Conspiracy of Fools

by Kurt Eichenwald

  Later that afternoon, McMahon was digging through his in-box when he noticed a typed letter. His secretary, apparently, had removed it from the envelope. He picked the pages up and started to read.

  Why am I getting a copy of this? It was addressed to Lay. He scanned to the bottom of the page. No signature. He read through it a couple of times. McMahon didn’t know much about the Raptors or another deal it mentioned, Condor, but he was taken aback by the ferocity of the attack on their accounting. Andersen was all over them! McMahon would have thought that they would be bulletproof. But what amused him most was how the letter went after Fastow’s premier deals. His old nemesis was sure to blow a gasket when he heard.

  Where did it come from? McMahon called Bill Brown, described the letter, then read it to him.

  “Wow,” Brown said. “This is all Fastow. Is it true?”

  “I don’t know anything about these things,” McMahon replied. “Raptor was the biggest secret around. Nobody got to know how it was structured.”

  “Where did you get it?”

  “It’s in my in-box. Is there a copy in your in-box?”

  Brown checked. Nothing. The call ended, and McMahon walked down the hall to Ray Bowen’s office. “Ray,” he said, thrusting the letter out, “read this.”

  It wouldn’t take long for word of this mystery letter to seep through the company.

  Later, McMahon’s phone rang. It was Sherron Watkins.

  “Did you get my memo?” she asked starkly.

  “What memo?”

  “The one I wrote to Lay.”

  McMahon’s mouth dropped. “That was your memo?”

  Watkins’s letter arrived that day in human resources and was sorted onto a stack of other notes from employees. But this one seemed serious and, since it was addressed to Lay, was delivered to his office that afternoon.

  Lay puzzled over it. The language struck him as inflammatory—wave of accounting scandals?—and there were these suggestions Enron would have huge losses from the Raptors. It seemed wrongheaded. Enron was better than ever. Skilling said so. Fastow said so. Everybody said so.

  Still, he couldn’t ignore the allegations. This was exactly the kind of thing he should give to Jim Derrick, Enron’s general counsel. He would know what to do.

  Derrick didn’t know what to make of the letter, either. The allegations were serious, but he wasn’t in a position to decide whether they were right. He snapped up a pen and wrote “FYI” at the top of the first page of the letter. Then he scribbled the names of a few in-house lawyers, plus Fastow’s and Causey’s. They would know how to deal with this. Probably even had the answer at their fingertips.

  The letter annoyed Causey. Some nobody wanted to look smarter about the Raptors than the lawyers and accountants who had reviewed and approved them? That was pretty nervy.

  Still, he had to address the question, along with another about Andersen that had been forwarded to him. Both were submitted for the all-employee meeting the next day, but he didn’t think the Raptor concerns should be discussed there. He began typing a response. He addressed the Andersen question first. Then he got to the anonymous letter.

  “NOTE: I would not read this question,” he typed.

  If management did wish to allude to it, Causey wrote, the answer should be vague, saying simply that a question had arisen about Enron’s structured transactions and the use of its own stock in those deals. Then they should dismiss it with a few words about how this stock was reflected in the calculations of earnings per share.

  Watkins’s letter asked nothing about earnings per share. Rather, it spelled out how Enron had recognized half a billion dollars in profits that weren’t there.

  Causey was sidestepping the question.

  The employee meeting the next morning, August 16, had the frenzied atmosphere of a high-school pep rally. It was held in the Imperial Ballroom at the Hyatt Regency just down the block from Enron. Lay bounded in, dressed in shirtsleeves, waving at the applauding crowd.

  “Well,” he enthused, “I’m delighted to be back.”

  Lay described his excitement about the future, brushing aside whatever problems Enron was facing—in India, in California—as bumps in the road. There were some issues he knew about, he said. Since the announcement of Skilling’s resignation, he had heard rumblings that Enron had strayed off the narrow path.

  “Our values have slipped,” Lay said. “But we’re going to work on that. We’re going to restore them.” Another chorus of applause.

