He grabbed hold of the top page. “Another smoking gun,” he muttered. “We don’t need this.”
Stulb watched in shock as Duncan prepared to tear off the top sheets of the document. “Dave!” Stulb interjected. “I’m not sure if you’ve had any discussions, but you really need to keep all this information.”
Duncan looked back at him impassively.
“There’s a strong likelihood that we’ll be the subject of litigation,” Stulb said. “And the SEC, the Justice Department, and everybody else might be interested in this type of information.”
Duncan shrugged and put the document down. It was saved. But Andersen’s destruction of thousands of other Enron records continued unabated for another nine days.
The first package of information provided for Dynegy’s due diligence arrived from Enron that same day. Hugh Tarpley, Dynegy’s head of mergers and acquisitions, pored through the numbers, trying to calculate the potential financial performance of this would-be merger partner.
Tarpley found the answer deep in the package. Enron projected earnings per share of $1.80 for 2001. But the real delight was 2002—$2.25 a share. Impressive. But how? There was nothing explaining what Enron was planning to do to achieve such stellar results.
During a negotiating session later that day, Tarpley decided to ask. He looked across the table at Dave Delainey.
“Dave,” Tarpley said, “I’d really like to get a copy of Enron’s business plan for 2002.”
Couldn’t happen, Delainey said. “We don’t have a business plan available,” he said.
How then, Tarpley asked, did Enron get its 2002 projections if it didn’t know what it was planning to do?
Delainey shrugged. “We just increased the prior year’s results by 25 percent,” he said simply.
Since returning from Florida, Skilling had desperately been trying to devise a plan to save Enron. He had phoned business associates in Germany, seeking someone, anyone, to invest in the company. Cash would solve the problem.
But on November 1, Kevin Scott, an old friend from California, called Skilling to propose he shift his energies to a different project: saving his own skin.
“This could get bad, really bad,” Scott said. “You need to put your team together.”
“What are you talking about?” Skilling asked.
“You need the best lawyer you can get your hands on. You need an accountant. And you need a psychiatrist.”
Scott said he had a friend for Skilling to call, a lawyer at O’Melveny & Myers. Skilling took down the name.
———
“Are you sure?” Chuck Watson said.
Standing in front of him, Andrea Lang, the head of human resources at Dynegy, nodded as she stared at the piece of paper in her hand. “I don’t think Enron lied to us,” Lang said. “So I’m sure the numbers are right.”
Watson was almost breathless. Lang had been meeting with her counterpart at Enron, discussing personnel issues. In the process, she had learned what Enron was paying its employees. The numbers were unlike anything Watson could have imagined. Enron paid at least 25 percent more—sometimes as much as double—what Dynegy people received for the same jobs. Even Enron’s human-resources chief commanded a sharply higher salary.
Enron’s profligacy was starting to unnerve Watson. He was beginning to suspect what had really gone wrong at the company. Enron’s people had been contaminated by too much money.
Lang could see the humor in it. “Well, I’ll tell you, Chuck,” she said. “All I’d like is to get the same salary as my Enron counterpart. Nothing more.”
Watson chuckled. “Sorry, Andrea, but no,” he said. “That’s why they’re in trouble.”
Vince Kaminski was wandering the twenty-eighth floor when he noticed a rush of activity in one of the conference rooms. He stuck his head in and saw a group of executives—Mordaunt, Glisan, Faldyn, and others—enmeshed in some obviously troubling discussion. Something about Chewco.
He spoke a few words of greeting, but no one seemed eager to talk. So Kaminski headed down the hallway toward Rick Buy’s office. He was about to walk in when he noticed Buy in a small conference room.
Buy was alone, seeming agitated, pacing as he muttered to himself. Kaminski could hear the words clearly.
“I couldn’t have stopped the Raptors,” Buy said as he paced. “Yes, I could, I could have.”
