Conspiracy of Fools

by Kurt Eichenwald

  27. Some details of the plant renegotiations from Mehta, Power Play; Minority Staff, U.S. House of Representatives, Committee on Government Reform, “Background on Enron’s Dabhol Power Project,” Feb. 22, 2002; and Inkpen, “Enron and the Dabhol Power Company,” and “Enron Development Corporation,” 1996.

  CHAPTER 4

  1. Some details of the atmosphere and style at Armando’s from Eric Lawlor, “Armando’s Gets a New Chef—and a New Attitude,” Houston Press, Jan. 8, 1988.

  2. Some details of Fastow’s work and role within the retail unit from a May 1, 1996, e-mail he wrote, which included a draft memo for distribution discussing his role.

  3. Some descriptive details of Portland’s World Trade Center and surrounding areas from Bill Greer, “At Peace in Portland,” The Tennessean, Sept. 12, 1999, Travel 1. Some details of their discussion from a Schedule 14A proxy statement filed with the SEC by Portland General on May 21, 1997, 24–25.

  4. Some details of Kaminski’s background from the notes of his interview with lawyers from Wilmer, Cutler & Pickering, Dec. 19, 2001.

  5. Some details of Watkins’s background and experiences at Enron from the book she wrote with Mimi Swartz, Power Failure, 72–75.

  6. Watkins acknowledged her salty tongue in Power Failure, 12.

  7. A copy of Beerel’s undated analysis was obtained by the author.

  8. A copy of Fastow’s untitled report to Skilling was obtained by the author.

  9. Some details of the management committee meeting from a set of unsigned notes contained in Enron’s official files and obtained by the author.

  10. Some details of the Phoenician meetings between Enron and Portland General from the May 21, 1997, Schedule 14A proxy statement, 27–28. Anita Marks, “Enron Deal: A Marriage Made in Phoenix,” Business Journal—Portland, July 26, 1996, 1. Additional information about the merger from an internal Calpers analysis, prepared for the pension fund’s investment committee by the Pacific Corporate Group, Aug. 19, 1996.

  11. Some details of Lay’s meeting with Portland General employees from Bill MacKenzie, “Big Guy in Town Makes Big Power Play,” Oregonian, July 27, 1996, E1. Also see MacKenzie, “PG Employees Optimistic,” Oregonian, July 24, 1996, C1.

  CHAPTER 5

  1. Details of Lay’s trip to Morristown from the flight plan filed by the pilots. Information about the plane from the official records for the aircraft maintained by Enron.

  2. Some details of Wilson’s signing of the electricity deregulation bill from “California Set for Massive Electric Deregulation,” Reuters, Sept. 24, 1996. Also see “SD Electric Law,” City News Service, Sept. 23, 1996. Information about the legislation itself was found at www.energyquest.ca.gov/time_machine/1990ce-2000ce.html.

  3. Information regarding the structure of the California electricity system from Will McNamara, The California Energy Crisis: Lessons for a Deregulating Industry (Penn Well, 2002); and James L. Sweeney, The California Electricity Crisis (Hoover Institution Press, 2002). Also see the March 2003 report prepared by the staff of the Federal Energy Regulatory Commission, “Final Report on Price Manipulation in Western Markets,” docket no. PA02-2-000.

  4. Details of the basement inspection, and the technician’s failure to properly use the equipment, from records produced in the National Transportation Safety Board’s investigation of the San Jaun explosion, as well as the final NTSB report, “Pipeline Accident Report: San Juan Gas Company Inc. Enron Corp. Propane Gas Explosion in San Juan, Puerto Rico, on November 21, 1996,” PB97-916501 NTSB PAR-97/01. The company’s history of safety violations, and the total fines it paid, from the NTSB report.

  5. Details of the San Juan explosion, and the events surrounding it, from redacted copy of testimony before the NTSB, as well as the final report, “Pipeline Accident Report.” Also see Hilario de Leon, “Explosion Turns Day into Night on Busy Street,” Associated Press, Nov. 21, 1996.

  6. Some details of the board’s decision on Lay and Kinder from Lay’s employment contract, Dec. 18, 1996.

  7. Some details of Kinder’s decision to leave Enron from Michael Davis, “Lay Staying, So Kinder Will Leave,” Houston Chronicle, Nov. 27, 1996, Business, 1.

  8. Details of the party at the Museum of Natural Science from planning and billing records obtained by the author. Some descriptive information from the Web site for the Houston Museum of Natural Science, www.hmns.org.

