Naturally, such fast-paced growth put enormous demands on Enron’s financing abilities. Put simply, Lay said, the balance sheet wasn’t large enough to handle the expansion.
“So we had a choice,” he said. “We could either significantly decrease the growth rate or continue to grow rapidly through utilizing off-balance-sheet transactions.”
He glanced around the room. “We opted to continue focusing on rapid growth,” he said.
The consequences of that decision were now on the examining table. They began with Chewco; Lay said he had joined the board meeting where Chewco was discussed after the presentation had ended. He didn’t know Michael Kopper, he said; in fact, he first learned of Kopper’s name that fall, when he read it in The Wall Street Journal.
Then LJM1. He had never asked Fastow about his compensation, Lay explained. The worries his CFO had aired about the possibility of his partnership work damaging his Enron career left Lay with no doubt that the compensation from the fund was minimal. Same with LJM2. Why, again and again, Fastow had expressed reservations about his participation, stressing that he was taking part only to benefit Enron.
They ran through a series of transactions and discussed the deals where LJM2 purchased an Enron asset, only to sell it back months later at a profit.
“I was unaware that was happening,” Lay said. “What were the reasons for buying them back?”
———
The discussion about the Raptors was the ugliest. The structure of the deals was laid out for Lay in excruciating detail. He had never known that the sole capital available to one Raptor was shares in the New Power Company, which were being used to hedge Enron’s investment in New Power.
Lay shook his head. “I don’t understand the logic of that structure,” he said.
They discussed a presentation that Causey had made to the board about the Raptors in early 2001. Lay didn’t remember hearing anything about there being any problems.
Chuck Davidow spoke up. “At the time of that presentation,” he said, “two of the Raptor structures owed Enron $175 million and didn’t have the capacity to pay.”
Lay was silent for a moment. “That was a significant omission,” he said. “I trusted Causey to bring something like that to the board.”
In a recent annual filing known as a 10-K, Davidow said, Enron stated that it recognized $500 million of revenue from dealing with related parties.
“That disclosure refers to the Raptors,” he said.
Lay shook his head. “I don’t remember hearing anything about the revenues we were recognizing from the Raptors.”
Davidow looked at him evenly. “But did anyone question how Enron could recognize $500 million from Raptor when the value of the investment was going down?”
A pause. “The disclosures in our filings were signed off on by Arthur Andersen and Vinson & Elkins,” Lay said. “So I was confident in the 10-K.”
The interview lasted several more hours. By the end, Lay had started to show fatigue, both physical and emotional. Bill Powers had one more question.
“Ken,” he said, “do you still think the Raptors were real economic hedges?”
This time Lay understood exactly what Powers meant. “No,” he replied in a firm voice. “Of course not.”
It was Vince Kaminski who first heard the new allegation. Enron executives on the nineteenth floor had been shredding documents. A former employee named Maureen Castaneda said so. She had turned the information over to an investigator for Bill Lerach, a class-action lawyer suing Enron on behalf of its shareholders. Lerach was headed to court with a box of shredded paper from Castaneda and would be holding a press conference—but not until the ABC evening news ran its exclusive story about the allegations.
Kaminski alerted others to the development and took charge of the floor. The company had informed everyone, repeatedly, not to shred anything. And Kaminski wasn’t going to let anyone get near the shredders. If this had been happening, it was stopping. Now.
Rob Walls, the deputy general counsel, began alerting executives about the allegation. He tracked down Ken Lay, who was meeting with legal advisers in another Houston building at the time. Lay, in turn, called Kaminski, who assured him that no one would get near the shredder again.
A conference call with the lawyers was arranged. Bob Bennett, Enron’s top Washington lawyer, took charge. There was no doubt, once this got out, the FBI would descend on Enron with a warrant. There was only one choice to make.
“We’ve got to invite the FBI in,” Bennett said on the call, “so they can come down and secure the location.”
“Fine,” Lay said. “Tell them they’ve got free, open access to anyplace in the Enron building.”
