Now the only unfinished business of consequence was getting rid of LJM. If Skilling left, he knew Lay would need a full-time CFO. That, coupled with market jitters, made the choice clear: Fastow had to choose—LJM or Enron.
“Andy, I want to tell you something,” Skilling began. “I’ve been growing increasingly uncomfortable with the content of our conversations.”
Fastow blinked. “What do you mean?”
“Our last ten phone calls, all of them in one way or another dealt with LJM. And to be quite honest, I don’t give a shit about LJM. I care about the company.”
It couldn’t continue that way, Skilling said. There was too much noise about LJM. It was hurting Enron.
“Andy, you have to make the call,” he said. “If you want to spend your time working for LJM, you can. Or you can spend your time being the CFO of Enron. But I’d like you to make a decision between the two.”
Fastow had listened intently, watching his boss’s face. There were no emotional clues; his tone had not been combative, just blunt. “I can’t just say I want out, because I’m the managing partner,” Fastow said. “Can you give me a couple of days to think about it?”
Skilling leaned back. “Sure,” he said.
Ken Lay hurried past the large red sculpture of a number 9 in front of the midtown Manhattan office building. He had just come in from Teterboro Airport and was rushing for his eleven o’clock appointment on Fifty-seventh Street with Kohlberg Kravis Roberts & Company—a meeting, he knew, that could well decide his next career.
KKR was tops in leveraged buyouts and owned an array of companies through its investment funds. It won national fame in its successful battle for RJR Nabisco. Now its principals, Henry Kravis and George Roberts, wanted to speak to Lay about taking a role at the firm.
Lay rode to the forty-second floor and was escorted to see Kravis. The two chatted until the arrival of Roberts, who had been discussing the new opportunity with Lay for weeks.
Kravis took the lead. “I know you and George have been talking about our plans,” he began. What KKR wanted, Kravis said, was a council of five or so wise men—corporate chiefs who had proven their mettle on the business battlefield—to advise on strategy.
“You can be as active as you want to be,” he said. “You can give us a little bit of time, you can give us a lot of time, you can give us all of your time.” A flexible commitment. That sounded good.
“And,” Kravis continued, “we’ll certainly set it up to be very rewarding for you financially.”
Work as much or as little as he wanted and be paid well either way? Why, Lay could be involved in an array of KKR companies, doing different things every day. He would have responsibility, but none of the administrative duties that were part and parcel of being chief executive.
Only six months remained until Skilling took over as Enron’s chairman. Lay had been trying to find his next act, but nothing had grabbed him. This place did. KKR, he thought, would be a great place to hang his hat.
“… who says, ‘Hi, my name is Spike, honey.’ ”
Tim Belden, Enron’s top energy trader in Portland, reread Lockyer’s quote in that morning’s Journal, dumbstruck. The state attorney general was boasting that he wanted Ken Lay raped in prison? This was crazy.
Worse, it was scary. Belden knew there was something out there for investigators to find—the secret trading strategies. Already the firm had been hit with subpoenas from California, and an investigating committee in the legislature was demanding reams of documents. About the only thing keeping the dirty details secret was the legal wall that Enron had erected around its trading operations.
But how long could that last? For the first time Belden wondered if he might need to hire his own criminal lawyer, just to protect himself.
It had taken a few weeks, but Mintz finally completed his memo for Skilling about the missing signatures on the LJM approval sheets. He had written it in longhand, being cautious in his wording to make sure that he showed appropriate deference to the top boss.
The memo, only three paragraphs long, laid out the sheets’ purpose, mentioning that there was a line for Skilling’s signature that had apparently been missed. The sheets from 2000 had all been collected, he said, and were ready for him to officially give his approval for the deals.
“To that end,” Mintz wrote, “I will arrange to get on your schedule to assist you in this regard; alternatively, I can send such approval sheets to you as a package and you can sign them at your convenience.”
