Conspiracy of Fools

by Kurt Eichenwald

  Mintz took a breath. This was ridiculous; he was being asked to write up a legal document without having access to the necessary information. It was like being told to fly an airplane with his eyes closed.

  He gave up on Kopper, but for the next few days Mintz nosed around the office, seeking information. While he picked up scraps, no one would say anything about Chewco’s investors. There were intimations that the money was coming from wealthy Middle Easterners, but nobody volunteered details.

  The more the secret eluded him, the more Mintz wondered: what was really hidden behind that black curtain?

  The Chewco negotiations took on a through-the-looking-glass feel. Everybody at the bargaining table was from Enron, but it wasn’t clear whether anyone solely represented the company’s interests.

  Kopper kept musing about his concerns for the Chewco investors. Bill Brown, a chief negotiator on behalf of the company, had believed Fastow would give him a chance to be a Chewco investor. Everyone knew conflicts were rampant, but no one seemed to understand where they all were.

  Despite Fastow’s suggestions, Brown took a tough line on Enron’s behalf. By his calculation, Kopper wanted terms that could cost Enron millions of dollars. He fought them.

  One day, after some tough haggling, he heard from Fastow.

  “How are the talks going on Chewco?” Fastow asked.

  “We’re making some progress. It looks pretty good.”

  That sounded great, Fastow said. “I hear you’ve been negotiating pretty hard on this thing,” he added.

  Maybe a compliment was coming. “Well,” Brown said, “that’s my job. I just want to get a good deal for Enron.”

  “Yeah, I understand that. But we really need to close this deal. I mean, how far apart are we?”

  Well, Brown replied, if Kopper got his way, he said, it could cost Enron as much as thirteen million dollars.

  Fastow scoffed. “Come on, Bill, that’s pocket change to Enron,” he said. “And it hardly seems unreasonable, given the risks Chewco’s investors are taking.”

  Something’s not right. Fastow wanted to leave money on the table? Fastow, who fought for every dime in a deal?

  “So,” Brown said tentatively, “you’re okay with us walking away from the thirteen million?”

  “Yeah. Let’s just get the deal done.”

  The discussion over, Brown got back to work. His exuberance over his progress on the Chewco deal was replaced by a cold apprehension. He couldn’t shake the feeling that he had just been warned by Fastow to back off—a warning he figured he probably better keep in mind.

  In a wooded enclave outside of San Antonio, children wedged into inner tubes floated lazily in a man-made river at the Hyatt Regency Hill Country Resort. Throughout the onetime ranch, visitors basked in luxury—swimming, golfing, or enjoying a fancy meal beneath a huge chandelier made of interwoven deer antlers.

  It was November 5, 1997. For the second day the Hyatt was packed with senior Enron executives, there for the company’s annual management conference. Lay viewed it as an opportunity for his hardworking executives to take a breather, to think about their jobs in a relaxed atmosphere, and maybe to come up with new ideas.

  Somehow, though, the tensions of the office weren’t so easy to shake off, particularly a new dispute between Jeff Skilling and Rebecca Mark. For weeks, Mark had been negotiating what she thought would be a breakthrough deal, a sale of a 50 percent interest in Enron’s international deals to Shell. A Shell executive had presented Lay with a three-billion-dollar bid, but Lay and Skilling shot it down. Lay thought the number too small, and Skilling didn’t believe it was real. All Shell wanted, he argued, was the trading rights in the regions where Enron had plants. He wasn’t about to let a competitor stick its nose into his tent, not on some bogus offer.

  Then, weeks later, Skilling and Lay had come back with a proposal that had stunned Mark and her team: they wanted international, which now was responsible for development outside North America, to hand over their projects in most of Europe to the trading division.

  Lay found the reasoning persuasive. Skilling and the traders were trying to move into Europe and set up trading arrangements with the utilities. But those potential customers still saw Enron as a competitor because of its international power plants. Turning those over to Skilling’s group would allow Enron to gain entrée into those markets and eliminate a threat to potential customers’ business.