Dozens of agents arrived the next morning and began checking computer systems, searching for paper records, and examining the shredders. Two agents wandered through Fastow’s office; they were surprised when, while they were checking the walls, a panel popped open to reveal a hidden closet. But it was only used for coats and umbrellas.
Several agents set up shop in Lay’s office, working at his conference table as they reviewed documents. Boxes of paperwork were sealed and taken away. Even some of his communications with his lawyers got swept up in the search.
But for all the digging, the allegation that had set everything in motion proved to be a dry hole. On the ABC News report, horizontal strips had been held up as evidence of the shredding that was taking place, but the shredders on the floor where the effort was supposed to have taken place pulverized the paperwork into confetti, not strips. After several days the FBI concluded that nothing of value had been destroyed and that—unlike with Andersen—there had been no concerted, illegal effort to shred documents at Enron.
The unenviable task of notifying Lay that his career was over fell to Tom Roberts, one of Enron’s lawyers with Weil, Gotshal. On the evening of January 22, the day the FBI descended on the company’s offices, Weil, Gotshal had met with Enron’s lead creditors in the bankruptcy. They had issued the demand for Lay to leave. He was no longer an asset to the company, they argued, and was simply too enmeshed in the events of the last few years. He had to go.
Now it was about 9:30 New York time on the following morning. Sitting at his desk in the Manhattan offices of Weil, Gotshal, Roberts got on the telephone and dialed Lay in Houston. He came on the phone right away. Roberts explained about the meeting and the creditors’ demands.
“You can stay on the board, and they’d like you to do that,” he said. “But you have to step down as chairman and chief executive.”
There was a long, gut-wrenching pause.
“All right,” Lay said softly, trying hard to maintain his professional dignity. “I guess we need to hold a board meeting, don’t we?”
Roberts was sitting back in his chair. “Yes, that needs to be scheduled,” he said.
Lay was silent again. “Tom,” he said suddenly, “pray with me. Pray for the company, and for all of us.”
Roberts sat up in his seat. He didn’t know what to do. He had never prayed by phone before. “All right,” he said.
The line went silent. Roberts closed his eyes, unsure of what to think or say. Then the moment passed. Lay was the first to speak.
“Thank you, Tom,” he said. “Thank you.”
The next night, the weather in Sugar Land, Texas, was cool and overcast. Just past 2:15 in the morning, Deputy Constable Scott Head from Fort Bend County was driving east down Palm Royale Boulevard. On the other side of the street, he saw a black Mercedes four-door, driven by a man he recognized. It was Cliff Baxter.
Head considered the situation and decided to find out where the car was going. He pulled left and made a U-turn. He was less than three minutes away from Baxter’s car.
Baxter pulled his car between two medians, stopping almost in the middle of the eastbound and westbound lanes.
He was still dressed for bed, wearing pajamas and moccasins. He hadn’t wanted to make too much noise before leaving and
had shut off the security system at his home so it didn’t chirp when he headed out to the garage. There, he had left an envelope on the dashboard of his wife’s car, with a note inside explaining why he had made this decision.
The engine was still running. The car’s headlights illuminated the median. Baxter brought out a .357 Magnum revolver and held it to his right temple.
———
Constable Head didn’t hear the gunshot. But he arrived within a minute, at 2:23, and saw the car sitting in its awkward position between the medians.
He came to a stop, first calling in to report what appeared to be a disabled car. He approached the Mercedes and looked inside. All of the car doors were locked. In the driver’s seat sat Baxter, dead with a gunshot wound to the head.
Hours later, at about 7:30, Skilling struggled to wake up. The phone was ringing, and he was confused. He glanced around; he was in the den at Rebecca Carter’s house. She had come home from surgery days before and wasn’t able to climb stairs yet, so the two had spent the night downstairs on a pull-out bed. Carter reached for the phone.
“Is Jeff there?” It was Ken Rice, his voice shaky.
