Conspiracy of Fools

by Kurt Eichenwald

  “Ben, I’m sorry, but you need to go home,” Oxley said.

  Glisan had heard about the committee’s discovery. Still, he looked bewildered. “Am I fired?” he asked.

  Oxley nodded. “Probably.”

  McMahon had just heard about Southampton and Ben Glisan. That son of a bitch lied to me. He was part of it!

  “Sue!” McMahon called to his secretary. “Get me Ben Glisan on the phone! He’s at home!”

  It would take hours to track Glisan down.

  That evening, McMahon finally reached Glisan.

  “Ben,” he said, “I specifically sat you down before I gave you this important job. I asked you if you had any involvement in these things, and you told me no.”

  But wait, Glisan argued. Southampton wasn’t LJM. It was a one-off deal, a closed-end entity that completed a single transaction involving LJM more than a year earlier.

  McMahon steamed. “Ben, I have no idea what the hell you’re talking about. The one word I heard in that was LJM. And that’s enough. You told me no problem. And now you’re coming back to me and telling me LJM.”

  “Yeah, but through a closed-end entity …”

  “It doesn’t matter, Ben!” McMahon shouted. “Do you realize the jeopardy you have put this entire merger into? You lied! Did you intend to do that?”

  “That was never my intent,” Glisan replied.

  McMahon paused. “Well, I think you need to consider yourself terminated from this company,” he said.

  Mordaunt was thrown out with equal speed. It didn’t matter that she had come forward, she was told. She never should have invested in the deal. Her Enron career was over.

  Dynegy had to be informed. Its managers were days from presenting a merger deal to their board. Now Enron knew that Glisan, who had provided Dynegy with much of the the information it needed for its multibillion-dollar deal, was a liar. Maybe even a crook.

  Derrick, along with Pug Winokur and an outside lawyer, phoned Dynegy’s deputy general counsel, Keith Fullenweider.

  “We have some new information,” Derrick began.

  McMahon handled the job of breaking the news to Dynegy’s financial team. He went over to the offices of the law firm Baker Botts, which was advising Dynegy. Rob Doty, Dynegy’s CFO, was there crunching some more numbers.

  “I’ve got to tell you guys something,” McMahon said. “We found some other employees who received payments related to LJM. And one of them was Ben Glisan.”

  Doty brought a hand to his head and sighed. “Every time I talk to one of you guys, you tell me another new revelation. What else are we going to find out?”

  “Look,” McMahon said, “as near as we can tell, everything he’s told you so far has been right, but you needed to know this. It’s probably going to be disclosed shortly, and he’s not with the company anymore.”

  Enron had a new treasurer, McMahon said. Ray Bowen would take over Glisan’s job. Doty shook his head silently.

  “I don’t know how you guys put up with this,” he said.

  That same day, a handful of Dynegy directors met with a few of their counterparts from Enron. The time had come to convey an uncomfortable message: Ken Lay had to go.

  Otis Winters, a Dynegy director, tried to be polite, saying that Dynegy appreciated everything Lay had accomplished but that the company needed new leadership.

  “It’s our position that the Enron board should ask Ken to step down,” Winters said.

  John Duncan, one of five directors at the meeting, was almost indignant. That wouldn’t work, he said. Lay had to be a director and the interim chief executive. His expertise in public relations and government issues would be crucial to the success of the merger.

  “You need Ken,” Duncan said. “He built this company. You don’t understand his importance.”

  The Dynegy directors were thunderstruck. They had made it clear that Ken Lay could pull this deal apart, and the Enron directors wouldn’t budge. Winters tried again.

  “Of course,” Winters replied, “it’s Enron’s call, but Dynegy feels very strongly about this.”

  What the hell is all this?

  Chuck Watson was studying a draft of Enron’s 8-K filing that the SEC had demanded. No one had given him a warning; Enron had just shipped over a copy, revealing the details it had learned of the partnership debacle.

  Watson could only shake his head. A restatement of five years of earnings. The Southampton scandal. The revelation that the $1.2 billion equity adjustment was the result of an accounting error, not the closing of the Raptors, as Enron had said. And another error on Swap Sub.