  After weeks of discussion, the final issues were hashed out at a meeting in the hotel’s Bandera room. Skilling—along with Mark Frevert, head of trading in London, and his deputy, Dan McCarty—sat with Lay at the conference table. For about twenty minutes, they explained their plans for opening offices in places like Frankfurt.

  As the discussion was wrapping up, Rebecca Mark and her deputy, Joe Sutton, were hustling down a hallway to the meeting. When they had first heard of the proposal from Lay two weeks before, they had mobilized the entire division to put together a report against the plan. Their argument was basic: Outside of a few pockets, the energy businesses in Europe and the United States were nothing alike. Enron could not easily secure supplies of gas or electricity. There were entrenched and government-protected utilities and pipelines, with few players there to buy from and trade with on any meaningful level. That, the report said, left plant development as the only reliable way into Europe.

  Mark and Sutton reached the Bandera room and pushed inside. Lay, Skilling, and the two London executives looked up. The international executives stopped at the edge of the table and started passing out their report.

  “Okay, let’s go through our analysis,” Mark said.

  Skilling glanced through the bound report. “We don’t need this,” he said. “We’ve reached a decision.”

  She stared Lay in the eye. “Ken, you need to see this report. You need to understand what this market is about.”

  Lay had heard all the arguments before. “We already reviewed all this material,” he replied.

  “So what’s the conclusion?” she snapped.

  “Well,” Lay replied, “it seems pretty obvious that we need to move the European assets into ECT.”

  The room exploded.

  “That’s ridiculous!” Sutton shouted.

  Mark shot a look at Frevert. He was a short, overweight man, his face red. She looked back to Lay as she raised her arm to point at Frevert.

  “You think that that can do a better job in this marketplace than me and my people?” she snapped.

  Frevert said nothing. He glanced up at Mark, hatred in his eyes. Skilling sat back, taking silent delight in what was unfolding. He knew Mark was sinking herself.

  “We’ve been in Europe for years,” Sutton chimed in. “These people don’t know what they’re doing!”

  This makes no sense, Mark thought. She knew the European markets; she knew there wasn’t a lot of room for trading profits. She looked at Skilling and the traders.

  “Where are your numbers from?” she asked sharply. “You say you’ve got trading profits. But we know you’ve been selling bits and pieces of assets. How much are you earning from trading and how much from just asset sales?”

  The response was calm: virtually all from trading.

  Mark leaned into the table. “Show us.”

  “We don’t need to do that,” Skilling said.

  “There’s no way that you’re making money in trading,” Mark snapped.

  “And without assets on the ground, there’s no way you can keep making money in Europe.”

  The arguments came back fast. The utilities. Competition with customers. The trading possibilities.

  Sutton turned and threw his briefing book down the table. It smashed against the wall with a thud.

  “This is ridiculous!” he shouted.

  He headed to the door. He turned before walking out.

  “Rebecca, are you coming with me?”

  Mark followed Sutton to the doorway. There, she turned and looked at the assembled exec
utives with disgust.

  “This is a complete waste of our time,” she said, her voice icy. “You’re going to run this business however you want, and there’s no point in us talking about it.”

  She looked straight at Lay. “But if this is the way it’s going to be, we’ve got to talk about the contract.”

  The contract. Lay knew instantly what she meant. The compensation agreement with international. If the developers lost Europe, it was a change in their contract; they would have to be paid a lot to get them to agree.

  Mark followed Sutton out the door, furious. First they shoot down Shell, now they take Europe away, she thought. They just wanted her assets, so they could sell them and make it look like trading profits. She was certain of it.

  Back in the Bandera room, Frevert was speaking to Lay.

  “This is what we’ve been facing for the last two years, Ken,” he said.

  Skilling joined in. “It’s what I’ve been saying, Ken. This is what we’re dealing with.”

  Lay looked appalled at what he had witnessed.

  “Guys, I apologize for what just happened,” he said, looking contemplative. “We have got to get this fixed.”