“Yeah,” she said. “Hold on.”
She rolled over toward Skilling. “It’s Ken Rice,” she said. “Something’s wrong.”
Skilling quickly sat up in bed, grabbing the phone.
“Jeff? It’s Ken.”
Carter was right. Rice sounded distraught. “What’s going on?” Skilling asked.
“Are you sitting down?”
“Yeah, I’m sitting down.”
Rice paused and took a deep breath. “Cliff shot himself,” he said, his voice breaking.
“Shot himself? Is he okay?”
Rice choked back a sob. “No, Jeff. He’s dead.”
A long pause. “Suicide?” Skilling finally asked. His voice broke; he couldn’t speak anymore.
He passed the phone over to Carter, then collapsed back into the bed, sobbing uncontrollably.
“Oh, God!” he screamed. “Oh, God!”
The suicide of Cliff Baxter hit Enron like a final body blow, something that made the surreal events of the last few months all too concrete. Nothing compared with it—not the bankruptcy, not the end of Lay’s career. Suddenly all that seemed distant, unimportant. A friend had died alone. Because of what happened at this company.
There was anger, mostly at the news media, something that only intensified as camera crews showed up that morning at Baxter’s home in hopes of catching a moment with his widow. Making it all the worse were the instant rumors, fueled largely by the Internet, that Baxter had been killed because he knew something. The public wouldn’t know for years that there was no mystery in his death, and that Baxter had been seen alive and alone minutes before by the police constable who discovered his body.
For Lay, it was all gone now. The spot he had reached in the world, the company he had built, the excitement and dynamism he had always believed it generated. Now, it was all infused with the stench of death and failure.
That same afternoon, Lay slowly headed into the office of Ray Bowen. It was strange to think of it as Bowen’s office. It had been Fastow’s for so long.
Things were changing in the new management team; Whalley would soon be gone, following the trading division over to UBS. McMahon, the instant chief financial officer, would soon be the instant president. And assuming Fastow’s old job would be Bowen himself.
In their last few months together, Bowen had always struck Lay as levelheaded, calm. Lay wanted to talk to him. He took a seat in front of Bowen’s desk and chatted about the coming changes, about the bankruptcy-workout specialist who had already started up at the company, taking Lay’s job.
After discussing the personnel issues, Lay shifted topics. “What do you think the Powers report’s going to say?” he asked.
“I don’t think it’s going to be very nice to Rick Causey or Rick Buy,” Bowen replied.
“Yeah,” Lay said, his voice almost a whisper. “I’ve heard that.”
He took a deep breath. The conversation seemed almost painful to him. “What do you think of Sherron Watkins?” Lay asked. “What was she trying to accomplish?”
Bowen shrugged. “I think Sherron, in her clumsy fashion, was trying to be helpful,” he said. “I think her motivation was trying to help the company survive.”
Lay gazed down at the floor, considering the words. “Yeah, I agree,” he said. “That’s exactly how I feel.”
Another pause, the longest yet. Lay glanced up, staring Bowen in the eye. “What about me?” he asked. “What do you think happens to me in all this?”
Bowen looked back at Lay, a man he had admired for years, a man who had traveled in a different stratosphere, a man who now sat before him, dispirited and broken.
“Well,” he said, “there are two possible outcomes here. One is you look incredibly stupid and look like you did a bad job.”
He held his gaze steady. “And the other is they try to put you in jail.” The words, known but unspoken for so long, hung in the air. Lay brought up a hand and touched his chin. “I know,” he said softly. “I know.”
For a moment Lay just sat there, saying nothing. Then he looked up. “Well,” he said, “have a nice weekend.”
With that, Ken Lay stood, not saying another word as he wandered out of the office into the empty, silent hallway.
EPILOGUE
LIVE ROCK-AND-ROLL music echoed through the newly built, rambling estate where hundreds of members of Houston’s elite had gathered for a holiday party. It was mid-December 2002, the night of the big social event at the Bayou Breeze, the home of Abbott Sprague, who had made his fortune in fund management and now was one of Houston’s richest men.