  Watson contacted Lay. “Ken, you told me when we first met there was nothing else. You gave me your personal assurances! So why are there all these new revelations?”

  Lay’s voice was calm. “Chuck,” he said, “I’m as surprised as you are.”

  The merger was still going forward, with the final negotiations about price. This was an all-stock deal, Dynegy shares for Enron shares. The issue, of course, was the ratio. Lay and Watson hammered out an agreement based on the relative prices of Enron and Dynegy shares. Bergstrom and Whalley took it from there. It was pretty basic arithmetic.

  Then some investors apparently got wind of the deal. Enron’s share price shot up, rising from about seven dollars to the nine-dollar range. Enron was suddenly more valuable than just hours before.

  That evening, in separate meetings, the boards of Enron and Dynegy were scheduled to conduct their final reviews of the agreement. It had plenty of moving parts, calling for Dynegy to inject $1.5 billion in new cash into Enron immediately and another billion at closing.

  An hour before the Dynegy board meeting, a new document arrived from Enron. It was Ken Lay’s employment agreement. Andrea Lang, the head of human resources at Dynegy, gave it a quick review.

  She almost gasped.

  Sixty-one million dollars. If the merger went through, Lay would be entitled to a sixty-one-million-dollar severance. Lang took the information to Watson, who presented it to the board. The Dynegy directors debated Lay’s employment agreement for some time. But it was a legal document. There was pretty much no way around it. They voted to approve the deal.

  Past 8:30 that evening, Lay glanced around the Enron boardroom. The demoralized directors had been meeting for more than an hour. It was time. There was no choice.

  “All right, then,” Lay said. “I’m calling for a motion to approve the proposed merger transaction.”

  John Duncan made the motion. It was approved unanimously. The deal was all but sealed. Or so it appeared.

  That night, Ray Bowen signed the documents, writing his name hundreds of times. He was at Baker Botts, surrounded by lawyers and financiers for both companies.

  Past midnight, almost there. Clusters of tired executives and lawyers stood around, ironing out minor details. Everyone was giddy from exhaustion; there were laughs and jokes. They had done it. They had saved Enron.

  Jeff Donahue, an Enron managing director in corporate development, spied Dynegy’s draft release about the deal on a table. He leaned over to read it, chuckling. He picked up the release and waved it in the air, thrusting his chin toward Keith Fullenweider, Dynegy’s deputy general counsel.

  “Hey, Keith!” Donahue called out. “You’ve got a typo in your press release.”

  Fullenweider stood, showing little concern. “Let me see,” he said, irritation in his voice.

  He walked over and took the release. He read it over. What’s he talking about? “Jeff, there’s no typo.”

  Donahue smiled. “You missed it!” he said, pointing at a section of the release. “It’s right there. Look at the price it says your board approved.”

  Fullenweider read the words: Enron shareholders will receive 0.2685 Dynegy shares per share of Enron common stock. He shrugged. “So?” he said. “That’s no typo. That’s the price our board approved.”

  Donahue’s face fell. “Well,” he said, “that’s not the price our board approved.
”

  An uproar engulfed the conference room.

  The Dynegy and Enron boards had voted on different merger agreements and didn’t know it. Dynegy had approved an exchange rate of 0.2685 shares for Enron stock, while Enron had approved a higher ratio of 0.2885, based on the sudden pop that afternoon in the stock price. That translated into a difference of about $400 million.

  Fullenweider grabbed the release and tore through Baker Botts, looking for McMahon and Mark Muller, Enron’s chief deal maker. He found them in another conference room.

  “Your chairman fucked up!” Fullenweider snapped. “You guys can’t even get the goddamn merger price right! What the hell is the matter with you?”

  Muller was stunned. “What are you talking about?”

  “The exchange ratio! It’s .2685!”

  “No, it’s not,” Muller said. “It’s .2885.”

  “No, it’s not, you idiot!” Fullenweider shouted.

  “I’ve got the board minutes right here!” Muller shouted. “That’s what they approved!”

  Fullenweider threw up his hands. “Yeah! I know! That’s the problem!”