  Ray Bowen was quitting. He was sick of Enron’s retail division, sick of the mismanagement and silliness. Nobody wanted to consider the numbers, but the numbers never changed. The whole place was chaos, and he wanted out.

  When word got around that Bowen was lining up another job, Skilling met with him. He heard him out on his concerns, then told him that Enron didn’t want him to leave. If he wasn’t happy in retail, they would find him something else. Fastow was going like gangbusters in finance—maybe Bowen might consider working there? Bowen agreed to meet with his old boss to see if there was a role for him.

  Bowen went to Fastow’s office, laying out his frustrations with retail.

  “Ray, I’d really encourage you to stay,” Fastow replied. “You can reinvent yourself here, start again in the same building. I mean, look at me. When I was leaving retail, I thought I had destroyed my career. But Skilling put me somewhere else, and things have been going great.”

  Wander through the division, Fastow suggested. Learn what people were doing. Bowen agreed and found the finance division an exciting place. Around the hallways he heard about its deals; in particular, one called RADR had almost a mythic reputation. Bowen didn’t quite understand the deal; it had something to do with buying wind farms. But to hear the hallway chatter, it was brilliant.

  “We’re going to have lots of future opportunities to do deals using the RADR approach,” Kopper told him.

  Bowen’s interest was piqued. In late November, Fastow got back to him with a proposal. He had this new group, Fastow said, that was doing a lot of great things, and he wanted Bowen to be the co-head, alongside Michael Kopper.

  It was called portfolio management, he said. But around the office, most people knew it by another name: the special-projects group.

  Barclays Bank thought it had finally found the answer, a way to provide a loan that Chewco could pretend was an investment. All that was needed was for Chewco to guarantee partial repayment.

  On November 20, George McKean, an associate at Barclays, put together a letter to Kopper and Bill Brown spelling out the idea. The last bit of cash going into Chewco would be used to set up “reserve accounts.” That would secure Barclays’s money in the deal, regardless of the effect it might have on the accounting.

  Enron didn’t have much choice; because of demands from Calpers, Chewco had purchased its interest in JEDI on November 6, relying on short-term bank loans guaranteed by Enron. If Chewco didn’t pull together final financing by year-end—without an Enron guarantee—then JEDI could no longer be off balance sheet. All its debt, financial performance, everything, would come onto Enron’s books.

  The job of drafting the new deal was shuttled to Vinson & Elkins. There, in mid-December, a young associate named Joel Ephross drafted a “side letter” establishing the reserve accounts. Then Enron and Chewco reached another agreement, providing that the accounts would be funded with an immediate six-million-dollar JEDI distribution from the sale of an asset. The letter, signed by an executive named Jeremy Blachman for Enron and by Michael Kopper for Chewco, was placed in a massive pile of closing documents.

  But somehow, no one bothered to explicitly consult Andersen accountants about the reserve agreement. It would be years before they discovered the document.

  High above Fannin Street, Kopper wandered from room to room in the plush offices of Vinson & Elkins—asking questions, barking orders, occasionally nibbling some of the food piled on side tables. His usual crisp appearance had wilted long ago. His eyes were glassy and red-rimmed, his hair wild. Around him, the rooms swarmed with people. Charcoal gray legions of lawyers and bankers dashed about, buzzing with their assignments, drinking in the excitement.

  It was late on the evening of December 30, a Tuesday. Enron was proceeding with the closing for the deals related to JEDI and the creation of JEDI II. Conference tables in multiple rooms were stacked with documents undergoing one last review before the final signatures.

  There were so many transactions being wrapped up that night nobody could completely keep up with everything. The financing of Chewco. Calpers’s investment in JEDI II. Then a near-simultaneous sale of almost seven percent of retail—now known as Enron Energy Services—to JEDI II and the Ontario Teachers’ Pension Plan, in exchange for commitments to eventually pay a combined total of $165 million.

  Time and again, lawyers glanced at a document that laid out the side agreement between Chewco and Barclays. It seemed innocuous enough. Certainly, there were no typos. No red flags leaped out. Every reviewer flipped the page.

