Now a new deal had come along. In January, Enron had acquired Zond Corporation, a wind-farm operator. But three of Zond’s assets—Zond Windsystems, Victory Garden, and Sky River—raised the same problems as the co-generation plants. They were qualifying facilities, or QFs, meaning under law they could be paid higher rates, but those larger payments would disappear once Enron finished its acquisition of Portland General. The wind farms would be worth a lot less if Enron kept them; they needed to be sold.
Martin finished reviewing the records for the plants and assigned two deal makers, Mike Miller and Mark Miles, to look for a buyer. Not long after, Miles and Miller came back to Martin’s office with news.
“Kopper’s working on a wind deal,” Miles said.
Again? Martin wasn’t ready for another round of hand-to-hand combat with Fastow. She wanted out.
“Guys, we don’t need to put up with this shit again,” she said. She called Baxter, who oversaw asset sales.
“Cliff, I’m out of this wind project,” she said. “Fastow’s in it, and I’m not going through that again.”
“Amanda,” Baxter replied, “we already have interest from some buyers …”
“If there’s somebody who’s expressed interest, you do it. Let me and my guys out of this. You carry the water this time, so if there’s a problem, you get tagged.”
Baxter raised a few feeble arguments but ultimately gave up. He didn’t have much interest in battling Fastow either. He hated the guy, but the tiny wind deal just wasn’t worth the fight. He stepped aside.
Fastow’s rages had worked. Now nothing could keep him from doing the deal the way he wanted.
The idea was so delicious, so simple it was breathtaking. Somebody was going to make money on the wind farms; why shouldn’t it be Andy Fastow and his family?
The deal Fastow and Kopper were cobbling together was a structured transaction, where outside investors provide three percent of the deal’s capital. A company could provide 97 percent of the capital to an off-books partnership, find 3 percent somewhere else, stir in some legal legerdemain, and—poof!—an “independent” buyer was created. The company could then legally “sell” an asset to the partnership—even if most of the payment originated from its own pockets. The round-trip of cash complete, the company had converted an asset on its balance sheet into revenue. When Andersen accountants first laid out the rules, Fastow had ridiculed them, saying the three percent could come from anybody—even his gardener or his family. Now he was ready to put that thought into action.
With Kopper’s help, he constructed an entity called Alpine Investors to make the purchase. It would cost about $17 million, far more money than Fastow had in his bank account. But with the magic of structured finance, he didn’t have to worry about that. Almost $16.5 million would come in a loan to Alpine from Enron. Then Fastow—along with his wife’s wealthy family, the Weingartens, and friends like Patty Melcher, a wealthy Houstonian close to Lea—would kick in $510,000. Fastow would run the partnership, with Enron’s friends as investors.
Fastow sang the praises of the deal to Kopper. “Enron keeps control, without the burdens of legal ownership,” he said. “It’s perfect.”
Something about Alpine Investors made Jordan Mintz uncomfortable. A tax lawyer, Mintz had joined Enron a few months before, coming from Bracewell & Patterson, a Houston law firm. Abandoning a secure partner’s position for an iffy chance at a gas company struck some in his family as crazy. But Mintz had represented Enron and now wanted the thrill and challenge that came with working there.
Then along came Alpine Investors. Mintz’s job was to handle tax issues on the deal, but the whole thing just seemed weird. In a power-plant deal, he figured he would see heavy-hitting investors walking through the office. Pension funds. Maybe the capital investment unit of General Electric. Or some Wall Street private-equity fund.
Instead, he saw Patty Melcher. She was presented to Mintz as someone heading up the investment group providing equity for the deal. Melcher, a former investment banker whose husband was an heir to a fortune from Houston convenience stores, was pleasant enough. But this just wasn’t the way corporations did deals. Some friend of Lea Fastow’s? That felt like something put together by a backwoods county commissioner rather than by a cutting-edge Fortune 500 company.
Mintz sought out Larry Lawyer, who was working with Fastow on the deal. “Dude, this is so strange,” he said. “How often do we bring in outside investors like this?”