  9. Some details of Skilling’s elevation from the company’s official announcement, Dec. 10, 1996.

  CHAPTER 6

  1. Some details of the unveiling of the new corporate logo from Enron’s official announcement of Jan. 14, 1997. Other details from Skilling’s schedule book for that day.

  2. Some details about the selection of Duncan as the lead member of Andersen’s Enron engagement team from a Form 302—the FBI notes of an interview—for D. Stephen Goddard Jr., reflecting his statements to Special Agents Greg Ruppert, Paul Holdeman, and Paula Schanzle, Feb. 28, 2002. The notes are part of case file nos. 196C-HO-59147 (the Enron investigation) and 196C-HO-59147-AA (the Andersen inquiry).

  3. Details of Duncan’s background, including his purchases for the co-op and use of illegal drugs both during and after college, from a series of his FBI 302s in cases 196C-HO-59147 and 196C-HO-59147-AA. These include notes from interviews conducted by Special Agents John S. Hummel and David Michael Hays on Jan. 14 and 16, 2002. They also include notes from interviews conducted by Special Agents James E. Jewell and Paul Holdeman on March 21 and April 5 and 6, 2002.

  4. Some details of Bass’s background from his FBI 302 from his interview of Feb. 1, 2002, with Special Agent Omer Meisel.

  5. Some details of the Enron and Calpine deal from the Calpine press release of March 31, 1997, “Calpine to Acquire Interest in 827 MW of Gas-Fired Power Plants.” No similar release was issued by Enron.

  6. Some details of Fastow’s effort to bring friends into deals, and the creation of Alpine Investors, from a government affidavit of Special Agent Omer Meisel, filed as part of a criminal complaint against Fastow on Oct. 1, 2002, at Houston’s Federal District Courthouse, case no. HO-2-889-M. Also see the internal Andersen 1997 document “Joint Ventures, SPE’s, Partnerships.”

  7. Melcher’s role as an investor with Fastow was revealed by a number of sources, including the notes of the Jan. 12, 2002, interview with Kristina Mordaunt by Wilmer, Cutler. Also see the Wilmer, Cutler notes from the Dec. 6, 2001, interview with Carol St. Clair, an assistant general counsel with Enron.

  8. Some background of Mintz and details of his job from a copy of his executive employment agreement with Enron Capital & Trade Resources Corp., Dec. 1, 1997.

  9. Some details about the collapse of Alpine Investors, and its replacement by the RADR structure, from the Oct. 1, 2002, Meisel affidavit.

  10. Some details of the May 14, 1997, presentation to Calpers from the report used by Fastow, “Discussion with Calpers.” Also see a confidential May 27, 1997, memo prepared by Sheryl Pressler for Barry Gonder of Calpers, “Comparison of the Proposal Made by Enron to Staff Concerning a New Relationship Versus What PCG Has Communicated to Staff,” which summarizes the events of May 14, as well as a draft, unsigned memo to Pressler from Enron Capital Management, May 29, 1997. Also see details from the June 10, 1997, meeting within Enron about the Calpers presentation, as shown in unsigned, handwritten notes taken in a meeting that included Fastow and Jeremy Blachman, an executive in the finance division.

  11. Bill Brown described his early role in the special-projects group during his Dec. 5, 2001, interview with lawyers on the Wilmer, Cutler team. Copies of the official notes from that interview were obtained by the author.

  12. Some details of Glisan’s background from his employment application with Enron, dated Aug. 1996, as well as his résumé. Also see Glisan’s Commercial Support Performance Review, Sept. 3, 1996.

  13. Some details of Astin’s review of the investment proposal from the notes of his interview with Wilmer, Cutler, Dec. 11, 2001.
Other details from Wilmer, Cutler’s notes from the Jan. 11, 2002, interview with Mordaunt, and also from the firm’s notes of the Dec. 6, 2001, interview with St. Clair. There were what appeared to be some factual conflicts between Astin’s and Mordaunt’s accounts—unless Mordaunt was describing subsequent meetings, many of which took place that summer. However, the author reviewed contemporaneous handwritten notes taken during the summer of 1997 that confirmed Astin’s account of the events portrayed here.

  14. The problems with the Portland General contract were revealed in the minutes of Enron’s audit committee meeting on Oct. 12, 1998. Ultimately, those numbers were disclosed by Enron in its Nov. 8, 2001, announcement of its intent to restate its financials, dating back to 1997.

  15. Some details of Enron’s initial forays into broadband from the company’s April 22, 1998, release, “First Point Communications Inc. and Optec Inc. Join Forces to Become Enron Communications.”

