As the four chatted over drinks, Fastow noticed a group of people making their way to a second, smaller dining room. It was Jordan Mintz, an Enron tax lawyer, accompanied by his wife, Lauren, and her family, all there celebrating the eightieth birthday of Lauren’s father.
Fastow caught Mintz’s eye and signaled for him to come over. After settling the rest of the family, Mintz and his wife walked to Fastow’s table. The three couples made some small talk.
“Listen, Jordan,” Fastow said. “When you’re back in the office on Tuesday, make an appointment to see me. I have something important I want to discuss with you.”
Mintz knew not to ask details. “Okay, I will.”
As the Mintzes headed back to their table, Lauren tilted her head toward her husband. “What was that about?” she whispered.
Mintz was sure he knew. The previous year, Fastow had approached him about becoming the finance division’s top lawyer, only to snatch the offer away when Enron’s general counsel, Jim Derrick, pushed another candidate, Scott Sefton. But word was out that Fastow was unhappy with Sefton. This couldn’t be a coincidence.
“I think,” Mintz replied, “it’s about the global-finance job again.”
The following Tuesday, Fastow was sitting behind his desk, sipping on a bottled water as he spoke to Mintz.
“Derrick sold me down the river on Sefton,” he said. “I’m getting rid of him. And I think you’re the right person for this job.”
“Well, Andy, what’s Jim going to say?”
“Derrick’s out of the loop on this,” Fastow replied casually. The task had been delegated to the deputy general counsel, Rob Walls, a lawyer Mintz knew well.
Fastow told Mintz to speak with Walls, and wished him luck. This time everything worked out. Walls called days later with the news that Mintz had been selected as the finance group’s new general counsel, starting October. Mintz was ecstatic. This was a dream opportunity.
His enthusiasm wouldn’t last through his first day.
The next morning, Fastow and Causey got together at nine. It was, Fastow told Kopper, a meeting to discuss an agreement dubbed Global Galactic.
If LJM2 was going to keep buying Enron’s assets—helping ensure its ability to meet its earnings—then Fastow wanted the company committed to repurchasing the ones he really didn’t want, at a preset profit.
There were plenty of assets to discuss: the investment in the Nigerian barges, now owned by LJM2 since its purchase of the stake from Merrill Lynch; the stake in Cuiabá; deal after deal. As far as Fastow was concerned, with an agreement in place, he would be guaranteed not to suffer any losses.
Fastow put it all in writing, listing each asset, the repurchase price, and the predetermined profit that LJM2 stood to make. It was an agreement that, Fastow knew, proved Enron’s “sales” to LJM2 were a sham. The company bore the risk of ownership; no matter what happened to the asset values, LJM2 would profit. Any losses would be Enron’s. The “equity investments” from LJM2 were nothing more than disguised loans.
The document would prove to be what the government considered the smoking gun, the proof LJM2 was at the center of a web of illegal schemes. It would remain undiscovered by investigators until years after the company’s collapse.
———
The news coverage of the California energy crisis was relentlessly bad. Mutterings about market manipulations by out-of-state energy companies were growing louder. That was enough for Richard Sanders, chief litigation manager for Enron’s wholesale division; he could almost smell the lawsuits coming. In early September, Sanders visited his boss, Mark Haedicke, the division’s general counsel.
“I think it might be a good idea for us to go see what’s going on out there,” Sanders said. “To see what we can do to head off the litigation.”
Haedicke agreed. He authorized hiring an array of specialists from several firms. If there was anything to worry about, an army of lawyers would find it.
That same day in Portland, Christian Yoder, Enron’s top lawyer on the trading desk, received a call from Haedicke in Houston to fill him in on the decision. “Do you know any attorneys who are really expert and up-to-date on California trading and California issues?” Haedicke asked.
“No,” Yoder replied. “It’s kind of an unknown area.”