Lawyer shrugged. “Not too often,” he replied.
Trouble.
Alpine Investors wouldn’t work. Fastow hadn’t hidden his family’s role in the deal from the accountants, and they decided the structure didn’t meet the rules. If he or his relatives provided part of the three percent, they said, the magic disappeared. Enron would still own the wind farms, the plants would remain on the books, the qualifying-facility status would be lost.
The news was a disaster. It wasn’t just Fastow losing an opportunity; there was no ready fallback. He didn’t have other investors lined up to provide the three percent, and certainly not ones who would allow Enron to control the plants. If a deal wasn’t done soon, the plants would lose their special status, and their value would crumple. Coming on the heels of the retail fiasco, the collapse of Alpine Investors could spell trouble for Fastow—and for Enron.
He sought out Kopper, and together they devised a solution—a dishonest one. They needed $510,000 but had raised only $91,000 from wealthy Houstonians they knew. The rest, $419,000, would be put up by Fastow but made to look as though it came from someone else. The cash went to Kopper from the Fastows’ account, with Lea writing records showing it as a loan. Kopper then funneled the money to his domestic partner, Bill Dodson, and to Kathy Wetmore, the Fastows’ real estate agent. Both agreed to act as fronts for Fastow, pretending the money was theirs.
With the “investors” in place, Fastow and Kopper created two entities for the deal, naming them RADR ZWS and RADR ZWS MM. The $91,000 in authentic investments came in, right alongside the $419,000 cash hoard that secretly belonged to Fastow. RADR closed in May 1997.
With a little money laundering, Fastow had pulled off the very deal that the accountants had said couldn’t be done—at least not legally.
On the morning of May 14, an Enron corporate jet banked over the Sacramento River before landing at the Executive Airport, minutes from the California capital. Fastow unfastened his seat belt and stood as the pilot taxied to a stop. Four colleagues lined up behind him.
They had come to Sacramento for a meeting that could well reshape Enron’s future. The company was preparing JEDI II, another fund to provide financing to energy producers. And again it wanted Calpers as a co-investor.
The executives headed to the front of the terminal and piled into a waiting private car. Arriving at Calpers’s offices in downtown Sacramento, they were whisked upstairs to a second-floor conference room. Barry Gonder, Calpers’s head of alternative investments, arrived, all smiles.
“Andy!” he said. “How you doing?”
“Great, Barry,” Fastow said, pumping Gonder’s hand.
A few Calpers staffers trickled in. Fastow pulled out a six-page presentation and laid it on the table.
“We wanted to come out here to give you an update on JEDI, talk to you about how the partnership is doing, and discuss some new opportunities we think will be particularly attractive to you,” Fastow said.
Fastow glanced down at his presentation. The cover was emblazoned with a logo for JEDI. He turned to the first page, studying it. Down the table, Shirley Hudler sat stone-faced, trying not to wince.
He’s going to wing it again. Hudler had put together the presentation for this meeting, but, as always, her work had been a waste of time. Fastow seemed to excel at being unprepared. She had watched him in previous meetings reviewing a presentation for the first time as he delivered it. He would get his facts wrong, flipping through the pages, trying to find his way as he spoke. So
mehow, Fastow seemed to believe he was smarter off the cuff than executives who did their homework. He wasn’t.
It didn’t take long for his first mistake. He was boasting about Enron’s accomplishments, its creativity. Why, he proclaimed, it had even figured out how to use its Transwestern pipeline, which had always moved gas out of California, to deliver fuel back into the state!
It’s the other way around, Andy, Hudler thought.
Finally, Fastow reached his main point. “We’re thinking about doing another private-equity partnership. Obviously, we’d like you to be our partner in it. And we’d really like to expand the box a little bit.”
The original JEDI had made investments in the gas industry. But Enron wanted JEDI II to invest in anything energy-related. Wind, oil, coal—whatever was promising.
