Conspiracy of Fools

by Kurt Eichenwald

  Lay recognized Causey. In the middle of all these troubles, the company had to deal with another issue: the rules had changed for the accounting of certain intangible assets. The arcane revision meant Enron would have to report a noncash reduction in earnings of $200 million in the first quarter of 2002. But it wasn’t as bad as it could have been, Causey said. The intangible assets acquired in the purchase of Wessex Water by Azurix so many years before did not have to be written down. Causey left the meeting, and Lay turned to the most serious issue.

  “I would like to open up a discussion, to see if any members of the board have a recollection of obtaining any information about the financial returns earned by Andy Fastow through the LJM structures,” he said.

  It was a roundabout question. In its simplest terms, Lay was asking: anyone ever find out how much cash Fastow was pulling out of these things? No one had.

  The time had come for the answer, the directors agreed. Two directors, John Duncan and Mickey LeMaistre, were appointed to call Fastow and simply ask him.

  The cream of Houston society gathered that night at the annual fund-raiser for the Holocaust Museum. A number of public figures mingled in the crowd, but in particular the dinner was honoring Salomon Smith Barney, which, when pressed by Fastow, had made a six-figure contribution. Fastow even kicked in some money of his own.

  As dinner proceeded, Ken Lay was asked to say a few words. He stood before the crowd. “Obviously, we’re delighted that Smith Barney stepped up and made the contribution they made,” he said.

  He turned and saw Fastow watching him. “But the person who really made this happen is Andy Fastow,” he said. “So I think we ought to recognize Andy’s contribution and see if he’d like to make a few comments.”

  The crowd applauded, and Fastow stood. He thanked Lay and joined in on congratulating Smith Barney. “We hope they’ll keep making these kinds of contributions,” he said. “Certainly, we’ll keep encouraging them to do it.”

  There was some polite laughter. Fastow glanced toward Lay. “I would be remiss if I didn’t acknowledge Ken and Linda Lay. Ken and Linda have become role models for Lea and me. Certainly, they are role models for the community. But they’re also our personal role models.”

  The Lays had given so much to the community, Fastow said, creating so many reasons to admire them. “Lea’s and my hope is that we can do just a small percentage of what they have done for our community. It’s through their inspiration that we’ve set up our own family foundation.”

  The Fastow Family Foundation. The entity stuffed with all the stolen money from the Southampton scam.

  “We’re trying to get that foundation more fully funded,” Fastow said. “We want to be very active in the community, give something back, just as the Lays have. We want to follow in the footsteps of our role models.”

  He gestured toward Lay. “So, Ken and Linda, thank you for the example you have set for us, and for Houston.”

  The crowd applauded. Lay felt slightly uncomfortable; he had never been quite so publicly slobbered on.

  The e-mail that went out to Enron’s thousands of employees that night at ten seemed like standard fare, a brief explanation about a change in company benefits.

  “October 26 is fast approaching!” the e-mail began.

  As everyone had already been told, the corporate savings plan was about to switch administrators, the e-mail said. So employees had just four days left to make changes in their retirement plans. The lockdown would stay in place, it said, until November 20. Whatever everyone held as of Friday would be what they owned for the month—including employees who invested almost exclusively in Enron stock.

  The e-mail ended on a chipper note. “Enron benefits,” it read. “Keeping pace with your lifestyle.”

  As he drove to the office the next morning before eight, David Duncan called his secretary, Shannon Adlong, from his cell phone. Enron was about to announce the SEC’s informal inquiry and had scheduled an analysts’ call. Duncan asked Adlong to pull up the Enron Webcast on his computer so it would be ready when he arrived.

  Minutes later, he was in the office. He summoned other accountants on the team—Deb Cash, Tom Bauer, Kimberly Scardino, among others—to join him and closed the door.

  Shouts were echoing down the fiftieth-floor hallways of the Enron building. Fastow was yelling at Ron Astin, the Vinson & Elkins partner who had worked with him for years.