Yoder agreed to look around. He thought of Stoel Rives, a renowned Portland firm, which suggested Stephen Hall, a bright third-year associate. Yoder interviewed Hall and agreed he was the right man for the job. The two lawyers became friendly, which helped in future years, when they both emerged as key witnesses in the storm of scandal.
Mark Haedicke sat down with Stuart Zisman not long after receiving his letter on the legal perils of Raptor I.
“I want to thank you for your candor,” Haedicke began. “But I do have some issues.”
Zisman’s language, he continued, was inflammatory and opinionated. Not what Haedicke wanted to see. For example, he said, Zisman had described Raptor as “cleverly designed.” That seemed almost snide and really had no place in this kind of legal memo, Haedicke said.
The meeting lasted less than fifteen minutes. Haedicke never mentioned Zisman’s warnings about possible earnings manipulation. Word choice—that was the problem.
Cliff Baxter was on the phone with Badr El-Din, hearing more about kidney failure than he wanted to know. Sheikh Zayed needed to give the final sign-off before Project Summer could be closed, Badr El-Din said. But the sheikh had experienced complications and was in no condition to consider such a complex deal.
“I don’t dare go in while his family is there, tending to his care,” Badr El-Din said. “We will have to wait.”
Anxiety gnawed at Baxter. Delay on a transaction this large was a bad omen. And sure enough, efforts to jump-start the process faltered. UBS tracked down one of the sheikh’s family members in Spain and asked him to fly to the Emirates to get somebody to sign. Endless other calls were placed—to Spain, to the UAE, to Cleveland. Repeatedly, there were promises signatures were coming. They never did.
On September 8, Baxter dropped by Skilling’s office and slumped into a chair. “This isn’t working, Jeff,” Baxter said. “Every day that goes by, this starts receding. There’s going to be second thoughts.”
Skilling nodded. This was bad.
The SEC’s proposal to split accounting and consulting had stirred up a hornet’s nest on Capitol Hill. Day after day, outraged letters and phone calls arrived at Arthur Levitt’s office from Congress. When pressed on the problem, though, many objectors displayed an unfamiliarity with the issues bordering on ignorance; some seemed not to know the difference between a balance sheet and a balance beam.
Still, Levitt respected a handful of the staunchest opponents—like Phil Gramm, a Republican senator from Texas. Gramm, whose wife, Wendy, served as an Enron director, believed the rigors of the marketplace, not the dictates of the government, should guide American business. That left him philosophically opposed to the Levitt plan. But Gramm was also infused with an abiding sense of fair play and wanted the proposal to die on the merits, not political gamesmanship. He secretly appointed himself Levitt’s congressional spy, monitoring his colleagues’ intrigues.
Levitt was in his office one day when Gramm called with news. “Arthur,” he said, “thought you’d like to know that Shelby is after you.”
Shelby. Richard Shelby, a Republican senator from Alabama. “How so?” Levitt asked.
“He’s putting together an appropriations rider. Something to bar the SEC from spending any of its budget implementing this proposed rule of yours.”
Levitt thanked Gramm and hung up furious. It was a typical Washington power play. If politicians couldn’t win on the issues, they’d attack the budget. Levitt decided to fight back, finding the home number for Senator Trent Lott, the majority leader. Lott had the power to squelch Shelby’s shenanigans; Levitt hoped to appeal to the senator’s sense of fairness. Lott was gracious when he came on the line.
> “Trent, this is too important an issue to be sabotaged in the dead of night with some appropriations rider,” Levitt pleaded. “No matter what you think about the issue, the process should be aboveboard.”
There was plenty of support for what he was proposing, Levitt said. A number of newspapers and magazines, including The New York Times, The Washington Post, and Business Week, had endorsed adoption of the rule.
“Well, Arthur,” Lott drawled, “I’m not familiar with what you’re proposing to do, but if those liberal publications are in favor of it, then I’m against it.”
Levitt hung up, shaken. Political power was aligning against his proposal. Somehow, ensuring that public accountants represented the interests of the public was too controversial for Congress. The members’ ties to the industry, Levitt figured, were too strong. If he continued down this path, Congress could cripple the SEC’s budget. He had no choice. He had to compromise.