  He shook his head in disgust. “They approved the wrong goddamn deal!” he shouted.

  The two sides, battling fatigue, retreated to separate rooms to ponder the latest disaster. Muller was on the phone, tracking down Whalley. Bowen meandered in, watching lawyers and executives scurry about. A second later, William Joor, a Vinson & Elkins partner, began tapping his head against the wall while simultaneously kicking it.

  “Oh, my God,” Joor muttered. “I can’t believe this.”

  Joor turned around, rubbing his head. “How are we going to explain this in the proxy?” he asked the group. “We look like the biggest bunch of idiots on the planet!”

  Bowen sat beside Rob Walls, a senior lawyer with Enron. “You know,” he said to Walls, “this is really shitty.”

  He chuckled. “But, you’ve got to admit, it’s just too funny to be true.”

  Past three in the morning. The Dynegy team had walked out in disgust, leaving the Enron executives to clean up the mess.

  Muller motioned toward McMahon. “You’re the CFO,” he said. “You need to call Ken.”

  “Oh no,” McMahon shot back. “This isn’t my deal. You’re supposed to get the darn numbers right, Muller. You call Lay at three in the morning and wake his ass up.”

  Muller thought about it. “Yeah, all right.”

  The Lays were asleep when the phone rang. Linda rolled over in bed and picked up the receiver. “Hello?” she mumbled.

  The Enron team listened in.

  “This is Mark Muller from Enron. I need to speak to Ken Lay. I’m sorry I woke you up.”

  A pause. “Can I tell him what it’s about?”

  “Yeah,” Muller said. “You can tell him our merger’s all screwed up because of him.”

  Linda turned over and passed the phone to her husband.

  “Ken, this is Mark,” Muller said. “We’ve got a major problem here with the numbers.”

  Muller spelled out what he knew.

  “Okay,” Lay said. “Well, you know, the number Dynegy has is not the one Chuck and I discussed. He got it wrong. Let me call Chuck, and I’ll take care of it.”

  Minutes later, Watson was on the line from his home. “Ken,” he said, “that ain’t the deal.”

  Somehow, there had been some horrible miscommunication, Watson said. Enron was using the closing price, Dynegy the price from when the deal was struck. But the deal had already been sent for final approval to the board of Chevron, Dynegy’s largest investor. It couldn’t be revised now.

  Lay was silent for a moment. “Well, then I’ve got to call my board,” he said.

  “Okay,” Watson replied. “Then call your board.”

  Lay called back his team. “Chuck isn’t going to budge,” he said simply. “He’s not going to negotiate.”

  The room was silent.

  “I’ll call a board meeting,” Lay said, sounding defeated. “We have to get this fixed.”

  CHAPTER 22

  UPSTAIRS IN HER HOUSE, Rebecca Carter stepped into a game room, passing her teenage son’s collection of sports trophies that filled a built-in cabinet. She pulled out a chair and sat down at his computer. Within moments, she was on the Internet, typing in the Web address for the SEC.

  It was early on the morning of November 8, and Carter was hoping to learn the latest on Enron. She pulled up the list of filings, and noticed something new had been added that morning, an 8-K. She moved the computer mouse and clicked it open.

  Carter’s eyes widened. A restatement—going back five years? Chewco? Accounting errors?

  I can’t believe what I’m reading here. The nineteenth page was the biggest shock of all. There, Carter read about Southampton and the investments made by Enron executives.

  Kristina Mordaunt? Kristina was a friend of hers! She’d invested in some Fastow entity—and now was getting fired? And Ben Glisan! He was a Boy Scout. What is going on?

  Carter jumped up and ran downstairs. That morning, she knew, Skilling was in Washington, meeting with Bruce Hiler, his new lawyer. Somebody had to tell them about all of this. She searched frantically for Skilling’s itinerary. After locating it, she grabbed the phone and dialed Hiler’s office. A secretary answered.

  “I need to speak with Jeff Skilling,” Carter said.

  “I’m sorry, he’s in a meeting with Mr. Hiler.”

  Carter didn’t hesitate. “Interrupt them,” she said.