Once the memo was typed up, Mintz signed it and carried it back out to his secretary. “Darlene, can you put this in a P&C envelope and take it up to Jeff’s office?”
She fetched one of Enron’s “personal and confidential” envelopes and slid in the document. Neither knew that in hours, Skilling would leave the office for days. At best, he wouldn’t pick up the memo for a week.*
Fastow was out of options. He couldn’t back partly out of LJM and keep Skilling happy. It had to be all or nothing.
He had asked the lawyers to examine whether he could hold a small interest—say, less than ten percent—in the general partners of the LJM funds and avoid disclosure. The answer was no. In fact, their position was changing. Even if he held only a small interest, the market probably should know his compensation, they now said.
It was obvious what he had to do. He needed Kopper to come to the rescue once again. They had been working together on their side deals for almost four years. Kopper knew everything; he was the one keeping track of their comparative financial winnings on his laptop. He had bailed Fastow out before, on RADR. There was nobody else Fastow would trust to take over LJM2, and certainly nobody else likely to quietly cut him in on profits in the future.
That was decided. Fastow would sell his interest in the LJM funds to his buddy Kopper.
At 3:30 on May 24, Mintz breezed into Fastow’s office. That day, he had gotten word Fastow needed to talk, and this was the first time their schedules had both been open.
“Hey, Andy,” Mintz said cheerily. “How’s it going?”
Fastow, standing at his desk, nodded in the direction of the small conference table. “Sit down,” he said.
Mintz took a chair as Fastow picked up a small pad of paper and joined him. Then the words rushed out.
“I’m gonna sell LJM,” Fastow said.
What? Had Mintz heard correctly?
“Really?” he replied calmly.
Fastow nodded. “Yeah, I’ve got to get out,” he said. He explained how everyone had ruled he would have to disclose his stake in the funds, no matter how small it was.
“Well, is that right?” Mintz replied. What, he wanted to know, were the lawyers saying?
“I don’t care,” Fastow replied. “Skilling thinks the time has come for me to move on. So fine.”
He took a deep breath. “Talk to Ron Astin. Find out what types of disclosures we’ll have to make if I sell.”
He’d take care of it, Mintz promised.
The meeting ended, and Mintz headed to the elevators. He climbed on alone, and the doors closed behind him. A second passed. Mintz clenched his fists and thrust them up in the air.
“Yes!”
Back in his office, Mintz grabbed the phone. He dialed the Fried, Frank firm and asked to be put through to the lawyers working on the analysis of the LJM conflicts.
“Guys,” he said happily, “I’ve got some good news.”
Skilling was at his desk, his face stern. It was 10:30 on the morning of May 29, his first full day after a week out of the office. Fastow sat before him.
“You’ve asked me to think about this issue regarding LJM, and I’ve come to an absolutely clear-cut decision,” Fastow said. “I unequivocally want to be the chief financial officer of Enron.”
Skilling was surprised.
“That’s what I’ve always wanted to be,” Fastow continued. “And from now on, that’s my dream job.”
The transition would take time, he said
. He would probably have to travel, to sell the funds’ investors on the idea.
“I talked to Michael Kopper about taking over for me, and I think the investors will be okay with that,” he said. “But one way or the other I’ve made my decision. Within a month, I think I can do it.”
“Okay, Andy,” Skilling said. “Let me know if there’s anything I can do to help.”
They talked for another minute. Fastow sounded almost relieved with the outcome.
For good reason.
That week, Enron was in the final stages of repurchasing the interest in the Cuiabá power plant from LJM1. The agreement to buy back the investment—at a profit to LJM1, of course—had been struck long before.
But this repurchase had to be disclosed. LJM1 was a related party, already identified in the filings. Its transactions with Enron couldn’t, under any interpretation, be kept secret. Anyone looking closely at Enron’s disclosures—and now, it seemed, many investors were—would spot the repurchase. It was going to be awfully hard to explain why assets were moving from Enron to LJM and back again, all at a loss to the company.