  Then the kicker. Things had been tough, Lay said, but now Enron was ready to turn a corner. In anticipation, he said, the company was giving all employees a onetime options grant, equal to five percent of their base salary.

  “We want you,” he said, “to enjoy the ride back up!”

  Sitting close to the stage, Watkins listened to Lay’s rousing speech with growing discomfort. Lay didn’t even suggest that an accounting problem might be brewing. The anonymous letter had apparently missed its target.

  As he wrapped up, Lay mentioned that his door was open to anyone with concerns. Just make an appointment, he said, through Cindy Olson from the human-resources group.

  Soon the meeting was over and Watkins crossed the street with the crowds of employees heading back to Enron’s office building. Climbing on the elevator, she pushed the button for sixteen, Cindy Olson’s floor.

  It took more than an hour, but Olson finally appeared. The two sat down at a small conference table, and Watkins brought out a copy of her letter, saying that she had sent this to Lay anonymously. Olson slowly read it.

  She glanced up, looking ill at ease. “I’ll tell you,” she said, “Ken gravitates toward good news. It’s one of his greatest strengths and greatest weaknesses.”

  The only way to really get action would be to sit down with Lay face-to-face. Would Watkins, she asked, be willing to do that?

  “Absolutely,” Watkins replied.

  In the Los Angeles offices of The Wall Street Journal, John Emshwiller was on a couch, chewing sugarless gum. He hadn’t been around the day of the Skilling resignation, but now his boss, Jonathan Friedland, wanted him to jump in.

  “We need a second-day story on the Skilling departure,” Friedland said.

  Emshwiller wasn’t happy with the assignment. Corporate resignations are choreographed affairs. Enron had selected its dance step and wasn’t likely to change it now. Plus, Emshwiller didn’t know many people there. This wasn’t a company that he covered day to day.

  “I might not be able to get much today,” he warned.

  Friedland’s phone rang. “Do what you can,” he said before grabbing the receiver.

  It couldn’t be put off any longer. Lay was back at Enron—for how long, no one knew. The job offer with KKR wouldn’t, and shouldn’t, wait for him. He had to decline. From his office, Lay telephoned George Roberts.

  “George,” he began, “I’m sure you’ve seen the news.”

  Skilling was home, putting together a list on a pad of quadrille paper. He had blown out of the office immediately after the announcement, leaving the packing to his secretary, Sherri Sera. Now, he was plotting his new life.

  Finances. Office. Estate Planning. Those needed to be organized. His brother Mark would help him out there.

  Reputation. Make sure his departure hadn’t damaged his image with the business world.

  Family. Spend more time with his kids, arrange some trips with them. Health. Obvious. Community. Reach out into Houston, play a bigger role in the city.

  There were plenty of details needed, but that was basically it. A business plan, just without a business.

  It was section eight, called “Related Party Transactions,” that got John Emshwiller’s juices flowing.

  After being assigned to follow the Skilling resignation, Emshwiller had put in a request for an interview, then scrounged up a copy of Enron’s most recent SEC filing in search of any nuggets.

  What he found startled him. Words about some partne
rships run by an unidentified “senior officer.” Arcane stuff, maybe, but the numbers were huge. Enron reported more than $240 million in revenues in the first six months of the year from its dealings with them.

  One fact struck Emshwiller in particular. This anonymous senior officer, the filing said, had just sold his financial interest in the partnerships. Now, it said, the partnerships were no longer related to Enron.

  The senior officer had just sold his interest, Skilling had just resigned. The connection seemed obvious.

  Could Enron have actually allowed Jeff Skilling to run partnerships that were doing massive business with the company? Now that, Emshwiller thought, would be a great story.

  Emshwiller was back on the phone with Mark Palmer. With no better explanation for Skilling’s resignation, he said, the Journal was going to dig through everything it could find. Right now he was focusing on these partnerships. Were those run by Skilling?

  “No, that’s not Skilling,” Palmer replied, almost nonchalantly. “That’s Andy Fastow.”

  A pause. “Who’s Andy Fastow?” Emshwiller asked.