  “I never wanted to do LJM!” Fastow screamed. “The board directed me to! It was Enron’s idea, not mine!”

  “Andy!” Astin shouted back. “We can’t say that!”

  Fastow argued, but Astin stood firm. “Andy, I don’t represent you!” the lawyer shouted. “I represent Enron!”

  For a second, Fastow glared at Astin. Then he turned on his heel and stormed away, toward a conference room off Lay’s office where the analysts’ call was about to occur.

  ———

  At home in Houston, Jeff Skilling was dialing into the Enron conference call. He had been witnessing the unfolding chaos from afar and feared Lay might not be up to the challenge. He could only hope that he was wrong.

  “This is Ken Lay. Thanks for joining us today.”

  The small conference room where Lay was sitting was packed. To one side sat Fastow, his jaw locked in anger. Causey and Glisan hovered nearby. Across the room, Astin was in a chair, staring at a briefcase on his lap. Palmer leaned on a wall near a tiny refrigerator, drinking a soda.

  Like almost everyone in the room, Whalley looked uncomfortable. He didn’t want to be here. They couldn’t say what the SEC was doing, which was the main thing that the world wanted to know. This could only go badly. But Lay had insisted he attend. After all, he was president. Lay introduced the participants, then began his presentation.

  That’s my cue, Whalley thought. Lay could hardly stop the call to inform the analysts that his number two was walking out. Whalley stood and, without a word, left the room.

  Enron was disappointed in its stock price, Lay said, particularly with its business going so well. But he and his messengers were prepared to speak with investors as often as they needed.

  “There has been a lot of recent attention to the transactions Enron previously entered into with LJM. Let me reiterate a couple of things. We clearly heard investor concerns earlier this year, and Andy Fastow, Enron’s chief financial officer, ceased all affiliations with LJM”

  Lay went through all the issues: the SEC investigation; an explanation for the failure to disclose the $1.2 billion equity reduction in the press release; the reasons for the reduction—ones that said nothing about the accounting error. Then he turned the call over to Fastow, who put the company’s liquidity position at $1.5 billion.

  Lay took the floor again. “And with those brief comments,” he said, “we would welcome your questions.”

  David Duncan rested his chin in his hand as he listened. Everyone in his office was silent. So far, things seemed to be going pretty well. No major problems.

  Their tone was aggressive. But for the first few minutes at least, the questioners threw mostly softballs. Then Curt Launer, an analyst from Credit Suisse First Boston, was recognized. What, he asked, would the 2000 earnings have been without the partnership transactions?

  Lay glanced at Fastow, who didn’t move a muscle. Nothing. Lay motioned to Causey. “Rick Causey, chief accounting officer,” he said.

  Causey told Launer that he should just review the footnotes from the past to figure out the earnings—the same ones that no one had ever been able to decipher. As Causey spoke, Lay shot a cold look at Fastow.

  Minutes later, the operator announced a new questioner.

  “We’ll next hear from Richard Grubman with Highfield Capital,” she said. A collective pall fell over the room.

  Grubman. The short seller. The one Skilling had called an asshole months before. This was going to be tough.

  Grubman sketched out some numbers he had calculated about the financing of Azurix. By h
is reckoning, he said, Enron may have to provide one billion dollars to support the structure. Had it taken reserves against that liability?

  Causey fielded the question, arguing that Azurix had more than sufficient assets to handle its obligations. Grubman fired back, declaring that the value wasn’t there.

  “Richard, let me intercede here for a minute,” Lay interrupted. Wessex was the remaining asset of Azurix, he said. Outside auditors had reviewed the company and concluded there was no need for a write-down of its value.

  “I know you want to drive the stock price down,” Lay said, “and you’ve done a good job of doing that, but I think that’s that. Let’s move on to the next question.”

  Skilling allowed himself a moment of quiet satisfaction. This was the guy who had provoked his blowup. And Lay wasn’t doing much better with him.

