Three hours, and all those profits! The directors beamed with delight. “Now,” Fastow said, “we’ve been working for months on a project involving LJM2 that we believe will take us to the next level. We call it Project Raptor, and Ben Glisan has been the point man on that.”
Using a four-page PowerPoint presentation, Glisan launched into his pitch. This would be a variation of the Rhythms hedge, Glisan said, only this time to protect Enron against future losses from an array of merchant investments. He spelled out the terms: Enron stock shifted into Talon, outside cash coming from LJM2.
“Under the deal, LJM2 will be entitled to a 30 percent annualized return, plus fees,” Glisan said. “Enron will receive 100 percent of any returns beyond that.”
Glisan said nothing about the forty-one million dollars that LJM2 would receive before hedging began, guaranteeing a blockbuster return. Still, he was frank about Raptor’s limitations.
“Raptor does not transfer economic risk,” he said. Instead, it simply moved any big swings in the value of Enron’s investments off the books.
While the directors seemed to be listening, few grasped the full import of what Glisan was saying. A handful of questions later, they unanimously approved Raptor.
That same day, final instructions went through to distribute the cash from Southampton. At about the time that Glisan was meeting with the board, a clerk at Chase entered wire instructions into the computer. In an instant, $1,040,744 moved from Southampton’s Chase account to account number 3714-9242 at Charles Schwab, owned by Glisan. An identical sum was wired to an account held by his co-investor Kristina Mordaunt.
Fastow had transformed two Enron executives—including his new treasurer, a man with power to block his wheeling and dealing—into millionaires.
A bell sounded in Saugus High School in California at noon on May 22, but students were not changing classes. School officials were being notified that, under their agreement with state utilities, the power had to be shut off. Lights and air-conditioning went dead. Students kept working in their dim, sweltering classrooms.
For days, California had been roasting in an unseasonable heat wave, with temperatures blasting past one hundred degrees in many areas. Demand for air-conditioning had drained power reserves dangerously low. On this day, the California Independent System Operator, which managed the grid, declared a stage-two emergency, forcing customers like Saugus to shut off power or pay massive fines.
The California energy crisis had begun.
Antiques and portraits from another era decorated the corner suite at the Ritz-Carlton Montreal, where Robert McCullough was working. It was the next morning, May 23, and McCullough, head of his own energy-consulting firm in Portland, was on his cell phone, trying to learn details of the strange power crisis hitting the West Coast.
McCullough was in Montreal for an international symposium of electrical utilities but knew the real industry epicenter that day was in California. Much of the world seemed to be taking the state’s emergency in stride; the news hadn’t even made the front page in Los Angeles. But to McCullough, the previous day’s events were the chest pains that foreshadowed a massive heart attack.
It was May, for heaven’s sake; summer hadn’t even begun. McCullough had always believed that the new system in California was rickety, but this was worse than he had imagined. Prices were already spiking; this was going to damage a lot of his clients, not to mention the state’s economy.
As the morning wore on, McCullough learned enough to fuel his suspicions that something was drastically wrong. Somebody, he decided, had to be manipulating the market, driving up prices for profit. He was sure of it.
Later that day, McCullough was on a conference call with Paula Green and Mike Sinowitz, both with Seattle City Light. Washington State had shared in California’s problems the previous day, although no emergency had been declared. What was going on? McCullough asked them.
“Well,” Sinowitz said, “if the prices are high, that just means there’s a lot of demand.”
Not good enough. “Mike, what’s your demand?”
“Not very high.”
“So therein lies the question,” McCullough replied. “Why are prices so high if there’s not a lot of demand?”
He could almost hear Sinowitz’s brow furrowing.
June 1. Only thirty days left until Enron had to take Merrill Lynch out of its investment in the Nigerian barges—the deal that had helped Enron hit earnings at year-end.
But there was a problem. The accountants at Andersen had never been told about Fastow’s guarantee, and there was nothing about it in any of the paperwork. After all, the guarantee might have led Andersen to nix the original deal as not a real sale at all. So if Enron bought the barge interest back now, would Andersen get suspicious?