  Kopper wandered into one of the conference rooms, watching the hordes of lawyers. “Okay, what’s going on here?” he called out. “Where are we on the documents?”

  Jordan Mintz glanced up at Kopper and was shocked. He looked like a zombie. Mintz walked over to him.

  “Hey, Michael, you okay? You don’t look so good.”

  Kopper glanced over Mintz’s shoulder, watching the lawyers work with the documents.

  “Yeah,” he said. “I’ve been up for two days.”

  Two days without sleep? That seemed a little extreme.

  “Well, don’t worry, Michael,” Mintz said. “Everybody’s got this under control. We’re getting it done.”

  Kopper stared at Mintz for a second. “Okay,” he said. Then he walked away.

  Late that night, the documents were finally signed. And when all was said and done, most people in the room still didn’t know the identities of the independent investors who had put up more than $11 million for Chewco.

  No wonder. In truth, they didn’t really exist.

  Chewco was the financial equivalent of a stack of Russian nesting dolls, a hollow figurine hiding smaller and smaller versions of itself inside. As one by one they were cast away, only a single figure remained: Michael Kopper.

  In its final structure, the largest figurine was Chewco, which, to be counted as separate from Enron, had to obtain three percent of its capital, or about $11.5 million, from independent sources. Inside Chewco, two entities supposedly provided the money, SONR 1 and Big River Funding. SONR injected $115,000—just one percent of required “equity”—with money from Kopper, who obtained it from his profits in RADR, the illegal wind deal.

  The rest of the cash, $11.4 million, came from Big River—the next hollow figurine. Big River obtained north of eleven million dollars from Barclays Bank. Kopper treated the cash as an investment; Barclays recorded it as a loan. But Big River was another special-purpose entity, meaning it had to find three percent of its capital—more than $300,000—from outside sources.

  That money came from the next, smaller figurine—Little River Funding, another special-purpose entity. Little River again borrowed 97 percent of its cash from Barclays but, to remain independent, also had to obtain 3 percent—now down to about $10,000—f
rom an independent source. Kopper provided that cash.

  Using the multiple special-purpose entities, Kopper had purchased three percent of one vehicle, which owned 3 percent of another, which owned three percent of another, which owned half of JEDI. All for $10,000, along with the $115,000 kicked in to SONR.

  Before it was all over, Kopper decided that his ownership of Little River Funding might threaten Chewco’s accounting. Because of Fastow’s experience, Kopper already knew an investment from a relative wouldn’t work. So instead, he transferred his holdings in Little River to Bill Dodson, a man he knew well. Dodson wasn’t family; he wasn’t a spouse. He was Kopper’s live-in lover.

  Every element of the deal was hardwired; Kopper and Dodson couldn’t possibly lose. Not even their relatively paltry $125,000 investment was at risk. Within seconds of making the investment, they received a management fee from Chewco of more than $140,000—an immediate return of all of their capital, plus a ten percent profit. And they still retained ownership of the entity.

  But the Chewco deal created an issue for Kopper and Fastow. With RADR, Fastow had been the big financial winner. Kopper had come out in the best position on Chewco. There were going to be plenty of future deals, plenty of opportunities to even up the books. But somebody needed to keep score, to make sure things eventually balanced out.

  The job went to Kopper. Fastow instructed him to start a running tally of who had earned what off of their side deals—and keep it on his personal laptop. This wasn’t the kind of data that should appear on Enron’s computer system.

  After the holiday financial rush, everyone could finally relax. Work at Enron was always a fire drill at year-end as deals to help the company make its numbers raced through. But, still, 1997—with Chewco, JEDI II, and the sale of seven percent of EES—was a standout.

  Staffers sent around jokes, congratulating themselves on their achievement. “Top 10 Reasons Why We Thought It Was a Good Idea for You to Spend Your Christmas Holidays and Year End with Us,” one parody read. Number nine: “Making sure that Enron hits its earnings targets.”

  Over the weeks that followed, Enron assembled its final numbers for the year, and executives liked what they saw. More than half a billion in profits—half a billion.