  Good, he thought. You’re losing your temper, too.

  “That’s pointless!” Grubman shot back.

  Lay scowled. “Let’s go to the next question, Richard. You’re monopolizing the conference. We’ve got a lot of people out there with real, serious questions.”

  Standing by the refrigerator, Palmer winced. That just sounds defensive. This was the wrong approach.

  “I would appreciate an answer,” Grubman said.

  “I think,” Lay replied, “in fact, we’ve answered the question, but you won’t accept our answer. Let’s move on.”

  ———

  Duncan’s anxiety grew. Things were falling apart. He could see on his computer screen that Enron’s stock price, which had been climbing in the first few minutes of the call, was starting to reverse course.

  The pummeling kept coming. There were questions on the partnerships and LJM. Rather than tackle them head-on, Lay stayed defensive, talking about the controls. Finally, David Fleischer from Goldman Sachs came on the line.

  “The company’s credibility is being severely questioned, and there is really a need for much more disclosure,” he said. “There is an appearance that you’re hiding something or that you just don’t want to …”

  He hesitated. “That maybe there’s something beneath the surface going on that is less than—that may be questionable.”

  Enron could no longer give vague answers, like directing analysts back to the footnotes. There needed to be more information, Fleischer said.

  “David, I appreciate that,” Lay responded. “Certainly, as I also said earlier, there are limitations with what we can or should talk about with LJM in particular or related-party transactions in general because of both lawsuits, potential lawsuits as well as the SEC inquiry.”

  No! God, no!

  Skilling wanted to reach through the phone and shake Lay. He sets up an analysts’ call, and then says he can’t talk about the most pressing issue!

  Skilling couldn’t listen anymore. He walked away from the call, pacing the floor of his kitchen. This couldn’t continue. Somebody had to take charge. Lay wasn’t up to it.

  He had to go back. Enron needed him.

  Skilling dropped onto a white couch in the breakfast area near his kitchen and reached for the phone, dialing Lay’s office. He told Lay’s secretary to have him call as soon as he could.

  “We’re trying to provide information,” Lay continued. “We’re not trying to conceal anything. We’re not hiding anything.”

  Duncan shifted in his seat. This was bad. This plan to settle the market with a conference call had turned into a disaster.

  And there was nothing he could do to stop it.

  The call continued for another few minutes. As Lay wrapped it up, he promised that the company would keep in contact, and set up another conference call for sometime in the near future.

  “So again, thanks for participating in this call,” he said. “And thanks for the questions.”

  Mark Koenig pushed the button on the speakerphone, disconnecting the line. Most of the people in the room stood up. Lay, still in his seat, looked at them.

  “How did that go?” he asked.

  There was silence. They all knew the truth. “Well,” Causey said finally, “I don’t think we hurt ourselves.”

  Not another word was said. Everyone left the room.

  A disaster. A total, complete disaster.

  Duncan shut down the Webcast. His colleagues agreed. Enron had fumbled the ball spectacularly. Duncan huddled with his partners. Eleven days before, he had seen an e-mail from Nancy Temple telling the team to get in compliance with the document policy and shred what was no longer needed. This seemed like a good time to reiterate her instructions.

  “We should all work now on getting in compliance with the policy,” Duncan told his colleagues. “And I would like each of you to go out and communicate the need to get in compliance with the engagement personnel you work with.”

  Perhaps, one partner suggested, Duncan should gather the troops and let them know. He agreed, and told his secretary to arrange a full meeting at 1:30 in conference room 37C1. That would get the files in order fast.

  The phone rang in Skilling’s house. It was Lay, just off the analysts’ call. The two wasted no time on small talk.

  “Ken, you’ve got to bring me back!” Skilling implored.

  “What?” Lay couldn’t believe what he was hearing.

  “You’ve got to bring me back,” Skilling repeated. “For the outside world, I think I have some credibility, and they’re not going to believe someone would jump into the frying pan if they thought there was anything wrong.”