Cliff Baxter spoke to Skilling shortly after noon on September 14. His voice was calm, his manner decisive. Still no progress on Project Summer, he said. Just more promises that soon signatures would arrive.
“I don’t like this,” Baxter said. “It feels wrong.”
“What do you want to do?” Skilling replied.
Baxter showed no emotion. “I think we ought to terminate the offer.”
What? “Why do that, Cliff?” Skilling asked sharply.
“We’ve got to do something,” Baxter replied. “We’ve got to make them focused. We’ll give them a period of time to sign, or tell them we’re going to terminate the deal. If something’s going to happen, that’ll make it happen.”
Skilling took a deep breath. It sounded like an all-or-nothing bet. Still, he trusted Baxter’s instincts.
“Okay,” Skilling said. “Do it.”
The deadline passed the following Monday, September 18. No response. Baxter, looking worn down, dropped by Skilling’s office with the news. “Got nothing, Jeff,” he said. “Looks like Project Summer is dead.”
Oh, God. Skilling had invested so much emotional energy in this deal, hoping it would solve all of his problems. He rubbed a hand over his face, then looked at Baxter.
“Okay, so that’s that,” he said. “We’ve got to gear up again. Start over. Sell it in pieces if we have to.”
Baxter nodded. Skilling headed down to talk to Lay. There were a lot of things to do. And one of the first was to sit down with Joe Sutton and tell him to get out of Enron.
———
That same day in Dallas, Causey led an entourage of Enron executives down a fiftieth-floor hallway in Renaissance Tower. They found room 5050, the Dallas bureau of The Wall Street Journal, and stopped at a receptionist’s desk, asking to see a reporter named Jonathan Weil.
A lawyer by training, Weil was a self-taught financial sleuth who, months before, had received a tip about the accounting at some energy-trading companies, including Enron and its top rival, Dynegy. Weil, a reporter for the regional section called Texas Journal, had dug into the records, realizing that the companies depended on mark-to-market accounting—loaded with plenty of assumptions—to report spectacular earnings. He had called to get responses, then suddenly today, two days before publication, someone at Enron phoned back to say Causey was on the way to Dallas to speak with him.
The Enron team made their way into the bureau’s newsroom. Weil was at his desk and heard someone asking for him. He gathered his notes and stood. After introducing himself, he led the group to a nearby conference room.
They dispensed with the niceties quickly, and Weil let Causey take the floor. The calculations of its mark-to-market earnings weren’t just wild guesses, Causey said, but conservative estimates based on quoted market prices. If market prices weren’t available, then Enron relied on long-term pricing trends to calculate the proper values.
Weil listened quietly, rapidly writing Causey’s words into his notebook. Causey struck him as incredibly cocksure of Enron’s abilities. After Causey began to wrap things up, Weil was ready with some questions.
“So did the models last year tell you that California electricity prices would be going berserk this year?”
“Of course not,” Causey replied.
“Then how can you be so sure of your abilities to predict future trends?”
The conversation went on a while longer, until finally Causey had had his say. Later, Weil was back at his desk, typing the information. If nothing else, he was certain of one thing. If Enron was willing to fly top officers up to Dallas for this, he thought, he must be hitting a sore spot.
David Duncan reviewed the two-page draft letter. With one more go-through, it would be ready for Lay’s stationery and signature. Then off to Arthur Levitt at the SEC.
Duncan, on Andersen’s behalf, had written the letter objecting to the SEC’s proposed rule on consulting. Lay had agreed to sign, making it appear he had been so outraged by the proposal that he had banged out his objections—rather than just signing something written by the very accountants who stood to lose money if the idea was approved.
The tone of the letter struck Duncan as just right. It described Enron’s close relationship with Andersen, and its reliance on its consulting, as mechanisms that helped keep tabs on the company’s far-flung businesses. In essence, the letter argued that much of Enron’s success, and its skill in controlling its operations, were attributable to Andersen’s ability to provide both auditing and consulting services.