One executive on the deal, Alan Quaintance, was wrestling with that problem and sent an e-mail to other executives asking for help. He explained Enron had convinced Andersen that Merrill was making a long-term investment in the barges, and now had to come up with a reason why the company was working to take Merrill out of the deal.
“I need help formulating this story,” Quaintance typed, “if it is even possible.”
Boxes and lines filled the whiteboard in a conference room over in the offices of Azurix. Rebecca Mark was at the board, delivering a lecture to two McKinsey consultants, Ron Hulme and Suzanne Nimocks. This was the idea, the one that would salvage the company, the story that would turn Wall Street around on its opinion of the company.
The door opened, and Amanda Martin walked in; Mark had just called and asked her to join the meeting. For several minutes, Mark continued her lecture, laying out the vision.
Mark checked the time. “Okay, I need to catch a plane to New York. Amanda, can you explain these boxes?”
She looked at the McKinsey consultants. “Then you guys think about it and get back to me in a week on how we can present this to the analysts and get them fired up.”
With that, Mark swept out of the room. Everyone who remained behind looked at each other. And then smiled.
“So,” Nimocks said to Martin. “Can you tell us how this works?”
Martin opened her eyes wide and took a deep breath. “Why don’t you tell me first what she told you?” she said.
Ron Hulme laid his head down on the table and started laughing. The other two joined in for five minutes.
“Okay,” Martin finally said. “We need help.”
Glisan had barely settled into his new office when an old deal reared its head: the proposed Chewco buyout.
Months before, McMahon had suggested that Enron purchase Chewco—the half-owner of JEDI that was controlled by Kopper—to minimize the administrative difficulties. But he had proposed a deal that would have given Chewco no more than one million dollars in profit. When Kopper and Fastow pushed for ten times that, McMahon had pulled the plug.
Now McMahon was gone, and his replacement—just enriched by Fastow and Kopper—wasn’t likely to make the same kind of waves. The buyout went through. It would take a year to close, but Kopper would receive his ten million dollars. And then the cash would go to Fastow.
Skilling studied the draft report regarding the possible sale of the international projects. The numbers were terrible, worse than he had imagined. Could this stuff even be sold? He had no idea what to do.
Amanda Martin was with a few friends at La Griglia when her cell phone rang. She spoke for a minute, then started to stand. “Sorry, I have to go,” she said.
Skilling, she explained, wanted to see her right away.
Later that evening, Martin waved her hand, brushing away the swarming mosquitoes outside Skilling’s house. It was past 9:30, and she had arrived minutes before to find Skilling outside, on the telephone and surrounded by wine bottles. He held a finger to his lips, telling Martin to be quiet. His demeanor on the call was smooth, debonair. He gestured, offering her a glass of wine.
Skilling hung up. His calm facade vanished. Tear
s welled up. He looked like a frightened little boy.
“You’re my friend,” he said suddenly. “You’ve always been my friend. I miss you. I really miss you.”
Martin was taken aback. She had been pushing Skilling for months to get her out of the mess at Azurix. He could have brought her back to Enron, but didn’t. She’d told him before that she didn’t think he knew how to be a friend. But now that he was drunk and rambling, he was trying to be.
“You look good,” he said suddenly. “Have you been working out?”
“No, Jeff,” she replied. “I’ve just been running around with the kids.”
“I’ve been working out. Can you tell?”
Sure, Martin said. Skilling blinked, and the tears emerged again. “You’ve got to make Azurix work, Amanda,” he said. “Promise me you’ll take care of that problem.”
Martin slapped at a mosquito. “I can’t, Jeff,” she said. “There are real problems.”
Skilling listened, still clearly unnerved by some unspoken fear. “Promise me,” he said. “I’ll take care of you. Just promise me you’ll take care of it.” He drained his glass. “You want more wine?” he asked. Martin declined, and he considered that for a second. “I’m going to get another glass,” he said finally.