“This one’s going to be bigger,” Fastow said. “A billion dollars. And this time we’re not going to be putting in stock as our contribution. We’ll invest cash. So whatever the partnership puts its money into will be something Enron wanted a piece of, too.”
Gonder looked uneasy. “That sounds good, Andy. But I’m not sure how the board would receive making another Enron investment. We’ve got $250 million in JEDI. I don’t think they’d be happy tying up more with one company.”
Fastow was ready with a response. “That’s the beauty of our idea, Barry,” he said. “Enron will take you out of JEDI. We will buy your interest in the partnership. Then you can roll the proceeds straight into JEDI II.”
Under the plan, Fastow said, Calpers’s half interest in JEDI would be purchased for almost $350 million, locking in its annual return at better than 20 percent. Then Calpers could use that money for JEDI II and participate in a much wider array of energy businesses.
Gonder looked intrigued. “It’s an interesting idea, Andy. Why don’t you guys put together a full proposal, and we’ll see what everybody here thinks.”
Mission accomplished. Everyone could tell that Gonder was eager to do the deal. Any fund manager would lick his chops at the chance to lock in returns—all while getting a chance to put money into a new, broader opportunity.
But some of the Enron executives who had listened to the pitch were bothered by its gaping holes. Enron itself couldn’t purchase the Calpers interest in JEDI; if it did, all of its assets would come crashing onto the company’s balance sheet. The whole purpose of JEDI was to provide financing to gas producers that would be off balance sheet.
So who in the world was really going to own the Calpers interest in JEDI once the deal was done?
Patty Melcher? Again?
Word had quickly swept through the finance division by June 1997. Enron was negotiating a deal worth more than $300 million with the largest, most respected public retirement fund in the country. And to get investors for the other side of the deal, Fastow was hitting up … Patty Melcher, a friend of his wife. It struck everyone as just so scuzzy, so wrong. Enron was the big leagues, not some charity fund-raiser.
But as time passed, the names of the outside investors who would purchase the Calpers interest became a deeper, darker secret. Melcher’s name was still tossed around, but the identities of everyone else stayed under wraps.
Jim Timmins, now in charge of Enron’s dealings with pension funds, was flummoxed. Here was the perfect opportunity to attract new investors; Enron could sell JEDI II to other funds, whether Calpers wanted in or not. Or it could arrange for another fund to buy Calpers’s JEDI stake. It was the kind of thing the company should be talking up. The pension plans wanted to do business with Enron; why wouldn’t Fastow jump at the chance?
Instead, Timmins was kept out of the deal on the purchase of Calpers’s interest in JEDI, spending his time on the structure of JEDI II. But occasionally he would hear of others asking about the investors buying Calpers’s interest. The answer was always the same.
Don’t worry about it.
———
It was dubbed the “special-projects group.”
By the middle of 1997, Fastow had decided that his favorites needed their own unit within finance. This would be an assemblage of the best, a financial SWAT team. Their work would be almost clandestine. As the elite, they would not only be trusted with sensitive deals, they would be given the opportunity to make special, personal investments alongside Enron, deals that could make them rich.
The head of special projects, of course, would be Michael Kopper, Fastow’s most trusted ally. Bill Brown, another young deal maker who had worked for Enron only two years, was also named to the group in its earliest days. But its rising star was Ben Glisan, a highly skilled thirty-one-year-old accountant who had joined Enron just the year before. Glisan, another Andersen alum, was a native Texan from a blue-collar family. He seemed almost starstruck by Fastow, who eagerly took the young man under his wing.
Once special projects was assembled, Fastow met with each of its members individually to lay out their next big deal: they would buy out Calpers’s interest in JEDI. And they’d do it in a very unusual way.
“I’m putting together my own investment partnership for the Calpers buyout,” Fastow said.
Sitting nearby, Kristina Mordaunt, a lawyer and Fastow confidante, took notes. The name of the partnership would be Chewco Investments, a tongue-in-cheek continuation of the Star Wars theme begun with JEDI; Chewco’s name was derived from Chewbacca, the film’s fur-covered warrior.
