Conspiracy of Fools

by Kurt Eichenwald

  The questions after his speech touched mostly on technology matters. But one broached a different subject.

  “Can you give us your thoughts about the power crisis in California?” an audience member asked. “And tell us what you think the state could have done differently?”

  Skilling smiled. He thought of the attorney general’s comment a few weeks before about taking Lay to a prison cell to be raped. Maybe it was time to shove back. “Oh, I can’t help myself,” he said. “You know what the difference is between the state of California and the Titanic?”

  The crowd laughed. Skilling glanced away. “I know I’m going to regret this,” he said, almost to himself.

  He looked back at the crowd. “At least when the Titanic went down, the lights were on,” he said.

  The crowd roared.

  The SEC reached its final decision: the quality of Andersen’s accounting violated the fundamental principles of the profession. Despite protests from Andersen’s top lawyers, the firm would have to be sanctioned and charged with civil fraud. At least that way, SEC investigators hoped, Andersen would learn its lesson, and other accounting firms would know that they had to straighten up. The nation’s securities regulators never wanted to see another case like Waste Management again.

  The violations at Waste Management, an Andersen client whose financial restatement years earlier helped spur Arthur Levitt’s “numbers game” speech, had horrified agency investigators. Andersen accountants had known about violations, but year after year failed to stop them. Now the SEC told Andersen it could settle the case or fight it out in court. Andersen, after much grumbling, took the deal.

  On June 16, Gary Goolsby, a senior Andersen partner in Houston, reviewed a two-page consent form, essentially the firm’s agreement to settle. Goolsby, the partner who months before informed Carl Bass of his removal from Enron accounting issues, had been chosen to sign the documents.

  In recent days, Goolsby had spoken repeatedly with Tom Newkirk, the SEC lawyer handling the Waste Mangement case, assuring him that Andersen had learned its lesson. The firm would mend its ways, Goolsby promised.

  He glanced through a second document, called the final judgment. On the second page he saw that the firm was forbidden, by a permanent injunction, to deceive anyone in the future. It all seemed pretty boilerplate. Goolsby signed the consent. Andersen was now on notice. If it played fast and loose with the rules again, the consequences would be stiff.

  That same week, federal energy regulators bowed to political reality. The California electricity shortage was not going to end on its own, not as long as traders could go state to state around the West playing games with prices. So price caps were extended to all western states. That clampdown, coupled with rising supplies, finally ended the crisis, more than a year after it began.

  That might have delighted electricity customers, but it troubled Enron investors, who saw California as an opportunity for almost unlimited profits. Now that bonanza was slipping away. Enron’s stock price the day of the announcement hit $43.07 a share, a new fifty-two-week low.

  Vince Kaminski could almost feel his heart tearing out. His best analyst, Stinson Gibner, had just come in to let him know that he was leaving Enron, too. It wasn’t a matter of pay or title. It wasn’t the PRC. It wasn’t that there was a better job offer. It was the Raptors.

  “I can’t have pride in a company that can do something like Raptor,” Gibner said. “I can’t keep working here.”

  Kaminski tried to argue, but his efforts were feeble. It was hard for him to disagree.

  The lawyers arrived in Skilling’s office at 9:15 on the morning of June 20 to talk about the continuing ripple effects from the California electricity crisis.

  Days earlier, Skilling had received a call from Pacific Gas and Electric, a California utility that had filed for bankruptcy months before. PG&E was reaching out to creditors like Enron, asking for meetings to discuss a proposal to help get it back on its feet. After the call, Skilling had asked Mark Haedicke and Richard Sanders, the two senior Enron lawyers handling the California mess, to come discuss the utility’s request.

  Once the lawyers arrived, Skilling decided to raise another issue. He was heading out to California the next day to deliver another speech. Before he left, he wanted to check his facts again. He mentioned his plans and said that his speech was again going to underscore that everything happening in California was a market-driven phenomenon.

  He looked from one lawyer to the next. “Enron has got to be clean as the driven snow. So one more time. Are we as clean as the driven snow on this?”

  Haedicke nodded. “Yeah. There was some stuff going on last year, but we shut that down.”

  What kind of stuff? Skilling asked.

  Sanders was surprised. By now—so many months after they had discovered Death Star, Fat Boy, and the other trading strategies—he thought that Haedicke would have told Skilling about this.