Skilling disappeared into the house. Martin was perplexed; she knew he was emotional, but she had never seen him this far gone. What had happened? What was eating at him? A short time later, he wandered back.
“I’m going to show you something,” he said.
He brought out his briefcase and removed some papers, apparently a report of some kind. “Swear to me that you won’t tell anybody you saw this,” he said.
Martin agreed. Skilling thrust the report toward her. It was an accounting analysis on the international assets, he said, put together for the sales effort.
“Look at those fucking numbers,” he said.
Martin studied them. If what she was seeing was true, the entire division might be worth a lot less than anyone at the company had ever believed. Enron might not be able to sell them.
Skilling stared down at his lap. “I don’t know what I’m going to do,” he said, his voice distant. “What do I do with these numbers?”
He shook his head, tearing up again. “I don’t know what I’m going to do. I don’t know what I’m going to do.”
Martin didn’t keep count. But Skilling must have repeated himself at least a dozen times.
In Avon, Colorado, green hills from the Gore mountain range eased down to a patio behind the Park Hyatt Beaver Creek Resort. Dick Cheney and his wife, Lynne, appeared at the patio entrance, carrying their buffet lunches, and found seats at a table covered by a large gray umbrella.
Cheney—chief executive of Halliburton, the energy-services company—was in Colorado to attend the World Forum chaired by former President Gerald Ford. Despite his close ties with the Republican White House—having served as Ford’s Chief of Staff and as Secretary of Defense under Bush—few would have been surprised if he hadn’t shown up. He had recently been selected by George W. Bush, the presumptive Republican candidate for President, to vet possible running mates. It was the kind of task that could easily push a policy forum onto the back burner.
As the Cheneys settled in, Ken Lay emerged from the hotel with his lunch. He had noticed the Cheneys ahead of him in line and now scanned the patio looking for them. He made his way over. “Mind if I join you?” he asked.
The Cheneys looked up and smiled. “Ken, not at all,” Lynne said. “We’d be delighted.”
Lay sat, removing his lunch from the tray. “Well, Dick, it seems like you have your hands full these days.”
“Quite a bit going on,” Cheney agreed. “It’s been very exciting.”
“I haven’t spoken to George in a few weeks. He set for the fall?”
“It’s going to be a tough campaign,” Cheney replied. “Particularly with the economy as strong as it’s been.”
Lay understood. Bush’s expected opponent, Al Gore, was the sitting Vice President. Strong economic performance usually gave the party in power a leg up.
A voice interrupted. “All right if I sit here?”
Lay glanced up. It was Karl Rove, Bush’s chief political strategist. By all means, he was told. The discussion ramped back to politics. Yes, Rove acknowledged, the economy presented a challenge. Still, there was the wild card of the sexual scandals involving Clinton; there was no telling if that might hurt Gore come November.
The free-flowing discussion lasted throughout lunch. Anyone spotting the group would easily have understood that Lay had secured a place in the inner circle of the next Republican presidential nominee.
Off the boardroom in the Manhattan offices of Deloitte & Touche, Arthur Levitt was loading up a plate with food. It was June 20, just past noon. Levitt, the SEC chairman, was at the firm’s headquarters with a few members of his staff, hoping to avert an ugly public battle.
Levitt’s efforts to stop the flow of fluffed-up numbers coming out of corporate America had led him on this pilgrimage to the accounting firms, the private sectors’ independent policemen. The firms were supposed to stop games playing, but somewhere along the line, Levitt believed, they had lost their way. Now they relied on their corporate clients to pay huge fees for consulting—helping put together deals, reviewing systems and technologies.
Consulting was an honorable trade, of course. It was just that Levitt believed it shouldn’t mix with accounting. How could a firm receiving millions from a company for providing strategic advice fight management over bad accounting? Auditors were supposed to resign if managers reported misleading numbers; Levitt was convinced that fear of losing consulting work would dissuade them. Auditor independence was being compromised for the worst of reasons: money.