Now, maybe no one would have to. The agreement in principle for the Cuiabá buyback had just been signed, with an expectation of closing on May 30, the day after Fastow told Skilling of his intention to sell the LJM funds. Kopper wasn’t a senior Enron officer; LJM technically wouldn’t be a related party once ownership changed hands.
So why not just postpone the buyback? As for the money—well, Fastow could get it by adding his share of the Cuiabá repurchase to the LJM2 sales price. No one—not investors, not directors—would ever have to know about it.
Enron had committed the cash, the deal was ready to go. But now, just for a while, they were going to pretend no deal existed, all so Enron could avoid revealing the truth.
Lunch hour had arrived, and Sherron Watkins—the married name of the former Sherron Smith, the sometimes-salty-tongued executive who formerly oversaw the operations of the JEDI partnership—was heading out. After emerging from the elevator bank, she bumped into her former boss, Andy Fastow, in the lobby. She had long considered Fastow something of a snake, but she was smart enough to know when to make nice. “How’re you doing, Sherron?” Fastow asked.
Watkins shrugged. Not good, she replied. She had been working in Broadband, and it was in a meltdown. Watkins had recently learned her job was being eliminated, and she was scrambling. She didn’t mention it, but she had reached out to a friend at Reliant Energy, hoping for a lead. The only opportunity she found inside Enron was investor relations, but she had a two-year-old and wasn’t looking forward to the hours that job demanded.
Fastow’s eyes lit up. “Come talk to me,” he said. “I think I’ve got something for you.”
She smiled. “Okay, I’ll do that.”
The two parted ways, and Watkins’s smile vanished. Work for Fastow again? She could almost feel her stomach sinking.
Days later, Watkins met with Fastow to discuss his plans. It hadn’t been announced yet, he told her, but he was slated to take over corporate development now that Cliff Baxter was gone. And he needed help.
“You can be my eyes and ears around the building,” he said. “You can even put your name on any deal you find.”
Watkins tried to sound pleased with the offer, but she wasn’t. It was just a new version of the chief-of-staff position he had come up with years before for Shirley Hudler—essentially making her his glorified spy, partly so she could find out what other Enron deal makers were up to.
She mumbled a few comments, then headed out. She called her friend at Reliant; nothing was available for at least a month. That left her with either investor relations or spying for Fastow. Unpleasant as the second option might be, at least it would allow her time with her toddler.
Looked like she was heading back to Fastow’s stable.
Near Cannes on the French Riviera, Ken Lay walked out of the exercise room at the Hotel du Cap-Eden-Roc, the internationally acclaimed hot spot for the heavyweights of the corporate and entertainment worlds.
It was the morning of June 2, and Lay had just finished putting in time on the treadmill. As he headed toward the sidewalk, he saw two friends he had brought along on the trip—John Duncan, chairman of the board’s executive committee, and Harry Reasoner, the managing partner of Vinson & Elkins. The two apparently had just finished their morning walk and were sipping juice.
“Well, good morning, you two,” Lay called out.
The men lingered. After fifteen minutes, Lay thought of something. The night before, he had received a message from Skilling. It reminded him of the evidence he had seen of Skilling’s apparent depression. He had been meaning to inform the directors. This was as good a time as any.
“On another matter, John, there’s something I think you ought to know,” Lay said.
“What’s that, Ken?”
“Jeff Skilling really isn’t a happy camper,” he said. “There’s a lot of frustration and stress.”
Reasoner stood by, listening to the conversation. Duncan considered Lay’s words for a moment.
“What do you think he might do?” he asked finally.
“I don’t know,” Lay said. “I probably ought to call Pug on this, too. But I just wanted you to know that he’s not enjoying his job. I’m trying to help, but he’s just having a tough time right now.”
“Do you think everything will be okay?”
Lay shrugged. “When somebody gets unhappy, sometimes they do weird things,” he said.
The negotiations, if they could be called that, to sell LJM2 to Kopper went along swimmingly.