The letter was sent up to Lay, and he signed it on September 20. The irony seemed lost on everyone. By persuading its largest client to lobby the government on its behalf, Andersen had compromised the very independence that the letter claimed was holding strong.
The bulls for a company’s stock are the supporters, the ones who cheer every time the price rises another point. But the market also has its bears, short sellers who scour for overvalued stocks and put together trades betting on an eventual collapse in share price.
In New York, Jim Chanos was a market professional who had made his career rooting out the bad news about high-flying stocks. That fall, Chanos, the president of Kynikos Associates, was looking for his next big idea. A call from a friend alerted him to an article by Jonathan Weil that appeared on September 20 in the Texas regional section of The Wall Street Journal. Chanos was intrigued; it sounded as if Enron and other energy-trading companies could use their accounting to manufacture earnings just by adopting aggressive assumptions about the future of the marketplace.
Maybe it wouldn’t lead anywhere, but Chanos wanted to take a closer look at Enron. And the first thing he needed to do was review some of the company’s financial filings.
When managers from India came to Houston to work on the next plans for selling the international assets, Skilling dropped by for a chat. The letter about troubles in Dabhol still ate at him. He figured he’d ask about the Maharashtra State Electricity Board and see what happened.
“Listen, guys,” Skilling said after he entered the room. “What’s going on with the bills to the MSEB?”
Not a problem, one manager responded. “They’re having trouble paying. But we’re working it out.”
Trouble paying? “What do you mean?” Skilling asked.
“The bills are really big,” the manager responded. “And they’re really straining under it.”
Skilling left the room more disturbed than ever. He began poking around and soon hit pay dirt. He discovered that Enron managers in India were helping the electricity board stay out of hock. Whenever it ran out of cash, they simply shut the Dabhol plant “for maintenance.” That way, they limited the flow of electricity to whatever Maharashtra could afford. That was why there were no accounts receivable; Enron only turned on the juice when its primary customer had cash.
Skilling was furious. He wanted the top executives from India to fly to Houston immediately.
The meeting took place days later in conference room 50M03 at Enron headquarters. Sanjay Bhatnagar, head of Enron India
, was joined by Wade Cline, the second in command. Across the table sat Skilling and Lay, looking impatient.
“All right, Sanjay, straight out,” Skilling said. “Is there a problem with MSEB paying?”
Bhatnagar raised his hands in a dismissive motion. “This is what it’s like doing business in India. We just stay on top of them and keep pushing to get it done.”
He had been keeping up the pressure, Bhatnagar said, just as he had always expected he would have to. “So there’s no problem. No problem.”
Skilling turned toward Cline. “What do you think?”
Cline glanced at Bhatnagar, then answered. “We have a problem.”
Bhatnagar smiled. “Wade is always worrying. This is India. This is how things happen in India. Not a problem.”
Skilling ignored him. “Wade, what are you thinking?”
The cash wasn’t there, Cline said. Under phase one, Enron should be billing about $30 million a month, but the energy board didn’t have it. They could only afford $15 to $20 million. When phase two began, Cline said, the monthly billings should climb to about $110 million. But the board would still have only about $20 million available.
Bhatnagar turned to Cline, looking livid. “Wade,” he said sharply, “you’re thinking about this all wrong. That’s not the way things are done in India.”
The Indian government had guaranteed payment, Bhatnagar said. The government would make good. They wanted foreign investment; they would never default on this.
Skilling held up his hands. “Fine. We understand the problem. They have $20 million; they need more than $100 million. Let’s start working on that.”
The executives needed to speak with Indian officials to find out if they would write a check. But whatever happened, Enron’s plant would not operate without payment.
The meeting broke up, and Bhatnagar headed downstairs, where executives in Broadband were waiting for him. Cline lingered behind for a moment. Skilling approached.
Conspiracy of Fools Page 49