As for investors, Patty Melcher was out. Calpers wanted the deal done quickly, Fastow said, and Melcher just wasn’t jumping when he told her to. She wanted her advisers to review JEDI’s records, to make sure she understood the investment. Enron couldn’t wait for that. So, in Melcher’s place, he said, he would bring in institutional investors. He didn’t identify them or explain how he would persuade them to blindly invest in a deal they hadn’t investigated.
Mordaunt finished her meeting with Fastow and telephoned Ronald Astin, a lawyer from Vinson & Elkins who was advising Enron on the dealings with Calpers.
“This is the proposal, Ron,” Mordaunt said. “Tell me what you think.”
The concept struck Astin as pretty out-there.
“Wait, Kristina,” he interrupted. “If you’ve got institutional investors in Chewco, why does someone from Enron management need to be involved?”
“Well, the idea is that the deal will be more attractive if they know Chewco has a manager who understands the assets,” she replied.
Astin thought about that. “All right, Kristina, but you do understand, the way this is structured, the Enron manager is going to end up with an interest in Chewco.”
“Yeah,” Mordaunt agreed. “We know that”
The projector clicked to the next slide. A chart appeared on the screen. “Okay,” Lou Pai told the assembled group. “This lays out the challenge we have.”
Pai, now head of retail, had been struggling for months to get the business off the ground. Today he had organized a presentation for Skilling and other executives, hoping to explain the difficulties the division faced.
The story on the slide was the same one Skilling had heard before. Because of high fixed costs, the potential profit margin for the business was low. Pai began explaining the numbers. Skilling didn’t want to hear it.
“Lou, you’re too fucking smart for this,” he snapped. “I don’t want to ever see this slide again.”
Pai’s face was hard. “Jeff, it’s the truth”
“I just don’t want to ever see that slide again.”
Pai slammed a hand on the table. “It’s the fucking facts, Jeff!”
“It may be the facts,” Skilling shouted back. “But I don’t want you to think about it that way!”
“Well, if you think it’s going to be the retail provision of gas and power, that math suggests it’s not!”
The angry back-and-forth continued for a few minutes, then both men fell into a sullen silence. The lights came up and, after failing in an effort to go forward with the meeting, the discussion ended and everyo
ne left the room. As the retail executives headed to their offices, some couldn’t help but wonder whether it was time to start looking for another job.
“Hey, Carl, can I talk to you for a second?”
Tom Bauer, the Andersen accountant for Enron’s trading operation, walked into the office of Carl Bass, the resident accounting wonk in the Houston office. Bass turned from his computer.
“What’s up, Tom?”
He was having a problem with an Enron accounting issue, Bauer said. As part of the Portland General merger, Enron had acquired a supply contract with Bonneville Power in Seattle. The contract was worth millions, and Enron wanted to book the value as income right away.
Bass shook his head and laughed. “They came to me with the same question last year, on another contract from Portland General,” he said. “But that one would have been at a loss. So they wanted to know if they could avoid the loss by counting it against the purchase price.”
The logic was simple. If a company acquired for ten million dollars had, say, a million dollars in immediate losses from an outstanding contract, then the real purchase price was eleven million. Of course, that’s a two-way street: if the acquired company came with immediate profits, the purchase price should be reduced. Otherwise, Enron was simply using its cash to purchase instant income.
“I gave them a memo on this,” Bass said. “I already answered the question.”
Bauer looked uncomfortable. There was clearly a lot of pushback from Enron on this one. “We’re going to need to make the case again,” he said.
The group of accountants walked alongside the stainless-steel oyster bar at Tony Mandola’s Gulf Coast Kitchen, a 120-seat seafood restaurant in Houston. Leading the way, Rick Causey headed to a table near the back. He sat, picking up a napkin and placing it on his lap. Bauer, Bass, and David Duncan took the remaining seats.
The Andersen accountants had invited Causey to lunch to let him know the bad news. They couldn’t support booking the Bonneville contract as income. As the lead partner, it was Duncan’s job to tell the client the decision.
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