“I wouldn’t be overly concerned,” Derrick said. “This is not necessarily a disclosable event, but it is something we probably ought to visit about in the next day or so.”
With that, Derrick said his good-byes and hung up.
That evening in New York, Lay was in a car headed to the airport. The day had been going well; even with that Journal story this morning, the analysts had seemed upbeat. Now they would fly to Boston and get ready to do their presentations all over again for investors there.
As he rode along, Lay dialed into the Enron voice-mail system. He wanted to check his messages before boarding the plane. He listened to the one from Derrick, unconcerned.
Okay, he thought. I’ll get back to him tomorrow and see if there’s anything we need to do.
The next morning, a sedan moved through traffic in Boston, ferrying Enron executives to their meeting. In the backseat, Causey unfolded the third section of the Journal and scanned the lead headline.
Enron Says Its Links to a Partnership Led to $1.2 Billion Equity Reduction.
He read a couple of paragraphs, seeing words that seemed to criticize the company for not revealing the reduction in its earnings release. He slapped the paper on his lap and turned to Lay, who was riding beside him.
“This is just wrong!” Causey fumed. “We disclosed this in the conference call!”
Lay nodded, angry. The analysts had heard all about this. To him, it looked as though a couple of Journal reporters had a vendetta against Enron.
Another short seller was on the phone to the Journal, this time with Rebecca Smith. He had possession of a recent quarterly report for LJM2 investors, he said.
“Would you like to see a copy?” he asked.
An emergency meeting was convened an hour later in Derrick’s office. Palmer had just heard from Smith, and she was furious. The Journal had obtained LJM2 documents, she had said, showing massive returns to the fund from investments in vehicles called the Raptors. Millions appeared to be going to Fastow, even to Kopper, she said. Then Smith had raised issues from a source that McMahon had heard bankers complain about being pushed to invest with Fastow to get business with Enron.
This was a disaster. If any of this was true, it would blow up into a full-scale government investigation. Derrick summoned Dilg and Hendrick from Vinson & Elkins and told them that they should reopen their interviews. They had questioned McMahon, and he never told them this. They needed to speak with him again right now.
McMahon was reached by telephone. Hendrick asked point-blank if he knew of bankers being threatened by Fastow. McMahon recounted his experiences: the call from a banker inquiring about a deal that he claimed had been promised in exchange for investing, along with the rumors that swirled about links between investing and getting business.
“I have no firsthand knowledge,” he said. “I wasn’t present when anyone pressured the banks to do anything.”
Led by Lay, a group of Enron executives trooped up a flight of stairs inside Logan Airport. Word from Houston was that Enron was headed into crisis mode. The entire senior management needed to make some decisions.
Everyone walked into a conference room and congregated around the telephone. They dialed Derrick’s office. The phone was answered on the first ring, and Derrick named all the people with him. The room in Houston was packed.
Lay opened the conversation. “Well, we’ve had good investor meetings the last two days, but our stock is now down four dollars in two days,” he said. “We’ve got this notice from the SEC; we’ve got these articles in the Journal. So I want to hear what’s happening there.”
Derrick nodded to Rex Rogers, one of his lawyers who had been dealing with the SEC.
“Ken, it’s Rex,” he began. “Now, I don’t want to overly concern people, but if we keep seeing articles appearing in papers like The Wall Street Journal, and we keep seeing our stock price drop, the SEC is going to want to come in and really take a look around.”
“Well, what does that mean?”
“The investigation might go from informal to formal,” Rogers replied. “Formal investigations are much less frequent, so that’s something we may have to announce. We may even decide that we want to announce this either way, given all the activity in the stock.”
Lay took a deep breath.
“Okay,” he said. “How are we on the PR front?”
Palmer answered. “We have problems” he said. “We have been getting a lot of questions from the Journal about Andy and his role in the related transactions and what kind of compensation he may have gotten.”