  It would send a good signal to the marketplace, Skilling continued, and from there, they could go to New York, make the rounds with the banks, and calm everybody down.

  “Ken, it’s a chance,” Skilling said.

  Lay pondered that. “Hmm, that’s interesting,” he replied. “Let me think about it.”

  ———

  Later that morning, Lay and his management team crossed Smith Street, headed back to the Hyatt hotel ballroom, site of his celebratory return nine weeks before. This time there were no ovations, no cheering. Just a collection of angry, confused, and bitter employees.

  Lay greeted everyone. A chorus of good mornings came back to him. “There it is,” he replied. “We’ve got a packed house again, and we appreciate that.”

  In an even tone, Lay commented that in any other circumstance, he would probably have a few words to say about September 11 and the heroes from that terrible day.

  “But of course, today we’re going to talk about Enron,” he said, “because just like America is under attack by terrorism, I think we’re under attack.”

  He turned the floor over to Greg Whalley, who gave a lengthy description of the performance of the company’s business units. All the numbers sounded great.

  Back to Lay. “As you can see, the underlying fundamentals of our business are very strong, indeed the strongest they have ever been,” he said. “But, regrettably, that is not what Wall Street is focusing on.”

  The challenges they faced, Lay said, needed to be seen in context. It wasn’t as though Enron was a stranger to tough times. There was the oil-trading scandal in the 1980s that almost brought the company down, he said. There was the J-Block contract, which could have cost billions. “In each and every case, the company has come back,” he said. “And it has come back stronger than it was before.”

  He knew, Lay said, that the stock-price drop was causing pain for employees, raising concerns about paying for children’s educations and meeting mortgage payments.

  “For that I am incredibly sorry,” Lay said. “But we’re going to get it back.”

  Of course, Lay acknowledged, everyone wanted to know about LJM. While the board recognized that Fastow’s role placed him in a conflict, the company had instituted more than enough controls to ensure that shareholders were protected.

  “I have reconfirmed over the past few days,” Lay said, “that these controls and procedures have been adhered to.”

  And despite everything the employees may have re
ad, Lay said, there was no reason for anyone to have concern about Fastow’s involvement in the LJM funds. “I and the board are also sure that Andy has operated in the most ethical and appropriate manner possible,” Lay said.

  Now, Lay said, all Enron employees were facing a test.

  “Will we measure up to the challenge, or will we not?” he asked. “True character is born in times of crisis. We need to show our character as an organization.”

  He looked straight at the audience. “I will say this also,” he said. “I am here until the board throws me out, or until we restore Enron to its greatness.” The crowd applauded.

  The employees had been invited to ask questions anonymously on note cards. Most of the queries had to do with Enron’s business prospects. Different members of the management team stepped forward to reply to the questions that fell within their area of expertise.

  Lay glanced at a card and read it to himself. Then he took his turn at the microphone. “A lot of these I think I’m going to have to handle,” he said. “Like this one.”

  He held the card up in front of his face.

  “I would like to know if you are on crack,” he read.

  The crowd laughed. Lay looked up. “I’ll come back to the answer,” he said. More laughs.

  “If so,” he continued, “that would explain a lot. If not, you may want to start because it’s going to be a long time before we trust you again.” The crowd laughed again.

  “I think that’s not a very happy employee,” Lay said. “I’m sure a lot of you have some hatred.”

  He paused. “No, I’m not on crack,” he announced.

  Harvey Pitt was angry.

  That morning, The Washington Post had reported on his Miami speech. But it played up his regrets about the SEC’s reputation for not being a kinder, gentler place for accountants. The article made it seem as though he were kowtowing to the accounting industry.

  But those remarks had been about process, not regulatory zeal, Pitt fumed. He had specifically said the agency was going to be aggressive in combating malfeasance! Pitt was speaking about another matter with Steve Cutler, his director of enforcement, and mentioned the Post article.