Already Kopper was flush with cash—thanks to Fastow. Just weeks before, Enron’s thirty-five-million-dollar buyout of Chewco finally closed, giving Kopper a ten-million-dollar profit, the payment once blocked by McMahon. Now all Fastow and Kopper needed was a swap. Fastow would give Kopper control of LJM2. In turn, Kopper would hand over the millions that Fastow had secured for him. Plus the $7.3 million distribution from LJM1 that Kopper would receive in a few weeks from selling the Cuiabá stake back to Enron. Oh, and some property he owned in Houston, too. It would take a few weeks, but when the dust cleared, Fastow would be able to pocket another $16.4 million.
The price was a bit on the excessive side, Fastow knew. But if he was going to be forced to walk away from his moneymaker, he wanted cash.
Lots of it.
Vince Kaminski was furious.
Once again he was being forced to put his analysts through the wringer of the Performance Review Committee, the PRC, and the outcomes were inane. These were top minds in their field, but now Kaminski was almost required to designate a portion of them as average or below.
They called it forced rankings. Skilling had sent out an e-mail announcing new requirements for the allowed percentages in each ranking level—just five percent at level one, thirty percent at two, and so on. While he mentioned flexibility, human resources treated the numbers as inviolate. The system was not only unfair, it was illogical. Even if his entire staff consisted of modern-day Einsteins, Kaminski would be forced to brand the performance of most of them as average or worse.
Not surprisingly, the analysts were in open revolt. In written evaluations, they told Kaminski that forced ranking was destroying the company. If everyone did a good job, the only way to move ahead was by undermining a colleague, but analysts needed to work as a team to get the best answers. Rather than sabotaging each other, they verbally attacked Enron and Skilling for pushing an idea without understanding the consequences.
Kaminski sided with them completely and made a stand at the PRC.
“I will not do the forced ranking,” he said. “It’s not in the best interest of the company.”
His defiance was short-lived. If he wouldn’t rank his troops, he was told, somebody else would. And Kaminski had no doubt that in the white-hot competition that was the PRC, his analysts would be given short shrift as rival executives jostled to elevate their own peop
le.
He buckled, and ranked his staff. He did try to cheat by stuffing too many of them into categories one and two. But he was just ordered to try again, until he hit the preset percentages.
One victim of the process was Kevin Kindall, whose yearlong inquiry had uncovered the threats posed by the Fastow partnerships. Vital work, but other, more senior analysts had been involved in pricing splashy, moneymaking deals. No matter how important Kindall’s effort, the truth was, it couldn’t even get a budget. His rank was forced down.
Kindall didn’t take the news well. “Vince, I did not deserve this,” he said. “My work did not deserve this.”
“I tried, Kevin,” Kaminski replied. “I know this is unfair. But there was nothing I could do.”
Wearily, he described how the process worked, recounting his attempts to thwart it. But Kindall wasn’t interested in the system’s mechanics, only its results.
“If Enron doesn’t operate in a way that can recognize my contribution,” he said, “then I need to move on.”
Kaminski tried to persuade his young charge to change his mind, but to no avail. Kindall resigned.
The person who had discovered the true nature of the financial threats that would ultimately destroy Enron was gone, his contribution dismissed as irrelevant to the company’s continued success.
The mood was electric on June 12 among the technology executives gathered in a Las Vegas auditorium. Vivek Ranadivé, CEO of Tibco Software, approached the stage to introduce the day’s featured speaker, Jeff Skilling.
The company was honored to have Skilling there, Ranadivé said. “Enron is being hailed as America’s most innovative company,” he said, “And Jeff Skilling has been declared the number-one CEO in the entire country.”
Skilling bounded onto the stage, dressed in an open shirt and a sports coat. He launched into a lengthy speech, telling his audience that the Internet had only begun to show its usefulness for business. It would transform industry, he said, and Enron’s future would be found there.
“We couldn’t do what we’re doing now without the technology of the Internet,” he said.
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