He turned. “No, I couldn’t. I couldn’t have stopped them. Skilling wouldn’t have let me. I couldn’t.”
Kaminski lingered for a few more moments, watching the small human drama play out. Then he turned and walked away, leaving behind a man in obvious torment.
“I’ve got to explain something to you,” Causey said.
McMahon had just walked into Causey’s office and immediately saw the panic on his face. Causey went to the whiteboard and drew the increasingly familiar Chewco structure. He spoke for several minutes, communicating a single theme: he didn’t think the accounting worked.
“Rick, what I’m hearing you saying is that you don’t think it works because you presume Kopper has a direct interest in it,” McMahon said.
“That’s right,” Causey replied. “But we haven’t actually found the link.”
“So until you find the link, wouldn’t you presume it does work, since so many lawyers and accountants spent so much time on it on the front end?”
Causey shook his head. “I don’t believe it. We’re going to find the money trail back to Michael. I know it.”
That presented big problems, Causey said. “I don’t think we can file the financial statements,” he said.
McMahon looked back at him, stunned. “What do you mean we can’t file the financial statements?”
The quarterly records were due to be filed soon. Failing to do so would announce to the market that Enron’s finances were in shambles.
Causey pointed at the diagram on the whiteboard. “Well, this is wrong,” he said.
“Show me where the accounting for Chewco is wrong!” McMahon barked. “Show me that.”
“I don’t have it yet.”
McMahon threw up his hands. “So you’re willing to not issue financial statements because … of what, Rick? You don’t have a basis for this!”
“You’re right,” Causey replied. “But I don’t want to file and find out we’re wrong and have to restate.”
McMahon spit out his words in disgust. “Oh, this is just great. So now, on top of everything else, we can’t issue financial statements?”
McMahon tracked down Ken Lay. Causey was making a decision that could be the deathblow to Enron, he said.
“I think Rick’s chasing ghosts,” he said. “We’re talking about a deal that’s freaking four years old! He can’t say why the financial statements are wrong. But he’s not going to issue them!”
Lay considered that. “Well, we can just issue the financial statements anyway,” he said.
McMahon stared at him. Does he not understand how the company works? “We can’t issue them without the chief accounting officer signing off on them, Ken,” he said.
Then what to do? Wait a minute, Lay said. Wilmer, Cutler was in the building; they were the experts here. McMahon agreed to track them down and get their advice.
———
Within minutes, McMahon found Joe Brenner, a partner from Wilmer, Cutler, and briefed him on the latest crisis.
“Right now,” McMahon said, “it’s just totally going down the path of ‘I don’t know what Andy did. I don’t know what Michael did. I don’t know what anyone did. So I’m never going to issue financial statements again.’ He didn’t say that, but that’s the road we’re heading down.”
Brenner promised to speak with Causey. But without final proof, this was going to be a hard call.
The proof arrived that same week, on November 2, a Friday. It came in one of several cardboard boxes, forwarded by Wilmer, Cutler to David Duncan. McLucas and his partners had been rooting around for records and dug up a bunch
related to Chewco. Now they were sending copies to everyone they could think of, just to get their views.
Duncan handed the records over to be examined by two of his partners, Tom Bauer and Deb Cash. After more than an hour of work, Bauer reached into box number seven and pulled out a file. Inside was a two-page letter agreement, dated December 30, 1997. It was signed on behalf of the company by Jeremy Blachman, an Enron vice president. Kopper had signed for Chewco.
The document perplexed Bauer. It provided that a six-million-dollar distribution from JEDI would fund some sort of reserve account. He read it through again.
What reserve account? What in the world was this?
Over the next twenty-four hours, the Andersen accountants struggled to piece together the mystery of the two-page letter. It soon became apparent that this information, never disclosed to Andersen, changed everything about the accounting for Chewco.