  Skilling was deep in conversation with Hiler when he heard Carter was on the line. Annoyed, he wandered over to a phone and picked up.

  “Why are you calling me out of a meeting?” he asked.

  “Enron’s restating the financials! And there’s more …”

  “Restating the financials?” Skilling interrupted.

  The words caught Hiler’s attention. “Put this on speaker,” he said.

  Minutes later, Carter’s voice filled the office as she read portions of the 8-K. She mentioned that the financial restatements went back five years.

  Hiler was bothered but not surprised. “This is going to be a problem,” he said.

  Skilling shrugged. Okay, new accountants have a different opinion from other accountants. So what?

  “But then this is the worst part,” Carter said.

  She read the statement about a deal that had involved numerous Enron executives as investors, including Fastow and Kopper. Then she read the names of the investors. “Ben Glisan, Managing Director and Treasurer of Enron Corp.; Kristina Mordaunt, Managing Director and General Counsel of an Enron division …”

  Skilling staggered into a chair. “You’ve got to be kidding!” he exclaimed. “You’ve got to be kidding!”

  His mouth was open. He didn’t know what to think.

  “Kristina? Ben?” Skilling asked.

  “Yeah, that’s what it says.”

  For a moment, he couldn’t speak. For days, he had been reading the papers, thinking that he had known everything that had happened at Enron. But not this. Not this.

  Oh, shit.

  Early that same morning, Ray Bowen was getting ready to head back to work, but was already feeling exhausted. With the high-wire act the night before, he had only been able to grab a few hours of sleep.

  But today, the final hurdles waited. The proposed merger had been presented to the credit-rating agencies to make sure that they would let Enron keep its investment-grade rating; without it, Enron’s trading business would dry up. Then Dynegy’s largest shareholder, Chevron, had to give its blessing for the deal. After that, smooth sailing.

  Bowen glanced at the clock. By now, McMahon must have heard something from the credit-rating agencies. The suspense was too much to bear. Bowen picked up the phone and dialed McMahon’s number. It rang and rang. Not a good sign.

  Finally, a click. “Yeah?” It was McMahon.

  “Hey, Jeff, it’s Ray. Is everything okay? Did we get the ri
ght answer from the credit-rating agencies?”

  McMahon’s tone was desperate.

  “No, Ray,” he said. “They’re fucking us.”

  ———

  An hour later, McMahon and Bowen were in Whalley’s office, struggling to come up with some strategy to please the credit agencies. The big problem was Moody’s Investors Service, which believed the deal offered Dynegy too many outs from the merger before it closed. In particular, Moody’s was concerned about the material adverse change, or MAC, clause, which allowed Dynegy to bolt if there was any dramatic deterioration in Enron’s prospects.

  The three executives got on conference calls with Moody’s, then with Jimmy Lee at Chase. They debated the possibilities; Dynegy was soon brought in. Without changes, this deal was dead. Backed into a corner, Watson agreed to toughen up the provisions allowing Dynegy to scotch the deal, and to make a few other revisions to satisfy Moody’s.

  The executives at Enron couldn’t have been more pleased. Now it would take some sort of financial tsunami for Dynegy to get out of this merger.

  Enron had to pay its bills that day. But if Moody’s didn’t give the nod, the merger, its last chance for survival, would slip away. It would go bankrupt, and then deeply regret having wired out all of its cash.

  Bowen came in to see McMahon and Whalley, pressing them to make the call: pay the bills or not?

  “Okay, here’s the problem,” Bowen said. “I’ve got like $400 million in cash on hand. If Moody’s shoots us down and we’re on the path to bankruptcy, that’s money that I would rather have here. But we’ve got a lot of bills due today that would eat up most of that cash”

  Whalley ran a hand through his hair, exhaling. “What happens if we don’t pay our bills?”

  There could be problems, Bowen said. A lot of the bills were related to settlements of energy trades. That money normally would already have been shipped out. Trading partners were probably wondering where it was, getting itchy about extending Enron any more credit. If Enron stiffed them, it could easily be shut out of the markets.

  The three men thought in silence for a moment.

  Whalley decided. “Ah, the hell with it, let’s wait,” he said. “Don’t pay them.”