So Levitt planned to issue new rules that month, requiring accounting and consulting to be separate. He hoped to avoid a political battle by persuading the firms to join in the effort. He had invited the three firms he found most uncompromising on the issue—Deloitte, Andersen, and KPMG Peat Marwick—to meet in Washington. They had refused, agreeing to get together only on their own turf.
The mood in the room was frosty. As he spooned food onto his plate, Levitt chatted up one executive, hoping to drive a wedge between members of the group. No luck. He wandered out of the kitchen and set his lunch on the conference table. His chief accountant, Lynn Turner, and legal counsel, Harvey Goldschmidt, joined him. The accounting firm honchos—Robert Grafton, Andersen’s chief executive; Stephen Butler, chairman of KPMG; and James Copeland, chief executive of Deloitte—sat across from them, stony-faced and curt. This was not a receptive crowd.
“I’m glad we’re meeting on this issue,” Levitt began. “It will be much better if we were together on it, with something we can all agree on.”
The faces across the table registered nothing.
“We don’t want to have this become a public cause,” Levitt continued. “Both sides here have everything to gain by coming to an agreement here.”
Levitt laid out his plan, explaining how the goal was to ensure firms did not consult for clients that they audited. There would be plenty of time for a transition, Levitt said, but the ultimate goal would be nonnegotiable. He finished. Copeland from Deloitte was the first to speak.
“Arthur,” he said, “we might as well shut down the firms if this is what you’re going to do.”
The accountants couldn’t perform good audits without consulting, he said, and would certainly be hard-pressed to generate the income they needed to stay in business.
“There is absolutely no evidence that consulting for accounting clients causes any problems,” Copeland said.
Levitt and his staff tried to explain how, in the long run, ensuring auditor independence would be in the firms’ best interest. But the executives would hear none of it.
“Arthur,” Grafton from Arthur Andersen interjected, “if you go ahead with this, it’ll be war.”
The m
eeting lasted ninety minutes, with the firms holding fast—a huge miscalculation, Levitt thought. The world thought of accountants as benign, boring defenders of the public interest. But here they were, grubbing for cash like any greedy Wall Streeter. Their image protected them for now, but in the end, Levitt wanted the truth to do them in. He had already decided to hold public hearings to force the accountants to show their hand.
He walked onto the elevator with Turner and Goldschmidt. “Okay,” he said. “Now we go to war.”
Andersen was working hard to guide Enron through its growing thicket of deals. LJM2 proved a lifesaver time and again, allowing the company to sell assets when no real buyer could be found. But each time, Andersen had to structure the deals to meet a literal reading of the rules. A few times, Enron executives held back on some details—like secret guarantees and buyback agreements—out of a fear that even a compliant accountant might balk.
Much of the work centered on Raptor. Talon hadn’t hedged anything yet, but already Enron executives were rushing in, brandishing wish lists of assets with values they wanted locked in place. Stock prices were getting more volatile; they could start falling anytime.
Still, Talon could only hedge so much before running out of capital. So on June 22, Fastow and Glisan went back to the directors, seeking authorization for Raptor II. The board approved it readily. LJM2 would be the investor again, with the same lucrative terms.
But Raptor was only one of many deals cooking. After all, it was late June. The quarter was about to end, and Enron needed to make its numbers.
Broadband Services had to unload something fast. Its profits weren’t strong enough, and a quick sale was the only option to push them up.
Fortunately, there were assets it could market. For example, the division had laid far more network fiber than it needed, believing it could sell what it didn’t use. But now fiber prices were slipping, and EBS wanted to find a buyer for some quickly before values dropped further. So far, no luck.
So the division turned to LJM2. One of its primary negotiators on the deal was Larry Lawyer, who had worked years before on Fastow’s first attempted crime, the Alpine deal which later evolved into RADR. Lawyer had secretly been given part of the return from RADR for his Alpine work. In fact, months before, he had received his last check, for more than thirty-nine thousand dollars—all tax-free, since he had decided long ago not to declare the cash as income.
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