This was the proof of a secret side agreement used to get the Chewco deal closed. The six million dollars had been placed in a reserve account to secure a portion of the money provided by Barclays Bank. Enron could argue all it wanted that Barclays’s cash was really equity and not a loan. It didn’t matter anymore. Chewco had been constructed with exactly three percent independent equity. With six million dollars secured, Barclays did not have that cash at risk. Even assuming Barclays’s money was equity, Chewco was short the three percent by at least six million dollars.
There could no longer be any question. The accounting failed. Chewco was not a valid special-purpose entity. It was Enron.
———
The Dynegy negotiations crept on through the afternoon of November 3, a Saturday, this time with a detailed discussion about LJM2. Dynegy needed to understand all of Enron’s deals with the fund and their implications.
Enron sent Glisan to handle the presentation. He distributed a small report, which included a one-paragraph description of each deal. Keith Fullenweider, Dynegy’s deputy general counsel, still had concerns.
“I need to ask, Ben,” Fullenweider said. “Does anyone else at Enron who’s involved in these negotiations have any interest in these partnerships?”
Glisan was silent. Then he changed the subject.
“Chewco is not a failed SPE,” Causey said confidently. “It’s valid.”
It was that same evening. Causey’s team had been working furiously as time inched toward the SEC’s deadline two days away for Enron to disclose more information about the partnerships. Ten people had been roped in for this meeting—seven from Enron, one from Vinson & Elkins, and two from Andersen—to make the final assessment on Chewco. After Duncan and Bauer arrived, Causey announced they had formally concluded Chewco was fine.
“What’s your view on Dodson as an equity holder?” Bauer asked.
“I’m not sure he can be counted as a related party,” Causey replied.
Kristina Mordaunt picked up the point. “Texas state law doesn’t legally recognize homosexual relationships.”
Unreal. Enron was hanging a huge accounting decision—impacting income statements and balance sheets going back years—on state antisodomy laws.
“I believe for accounting purposes, the assessment of whether Dodson is a related party has to rest on a lot more than just the legal status of their relationship,” Bauer said.
But there was a more important issue, he said. “How were you able to conclude that Chewco is valid, given the impact of the side letter?”
Causey stayed silent for a moment.
“What side letter?” he asked.
Bauer’s bombshell set off a frantic search in the conference room as everyone dug through the original files, looking for the letter. They found it among a pile of records on a side table. Causey read it, blanching.
“I’ve never seen this before,” he mumbled.
The lawyers had left earlier, and Causey called them back. None recognized it. He summoned Glisan to the meeting and thrust the letter toward him. As Glisan read the document, a look of terror gradually shadowed his face.
“I’ve never seen this before,” Glisan said. “Why would they do this? I’ve never seen this!”
Bauer watched him, disbelieving. Glisan placed the document down on the table and closed his eyes. “We’re toast!” he exclaimed.
At Skilling’s house that Sunday afternoon, the phone was ringing. He walked into the kitchen and answered.
“Hello,” a voice said. “This is Bruce Hiler from O’Melveny & Myers.” The O’Melveny partner Skilling had called days before had referred him to Hiler, a securities-law specialist. Skilling had called the lawyer on Friday and left a message for him. Now Skilling felt a little awkward.
“Hi,” he said. “My name is Jeff Skilling. I’m the former chief executive of Enron.”
“Yeah,” Hiler said. “I’ve been watching this.”
“So what do you think?” he asked.
Hiler pulled no punches. “I think this is going to be a real problem,” he said. He began to spell out the issues. Skilling was impressed; Hiler had clearly done his homework.
“Well,” Skilling said, “I think I need a lawyer. Would you be willing to take me on?”
Hiler didn’t hesitate. “Yes,” he said.
That same day, McLucas broke the news to Enron’s board.
“Chewco failed,” he said. “And unfortunately, that means that everything that touched Chewco has failed.”
There would have to be a restatement, he said, dating back to Chewco’s creation. JEDI was now solely owned by Enron. Its results had to be joined with the company’s.