  16. Some details of the wire transfer from the criminal information filed Aug. 21, 2002, in United States of America v. Michael J. Kopper, no. H-02–0560, in the Federal District Court in Houston, as well as the criminal complaint filed in United States of America v. Andrew S. Fastow, no. H-02-889-M, filed in the Federal District Court in Houston, Oct. 1, 2002. Also see the superseding indictment in the case of United States of America v. Andrew S. Fastow et al., no. H-02-0665, filed on April 30, 2003. Also, the author reviewed copies of wire-transfer documents used in the transaction.

  17. Some details of Astin’s response to his review of Sept. 4 from the notes of his Dec. 11, 2001, interview with Wilmer, Cutler. Also see Final Report of Neal Batson, Court Appointed Examiner, vol. 4, app. C, 111, filed in the case of In re Enron Corp. et al. filed in U.S. Bankruptcy Court for the Southern District of New York, case no. 01-16034 (the Batson Report).

  18. Some details of the Sept. 8, 1997, meeting from handwritten notes prepared by Bob Baird, as well as a sworn statement given by Astin to the bankruptcy examiner on July 18, 2003, 57–62. Also see the notes of the Dec. 11, 2001, interview with Astin by Wilmer, Cutler, as well as the Batson Report, vol. 4, app. C, 111–112. Also see notes of the Wilmer, Cutler interviews with Mordaunt on Jan. 11, 2002.

  19. The decision to substitute Kopper for Fastow is described in the Wilmer, Cutler interviews with Mordaunt on Jan. 11, 2002, as well as the firm’s interview with St. Clair on Dec. 6, 2001. See also the facsimile, including a structure of the proposed Chewco deal, sent by St. Clair to Vinson & Elkins on Oct. 31, 1997.

  20. Some details of Fastow’s meeting with Skilling from a transcript of Skilling’s nonpublic testimony before the SEC, Dec. 5, 2001.

  21. The effort to arrange the Barclays “consulting agreement” from minutes of the Oct. 20, 1997, Barclays operations committee meeting, as well as a Sept. 10, 1997, memo from John Meyer of Barclays to Helen Calvelli, Richard Williams, and John Sullivan—all from the bank—relating to the structure of the deal. Also see the Batson Report, vol. 3, app. F, 43–44.

  22. Some details of the Chewco tax-indemnification agreement from “Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.” (the Powers Report), Feb. 1, 2002, 64–66. Also see the Wilmer, Cutler notes from the Jan. 9, 2002, interview with John E. Lynch, a partner with the Vinson & Elkins tax group, and the notes from the law firm’s Nov. 15, 2001, interview with Mintz.

  23. Some details of Brown’s potential role in Chewco, and his discussions about the negotiations with Fastow, from the notes of his Wilmer, Cutler interviews of Dec. 5, 2001, and Jan. 5, 2002. Also see Brown’s undated memo to Fastow and Kopper “1997 Accomplishments,” which describes his work on the negotiations for Project Chewbacca, and Kopper’s Jan. 7, 1998, memo to Rocky Jones of Enron’s human-resources department, “Bill Brown.”

  24. Some details of the Enron management committee meeting from a distribution office memo from Vanessa Groscrand of Enron, “1997 Enron Management Conference, November 5–7, 1997,” issued in late Oct. 1997.

  25. Some details of the changes relating to the company’s European business from a memo issued by Lay and Skilling, “European Responsibilities,” Nov. 19, 1997.

  26. Ephross’s role in drafting the side letter from his Dec. 16, 1997, memo to Kopper, Mike Edsall, George McKean, and Sarah Ward. A copy of the Chewco side deal, signed by Kopper and Blachman, was obtained by the author.

  27. Terms of the deals completed that night from the closing documents. Also see the original subscription agreement, “Subscription Agreement Among Joint Energy Development Investments Limited Partnership, Enron Capital Management Limited Partnership, and Chewco Investments, LLC,” Nov. 6, 1997. Also see the Aug. 11, 1997, letter from Barry Gonder of Calpers to Enron Capital Management. Moreover, additional details are provided by the Aug. 20, 1997, confidential presentation from Enron to Calpers, “JEDI II: Investment Opportunities,” and an investment term sheet sent by Ron Astin of Vinson & Elkins to Dulcie Brand of Jones, Day, Reavis & Pogue on Oct. 31, 1997. Some details of the EES investments from Fastow’s Aug. 19, 1997, letter to Gonder; the Sept. 15, 1997, document “Bylaws of Enron Energy Services”; the Aug. 21, 1997, presentation from Enron to Calpers, “Enron Energy Services”; and a package of documents, sent by Blachman on Sept. 30, 1997, to Calpers, the Pacific Corporate Group, and J. P. Morgan with an attached memo headed “EES Due Diligence Questions.” Details for both transactions were found in a Sept. 22, 1997, letter prepared by Calpers’s lawyers with Jones, Day for Gonder’s signature, and addressed to Enron Capital Management. Additional details were found in a Sept. 15, 1997, presentation by Calpers’s staff to the system’s investment committee and in a term sheet sent to the Pacific Corporate Group by Jim Timmins of Enron on Oct. 3, 1997.