  The message was slipped to Skilling later that day. A Journal reporter was pushing for an explanation of his departure and now was rooting around, looking for anything he could find. Probably best just to give the paper a call.

  Emshwiller was at his desk when the phone rang. “Hi,” a soft voice said. “It’s Jeff Skilling.”

  It was a startling moment. Emshwiller had been on the hunt, and suddenly the quarry just walked in and lay down on the floor, waiting for him to fire. So he did: why was Skilling quitting his job?

  “It’s all pretty mundane,” Skilling replied. He’d worked hard and accomplished a lot but now had the freedom to move on. His voice was distant, almost depressed.

  He had been ruminating about it for a while, Skilling went on, but had wanted to stay on at the company until the California situation eased up. Then, he took the conversation in a new direction.

  “The stock price has been very disappointing to me,” Skilling said. “The stock is less than half of what it was six months ago. I put a lot of pressure on myself. I felt I must not be communicating well enough.”

  Skilling rambled as Emshwiller took it down. India. California. Expense cuts. The good shape of Enron.

  “Had the stock price not done what it did …” He paused. “I don’t think I would have felt the pressure to leave if the stock price had stayed up.”

  What? Had Emshwiller heard that right? Was all this stuff about “personal reasons” out the window? Had Skilling thrown in the towel because of the stock price?

  “What was that, Mr. Skilling?” Emshwiller asked.

  The employees at Enron owned lots of shares, Skilling said. They were worried, always asking him about the direction of the price. He found it very frustrating.

  “Are you saying that you don’t think you would have quit if the stock price had stayed up?”

  Skilling was silent for several seconds.

  “I guess so,” he finally mumbled.

  Minutes later, Emshwiller burst into his boss’s office. “You’re not going to believe what Skilling just told me!”

  That son of a bitch.

  Mark Koenig, Enron’s director of investor relations, heard that same night about The Wall Street Journal’s interview with Skilling. The news infuriated him.

  They had discussed this resignation for days, pressing Skilling for an explanation. What’s the reason, Jeff? What’s the reason? And every time, the same answer. Just personal, nothing to do with Enron. Kids, exhaustion.

  Then, one day later, when everyone had already walked the gangplank of Skilling’s story, the son of a bitch changed it! The stock price was all about Enron. If that was his problem, why didn’t he just say so in the first place? Why wait until everybody at the company had made jackasses out of themselves by parroting his line?

  Koenig glanced at Lay. The two were on an Enron jet along with a handful of other executives, including Fastow and Whalley. They had just spent a day with analysts in New York and were on their way to Boston to meet with investors there. The idea was to calm the market, to let the Street know that no surprises were coming. Then Skilling turns around and dumps one big, fat surprise in everybody’s lap.

  “Ken, Jeff’s comments are really going to undercut everything we said yesterday,” Koenig fumed.

  Lay shared Koenig’s unhappiness, but there wasn’t much to say. Koenig set his jaw. “What is the matter with him?” he seethed.

  ———

  The marketplace chatter about Enron was terrible. Steve Kean, Lay’s chief of staff and top government relations executive, had heard a lot of it, and thought the criticism was too close to the truth. Lay needed to reposition Enron, explain that he recognized its problems and was planning to fix them.

  With Lay on the road meeting with institutional investors, Kean composed an e-mail designed to explain the challenges that he thought Enron faced in the marketplace.

  He began by reiterating his faith in the company. “I believe everything we have been saying,” he typed. “We are making great money, we are growing, we are addressing our issues and we have all our capabilities intact.”

  Still, Kean typed, Enron was having difficulties because of its soured reputation in the marketplace.

  “We’re faced with too many bad, but true (or at least plausible) allegations that we have to deal with every time we try to tell our story,” he typed.