The room was raw with frustration. “How do we manage the public communications on this?” Lay asked. “We need to be able to talk about this in a way that manages people’s fears and lets them know we can recover.”
That was not advisable, McLucas said. “It’s a bad idea to make any definitive statements about these structures until the special committee has finished its work.”
As the bruised directors shuffled out of the room, Mark Palmer, who had arrived minutes before, approached McLucas and his colleague Charles Davidow to introduce himself. McLucas began dishing out instructions.
“All right, Mark, you need to understand, you need to speak to me before you answer any questions from the media. And if you can’t reach me, you talk to Chuck.”
For any call? That made no sense to Palmer.
“I’m sorry, I don’t know how well that’s going to work,” Palmer said. “The situation is really fluid, and we’re on a twenty-four-hour news cycle.”
McLucas’s face was stern. He cupped a hand and held it up in the air, aiming it at Palmer.
“All right, Mark, I want you to imagine the spotlight,” McLucas said. “You’re in a small room with an SEC examiner across from you, and the light is shining down on you. And he says, ‘Mr. Palmer, when you made this statement, did you know it was true? How did you know it was true?’ What are you going to say then, Mark?”
Palmer’s eyes went wide.
“Mark,” McLucas said, “you could be liable if you misled investors. Not Enron. You, Mark Palmer.”
Oh, my God. It all came crashing down. Palmer didn’t know the truth. He didn’t know who was lying. Everybody was running for lawyers, as Whalley said. Yet they expected him to stick his neck out by peddling their stories. Maybe he needed to worry about his own exposure.
He took a deep breath. “Thank you,” he said.
About that time, emotions were running high in an Enron conference room, where the accounting and financial teams were finishing their final analysis of the Chewco disaster.
McMahon still didn’t fully understand what had happened, and asked Glisan to explain it. For several minutes, Glisan filled him in on the side deal, the reserve accounts, and the effects these had on the accounting.
He spoke with mounting anger. “I was responsible for the accounting! But nobody told me this document existed! If I had known, I never would have signed off on it.”
The room greeted the outburst of righteous indignation with silence. Causey crossed his arms; McMahon screwed up his face in disgust. Both men thought Glisan was lying.
Monday, November 5. The deadline for filing the information demanded by the SEC. But too much had happened. The Chewco failure had thrown everything into disarray. Enron pleaded for time. The SEC gave three days. No more.
———
An entirely new accounting team, this time from Deloitte & Touche, swarmed over Enron’s financial records. This time the accountants weren’t working for the company; instead, they had been retained by Wilmer, Cutler on behalf of the special committee.
By that morning, the Deloitte accountants were digging into multiple issues, including this odd Southampton transaction, which they learned about from Kristina Mordaunt. Since her interview, Mordaunt had provided a road map for the investigators to follow and handed over all of her records. Other details turned up in Enron’s own files.
An accountant was reviewing a document when something jumped off the page. He consulted his colleagues, then the Wilmer, Cutler lawyers. They all were agreed. The special committee needed to be notified immediately.
“A million-dollar return on a five-thousand-dollar investment?” Bill Powers asked.
Yes, the Deloitte accountant said.
“Well,” Powers replied, “that’s not normal.”
Deloitte & Touche had figured out everything. The huge return on Southampton. The millions of dollars that flowed to Fastow and Kopper. The millions more that went to Glisan and Mordaunt, two executives still with the company who were supposedly helping guide it through this crisis.
Andersen had discovered other discrepancies. Swap Sub, the LJM1 entity that was used to hedge Rhythms and was purchased by Southampton, never had enough capital. It couldn’t be treated as independent of the company. Enron had been hedging Rhythms with itself, and it had paid Southampton to purchase what it already owned.
“We need to arrange a full board meeting,” Powers said. “The directors have to be told about this.”
Glisan was at his desk later that day when David Oxley, an executive from human resources, approached.
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