Lay was about to ask a question when a voice boomed out. “We went through all the necessary approvals with the board, Ken. You know that.”
It was Fastow.
Fastow was whistling as he spoke, his face twitching with anxiety. “It’s been reviewed by the outside auditors, the lawyers,” he said. “We just looked at it with Vinson & Elkins! This has been checked every which way!”
This was just the Journal getting back at Enron because the company refused to cooperate, some executives grumbled. Something had to be done to stop them.
Lay glanced over at Koenig from investor relations. They were scheduled to travel to Philadelphia the next day for investor meetings there. But Enron was in trouble.
Koenig nodded. “If you need to go back to Houston, I’ll understand. I don’t think that’ll be a problem.”
Philadelphia was off. The team was returning home.
———
At 7:30 the next morning, the Enron building was unnaturally quiet, its executives knocked off balance by the tumult of the last few days. Lay was in his office, reading that day’s Journal. This article was the worst yet. “Enron CFO’s Partnership Had Millions in Profit,” the headline read.
Well, okay. Investors ponied up hundreds of millions of dollars; it was hardly a surprise they earned millions in returns. But it was the third paragraph that held the most uncomfortable claim: that Fastow and possibly others had received seven million dollars in management fees during 2000.
This wasn’t helping Lay’s digestive tract. Definitely, he thought, these writers were on a crusade. But then again, how much money did Fastow actually make on these deals? Did anybody really know? Had anyone ever asked?
And then, down deep in the story was this mention of Michael Kopper, a former Enron executive who was described as now helping operate LJM2. Lay stared at the name.
Who in the world was Michael Kopper?
That morning at eleven, Enron’s directors convened by conference call for a special meeting. Lay took charge.
“As you can imagine with these recent articles, there’s renewed concern about the related transactions and Andy’s role in them,” he said. “There could come a point, whether there’s anything wrong or not, that Andy’s effectiveness as our CFO could come into question.”
The directors discussed the issue of Fastow’s LJM compensation. John Duncan worried that the seven million dollars reported in the paper sounded high. Pug Winokur dismissed that, saying it was all a matter of how much money Fastow had invested and how well the funds had done.
“Listen, on the Journal, I think we need to become more proactive,” Winokur said. “We should directly respond to them. We need to explain the fact that this was all approved by outside auditors and outside lawyers.”
The other directors grumbled in agreement. This was all being blown out of proportion.
Lay turned to Whalley. “Greg,” he said, “give us an update on the effect this is having on the business.”
Whalley’s tone was stern. “We can’t let this interrupt our management of the daily operations. And we have got to ensure we maintain our counterparties’ confidence.”
Counterparties. The other energy traders who participated in the gas and electricity markets, the ones who did business with Enron on faith that it would be able to pay for the energy it agreed to purchase.
“If we lose their confidence,” Whalley sa
id, “the consequences could be severe.”
Ray Bowen was sick of waiting for the next shoe to drop. He dialed Whalley and reached his voice mail.
“Greg, it’s Ray,” he said. “I don’t want to micromanage your life, but I’ve got a point of view on this.” There was no reason to hold back now.
“Andy’s a bad guy,” Bowen said. “You need to get rid of him, and go out and hire an accounting firm that isn’t Arthur Andersen to come in and look at these deals. That’s the only way we’re going to restore credibility. And I just think Andy’s a bad guy and there’s no way he survives this. So we just need to bite the bullet.”
With that, Bowen hung up.
Whalley’s secretary called back, saying her boss wanted to see Bowen right away. But their schedules didn’t mesh. They put off their meeting until October 23. By then, everything would be further out of control.
The Fort Worth office of the SEC had to drop the Enron investigation. The case was getting too big and would take a lot of manpower. And like most everywhere in Texas, the Fort Worth office had too many people with connections to Enron. Spencer Barasch kicked the case up to Washington.