  28. The structure of Chewco was clearly explained both in the Powers Report, 60–65, and in the Batson Report, vol. 4, app. C, 108–14. Additional information from the handwritten notes of St. Clair, Dec. 11, 1997, and undated notes apparently from that same month. Also see the July 18, 1997, memo from St. Clair to the Chewbacca Working Group, “Registration Rights and Procedures.” Also, some details from the FBI 302 from the agency’s Feb. 15, 2002, interview with Patricia Grutzmacher.

  29. The decision to create the file on the laptop computer was first disclosed by Kopper in his discussions with the government in anticipation of his plea deal. The existence of the laptop, with few details about it, was revealed in the government’s April 30, 2003, superseding indictment of Fastow.

  30. A copy of the “Top 10 Reasons” parody was obtained by the author.

  31. Details of the second-quarter write-off caused by J-Block and MTBE from the Enron press release “Enron Corp. Reports 1997 Second Quarter Earnings Per Share from Operations of $0.40, Announces Reduced Earnings Expectations, and Plans a 10 Million Share Repurchase by Year End,” July 15, 1997. Also see the June 3, 1997, analyst report by Curt Launer, then of Donaldson, Lufkin & Jenrette, “Enron Corp. Settles J-Block Contract,’ Second Quarter 1997 Earnings Per Share Indication Below Consensus.”

  32. The fifty-one million dollars in profits from the Bonneville power contract were later restated in Enron’s 8-K of Nov. 8, 2001.

  33. The overstatement of income to EES from the Batson Report, vol. 2, app. O, 13–16. Also see the Feb. 7, 1998, e-mail from John Stewart, of the Arthur Andersen Professional Standards Group, to Grutzmacher on the Enron engagement team.

  CHAPTER 7

  1. Some details of Levitt’s personal background and of the early days of the accounting wars from his book Take on the Street (Pantheon Books, 2002), 3–7, 105–24.

  2. Details of Stewart’s e-mail from the original document.

  3. Details of Skilling’s visit to Washington from entries in his daily schedule.

  4. Some details of the finance meeting with Fastow from unsigned, handwritten notes taken during the discussion. Additional information, and details of the Moody’s presentation, in the document “Enron Rating Agency Presentation to Moody’s
Investors Service,” Feb. 17, 1998. Also see the Dec. 17, 1998, document from Toronto Dominion, “Toronto Dominion Speedy Review,” which states that Enron has informed the bank it is entering into prepay transactions with it to satisfy its commitments to the ratings agencies to decrease its debt; such deals lowered on-books debt while raising total debt.

  5. Some details of Skilling’s meetings over these days from entries in his schedule book.

  6. Details of the Rhythms purchase and Skilling’s approval from the document “Enron Capital Management Deal Approval Sheet” with “Deal Name: Rhythms,” March 3, 1998, which was signed by Skilling two days later.

  7. A copy of the announcement e-mail was obtained by the author. Also see a copy of the personal letter to Fastow from James F. Burgoyne, managing director for GE Capital Services, March 24, 1998.

  8. Some details of Buy’s background from notes his confidential Jan. 17, 2002, interview with staff members of the House Energy and Commerce Committee’s Subcommittee on Oversight and Investigations. The notes are incorrectly dated as having been taken on Jan. 17, 2001.

  9. Details of the use of the “management fee” accounting gimmick from the Powers Report, 57–58.

  10. Some details of McMahon’s assumption of the treasurer’s position, and his meeting with Fastow about it, from the notes from his Jan. 21, 2002, interview with Wilmer, Cutler.

  11. Some details of the Ashcroft fund-raiser from documents on file relating to his presidential bid and “Spirit of Victory” political action committee.

  12. The weather details from records on file with the National Climatic Data Center, from William P. Hobby station in Houston, April 17, 1998.

  13. Some details of the April 17 finance committee meeting from the official minutes.