  They ran the gamut. Too much aggressive accounting, impenetrable financial reporting, hyping of unproven businesses. On top of that, Enron was believed to have a mercenary culture that drove away talented people. Worse, Kean wrote, it had gained a reputation for hiding problems until they became very big. The company needed to stop spinning, to make business decisions based on the economics of a deal rather than a desire to hit earnings or avoid a write-down. None of this meant there was a problem in investor relations or the accounting group, he wrote; they were the finest in the industry. But to improve its reputation, Kean wrote, Enron needed to reassess itself.

  He sent the e-mail. If the top brass addressed these issues head-on, he thought, Enron could set itself right.

  The Fastow partnerships were in play, that Palmer knew. Once Emshwiller started asking questions about them, it was only a matter of time until he came back looking for more. Not that there were any secrets to uncover, Palmer reflected. After all, Fastow had sold his interest, and his dealings were disclosed. Probably the way to handle the reporter’s suspicions, Palmer figured, was to be up front about everything.

  He called Fastow, asking him to speak with a Journal reporter about the LJM funds. Fastow audibly stiffened.

  “I don’t want to talk about LJM,” he said. “It’s a slippery slope, Mark. We’ll answer this question, then they’ll just have another one. It’s a slippery slope.”

  Fastow was overreacting, Palmer thought. Yeah, like the whole world was suddenly going to be so interested in a bunch of Enron off-books partnerships.

  ———

  The Journal wasn’t going away. With Skilling having muddied up the water in his interview, the paper was going full bore to find out what was really going on inside of Enron.

  Emshwiller was teamed up with Rebecca Smith, an energy reporter in Los Angeles. The strongest thread that the two of them had was this stuff about the Fastow partnerships. What were those? Did anyone on Wall Street even understand them?

  They set out on their reporting. Maybe, they figured, they could pull together enough string on the partnerships to put out a basic story. Then they could just stand back and see what else came in.

  Sherron Watkins was at her desk, hammering out a new memo for Lay. If she was going to sit down with him, she wanted to organize her thoughts first.

  There was a Vinson & Elkins lawyer who might be able to help, but Watkins couldn’t remember his name. Well, her friend Kristina Mordaunt, who now worked with Fastow in corporate development, was
tight with that firm. Watkins called Mordaunt, asking for the name of the lawyer.

  Mordaunt hesitated. “Why do you want to know?”

  “I’m going to be meeting with Ken Lay on some issues and might want to recommend him for a project.”

  “What issues?”

  Watkins invited Mordaunt to drop by her office so she could explain them in person. When her colleague arrived, Watkins handed her the original letter. Mordaunt read it and looked up, scowling. “Why are you doing this?” she said sharply. “Are you trying to bring down the company?”

  Nobody seemed to be taking Watkins seriously. Mordaunt greeted her revelations with annoyance and skepticism, urging her to speak with the legal department before seeing Lay. Watkins took the advice and met with Rex Rogers, a top attorney in the general counsel’s office.

  Rogers’s reaction was polite but patronizing. Would Watkins really want to take this to Lay? After all, every top expert—Arthur Andersen, Vinson & Elkins, Causey, Fastow—had signed off on these deals. The unspoken message was clear: the big boys knew what they were doing. Who was Watkins—who was anyone—to question their decisions? These were top people. They didn’t make mistakes.

  What e-mail was Ryan Siurek talking about?

  Siurek, an architect on the Raptors, had been speaking with Andersen accountants about some technical detail involving $1.2 billion booked as “notes receivable” from the Raptors, or commitments to pay Enron, which related to the company’s agreement to contribute stock to the entities. That had resulted in Enron’s increasing its reported equity by the same amount. Siurek said he had raised the issue during the March restructuring in an e-mail to Patricia Grutzmacher, a member of the Andersen team.

  But Grutzmacher had never heard about this, never saw the e-mail, and now was being asked about it. She dug through her old Lotus Notes files. Sure enough, there, in March, was an unopened e-mail from Siurek to her, with copies sent to other accountants on the Andersen team. None of them had ever discussed it with her. She opened it and found the notes-receivable question. She dialed Siurek.

  “Ryan, I found that e-mail you were talking about from last March,” she said. “But I never opened it. I never got back to you. This is the first time I’ve ever seen it.”