At the SEC’s headquarters, Linda Thomsen walked into the office of her colleague Tom Newkirk. They both were eager to get going on the Enron case, which they knew would likely be the enforcement division’s high-profile investigation that year.
“You know I really want it,” Thomsen said.
“Well, I want it, too,” Newkirk replied.
They were silent for a second. “Let’s flip for it,” Newkirk said, digging in his pocket.
He stood and tossed the coin. Thomsen called it, and it dropped to the floor. They both leaned over to look.
Newkirk shrugged. “It’s yours,” he said.
Greg Whalley wanted to know the numbers. Fastow and Glisan kept chirping that Enron was more than able to weather this bad storm. But Whalley didn’t know these guys. He wanted them to spell out what money was where. He summoned them to a conference room.
“Okay, liquidity,” Whalley said. “What have we got?”
“We’re in a very good position,” Fastow said. “We’ve got $3.8 billion in available lines of credit.”
Glisan raised a hand. “Well, wait, Andy,” he said. “We’ve already drawn down $500 million.”
Fastow nodded, closing his eyes. “That’s right,” he said. “There’s $3.3 billion available on the lines.”
Whalley stared at him, stunned. He just asked his CFO for the most important financial number of them all and got an answer that was off by half a billion dollars.
He decided to dig a little deeper. “How much of the line is a backup to the commercial paper?” he asked.
Good companies maintain extra lines of credit with banks that are available to tap in the event of trouble in the short-term commercial-paper market. But those lines are considered a replacement for credit that might disappear and should never be counted as additional available cash. For every dollar drawn from those lines, the company would have lost the same amount in commercial paper.
Fastow fumbled with the number. “Umm, it’s $1.8 billion backing the commercial paper.”
Glisan nodded. “Right, that’s right. So we’ve got $1.5 billion in available liquidity.”
What the hell? Whalley stood up, disbelief etched on his face.
“You guys are out of your minds!” he said, turning to head out. “I walked in with $3.8 billion in liquidity, and I’m leaving with $1.5”
He shook his head. “I don’t want to ask you another question. I don’t think we can afford it!”
Fastow started to speak, but Whalley just pushed through the door, disgusted. Realization hit him like a splash of cold water. Enron’s CFO was incompetent! The man didn’t understand the basics of his job. The prospect unnerved Whalley. My God. How much damage had he done over the years?
As he stormed down the hallway, Whalley made up his mind. This guy, he thought, has got to go.
CHAPTER 20
ENRON’S MANAGING DIRECTORS SHUFFLED into the Dogwood room on the third floor of the Hyatt Regency. It was just before 8:30 on the morning of October 22, and the executives were feeling surly. The barrage of bad news—about LJM, the write-downs, the fumbling in the senior ranks—had left them furious at the company’s leaders.
In the back of the room, juice and bagels had been laid out, and the executives crowded around the table, gossiping about Fastow and his self-serving deals. But their CFO was nowhere to be seen; Lay had asked him not to attend. Lay marched in, walking to the front as the executives found seats. The room quieted down.
“We’re ready to start,” he began. “This is going to be an open discussion of the issues we’re facing.”
With that, Lay launched into his presentation, explaining the previous week’s earnings release and the problems it had raised. Enron was facing challenges to its credibility, he said, and was assembling a strategy to deal with that. But Lay’s tone did nothing to calm the panic in the room. Enron was spinning out of control—right then!—and there wasn’t time to pursue some long-term plan.
The first question came from a member of the merchant-investing group, asking about the Journal’s LJM articles. Lay delivered the familiar spiel: the funds had been created to give Enron a broader market for assets, there had been plenty of controls, everything was supervised. Both he and the board, he said, were firmly behind Fastow.
That set off a barrage of more questions. What are you going to do about the mess? Why did you guys let Fastow take this on? Finally, Ray Bowen raised a hand and was recognized by Lay.
“The only thing we can do is tell the truth,” he preached. “If we believe this stuff is proper, we ought to invite people in, tell them the story.”