Taking part in the festivities were a number of executives, bankers, and lawyers who had been swept up in the Enron catastrophe. This year, there was no pressing business, no burning of the midnight oil at the end of the quarter to keep them away. And there would be no Christmas bash at Enron either. This event was as close to a corporate holiday reunion that any of them would see.
More than a year had passed since Enron had filed for bankruptcy, and for almost everyone touched by the scandal, the world had transformed into a radically different place.
Whatever doubts might have persisted about the magnitude of the deep problems within the company had been obliterated in February, ten months before, by Bill Powers’s final report to the Enron board. It spelled out in painful detail how the now-infamous off-books entities—Raptor, LJM, Chewco, Southampton—had been used by Fastow and his accomplices both to enrich themselves and to deceive investors about Enron’s finances. The revelations swept away the final vestiges of Enron’s former management. Rick Causey and Rick Buy, who had been responsible for managing the conflicts with LJM, had been ushered out the door, never to return. Even Ken Lay had been forced to relinquish his last, frayed connection to the company, stepping down as a director just weeks after resigning from management.
The Powers Report set the stage for what became a national spectacle—the congressional hearings on Enron. The House Energy and Commerce subcommittee took the lead, issuing subpoenas to all of the primary players in the Enron saga. Almost everyone—Fastow, Kopper, David Duncan, Causey, Buy—declined to testify, citing their Fifth Amendment rights. With the release of the Powers Report, even Lay heeded his lawyers’ advice and declined to appear before the committee. When a Senate committee subpoenaed him weeks later, he, too, took the Fifth.
Skilling chose a different path, testifying under oath and assuring members of Congress that he had done nothing wrong. He was not, Skilling insisted, an accountant, and had relied on Andersen and Causey to provide him with the proper judgments.
Sherron Watkins also appeared, playing the role of Enron heroine. Watkins, who by then had agreed to co-author a book on Enron, was an eager witness who ventured beyond her actual knowledge in her testimony. She accused Skilling of working with Fastow to dupe
the board and portrayed Lay as a scapegoat of underlings’ manipulations without citing evidence to justify her allegations. No one on the committee pressed her for details.
Other executives who had attempted to unmask Fastow and his collaborators and expose their partnerships’ dealings did not fare as well. Jordan Mintz was praised, but also challenged by some committee members who seemed not to understand the role he had played. Jeff McMahon was at first lauded for standing up to Fastow, but soon after condemned for his role in the Nigerian barge transaction. Vince Kaminski and Carl Bass, the executive and the accountant who had campaigned the loudest and longest against the partnership dealings, were never called to testify. And the name of Kevin Kindall, the Enron executive who discovered the threat to Enron’s survival and tried to stop it, was never mentioned in any public hearing.
By May, another bombshell emerged. The memo about the California trading strategies—crafted largely by Stephen Hall of Stoel Rives in Portland, under the direction of Christian Yoder at Enron—was turned over by the company to federal energy regulators, who promptly made it public. The document once intended to notify senior Enron management of bad doings by traders instead became smoking-gun evidence of the illegal trading.
Some politicians jumped on the trading strategies as proof that the California energy crisis was solely caused by manipulation—a position largely dismissed by reputable economists, who considered trading abuses a contributing factor to a problem fueled mostly by supply and demand mismatches. Hall and Yoder entered the Enron media firestorm, were hauled before Congress, and ultimately celebrated for their integrity.
As time passed, executives and professionals with ties to Enron worked to move on with their lives. A number of them—including Rebecca Mark, Amanda Martin, and Jeff McMahon—found quiet spots in business, handling family-related ventures, doing consulting work, or managing their own investments. Greg Whalley, the short-lived president of Enron, moved to Connecticut to join his traders then at UBS; as the investigations of Enron heated up, he would eventually leave and return to Houston.
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