this was the chance to get the place under some more watchful eyes. Lay liked that idea; he liked to see the possibilities, the upside. As anyone who knew Enron would say, Lay and his company had long ago learned that every challenge could be transformed into opportunity.
Conspiracy of Fools Page 3