He looked straight at Lay. “If we don’t have anything to hide, let’s apologize for not disclosing it better, but show them there was nothing wrong with it.”
On one side of the room, Dave Delainey, head of Enron Energy Services, had had enough. “Oh, please!” he barked. “We don’t need to apologize for anything!”
From his seat, Vince Kaminski had been listening to the proceedings with a growing sense of unease. He spoke up.
“I would like to give you my view of these transactions,” he announced to Lay.
Lay nodded. “Why don’t you come up to the podium?”
Kaminski rose and strode purposely down the aisle. Lay and Whalley stood to his left as he gripped the podium.
“I am in the terrible position of having to disagree with you,” Kaminski said as he looked at Lay.
“Anyone can disagree with me,” Lay replied.
Kaminski turned to face his colleagues. His anger at the side deals, the excuses, the impropriety, boiled over.
“What Andy Fastow did was not only improper; it was terminally stupid,” Kaminski began. “What he did is cause a crisis of confidence that could bring the company down. And the only choice that we have is to come clean.”
Kaminski’s face hardened. He thought of Stinson Gibner, who left Enron because of the Raptors. “One of our best employees resigned over this, because he couldn’t take pride in Enron,” he said. “This was my view from the beginning. I told Buy that this idea was so stupid only Andy Fastow could have come up with it.”
The room broke up in laughter. One executive involved in LJM1 interrupted. “Those were hedges!” he yelled.
Kaminski ignored him. He was on a roll. His face reddened, his voice cracked with emotion. The company had been hedging its investments against its own stock! It was stupidi Enron has been dishonest! Finally, Whalley placed a hand on Kaminski’s shoulder.
“That’s enough,” he said. With a gentle shove from Whalley, Kaminski started back to his seat. He passed Bowen, who was sitting on the aisle. Bowen looked him in the eye.
“God bless you,” Bowen said.
Later that day, Harvey Pitt stepped up to a podium at the Americana Ballroom in the Loews Miami Beach Hotel
, where members of the American Institute of Certified Public Accountants had gathered for their fall meeting.
The previous afternoon, the SEC released the 21(a) report that Pitt had drafted just weeks before, announcing how the agency expected corporations to cooperate if they discovered wrongdoing. Now he was ready to announce the next stage of his plan: an effort to improve the relationship between the SEC and the accounting industry.
Pitt shuffled his papers, then pulled up the microphone.
“In recent years, the unremarkable notion of an SEC chairman meeting with this group has taken on considerable mental, if not physical, risk. The agency I am privileged to lead has not, of late, always been a kinder and gentler place for accountants, and the audit profession, in turn, has not always had nice things to say about us.”
He pulled himself up straight. “Somewhere along the way, accountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to listen to the profession.”
He looked up. “Those days,” Pitt said, “are ended.”
The crowd of accountants cheered.
The essence of the new effort was cooperation, Pitt said, in hopes that the accountants could approach the agency with questions, and without fears of recrimination.
“Practices that reflect venality and disservice to public investors, however, will not be tolerated,” he said.
But together, he said, the agency and the accounting profession could create an environment where information provided to investors could better reflect reality.
“We may need to reconsider whether our accounting principles provide a realistic picture,” he said. “When rules get in the way of providing clear, reliable information to investors, then it is time to change them.”
The crisis at Enron was not going unnoticed at the upper reaches of Andersen. In Los Angeles, Rich Corgel, a senior partner, contacted a trusted colleague, John Riley, urging him to get involved. There were more conference calls coming, Corgel said, and Riley should be on the line. More important, Houston seemed shaky. The firm wanted Riley there to get a handle on the situation. Riley agreed.
Just after three that afternoon, the directors of Enron gathered in the boardroom, some by conference call, for another emergency meeting. Glisan made a short presentation, saying that demand for the company’s bonds was soft but that Enron still had more liquidity than it needed.
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