  “Well, there are some allegations of unfair competition and antitrust allegations,” he replied.

  Skilling seemed taken aback. “What are the kinds of things we’re being accused of doing?”

  Sanders paused. Did Skilling really want to know details? He mentioned the names and described each one. Some, he said, were problematic because they involved false documents. Others, like one looping power out of state and back in, smelled bad, but legally were probably okay. Still, Sanders said, the lawyers had ordered the tactics stopped as soon as they were discovered.

  “Okay,” Skilling said. “So we’re as pure as the driven snow?”

  Beau Herrold was desperate. As one of Lay’s investment advisers, he had been scrambling for months to get the family’s finances in order. But every time he felt he was on solid footing, Enron’s stock price dropped, decreasing the value of the assets securing Lay’s loans and triggering more demands for cash from the banks. It was like trying to build a sandcastle at high tide, with new waves coming in every so often, knocking down the latest fortifications.

  And Lay wasn’t making things any easier. His belief that Enron’s share price would pop back up was unshakable. As much as possible, Herrold had been tapping everything else—dumping some of Lay’s few other easy-to-sell investments, trying to negotiate better terms with the banks. But still the destructive waves kept coming.

  So, on June 20, Herrold decided to check out a more aggressive strategy he had been contemplating. Until now, he had used Lay’s revolving credit line with Enron only occasionally, pulling down four million dollars in cash at a time, then waiting before repaying it with Enron stock in hopes the price would recover in the interim. Instead of doing that every so often, Herrold thought, what if he did it again and again and again, to really pay down some of the debt? Get the sandcastle out of the tide’s reach?

  He spoke with lawyers and compensation experts at Enron, asking about limits on the credit line. Scribbling notes as they spoke, Herrold learned he could draw down four million dollars every business day—up to twenty million dollars a week. The only restrictions were that he had to give the company notice, and if Enron stock was used to pay back the loan, Lay had to have held the shares for at least six months.

  What about disclosure? Usually when corporate executives sold stock in their own company, they were required to file a document known as a Form 4 to let investors know. Would Lay have to do that each time he paid back the loans with Enron shares? Herrold telephoned Rex Rogers in the general counsel’s office to find out. Rogers assured him that the disclosure requirements on selling shares to the company were far less stringent.

  “It only has to be reported in the proxy for the year that you’re in,” Rogers said. “There’s no need for a formal Form 4, because it’s a private transaction between Ken and the company.”

  Satisfied he understood, Herrold consulted his stepfather about the idea. Getting his approval, he set to work using the revolving credit line to pay down some debt.

  The next day, June 21, protesters in pig
masks shouted and marched outside the Commonwealth Club in San Francisco, eager to show their contempt for the afternoon’s featured speaker, Jeff Skilling. On the street, a black sedan pulled by. Behind tinted windows, Skilling and two other executives watched as the protesters raged about Enron and corporate greed. It infuriated Skilling; they hadn’t created the mess in the state, the politicians did.

  He clenched his jaw. “I wish we didn’t have to do business in the state of California,” he muttered.

  Minutes later, Skilling was on a platform in the club’s main room. The place was already packed with ticket holders awaiting the discussion about the energy crisis.

  From the back of the room, a blond woman in her early thirties walked up to the third row. Skilling noticed her; she seemed to be staring at him. He figured she knew him from somewhere, but he couldn’t place her face.

  After several more minutes, the time of the speech finally arrived, and an officer of the club stood up to deliver the introduction.

  In the third row, Francine Cavanaugh tried to move slowly. She had just sneaked past security without anyone detecting the item she had smuggled in.

  Asking permission, she moved up to an empty seat in the front row. Then she reached inside her black book bag, pushing aside a brown paper bag she had put there as camouflage. She drooped her shoulders a bit to mask what she was doing; she didn’t want anyone to alert security before she had the chance to take her shot at Skilling.

  The club official droned on as Cavanaugh watched Skilling; he crossed his legs, seeming distracted, then took a breath. Cavanaugh stood and started running toward him.

  Skilling was annoyed. He thought the introduction was a little obnoxious, with all sorts of innuendo that Enron had something to hide. He didn’t like it.

  Suddenly, at the edge of his field of vision, he detected something. A blur. A commotion. He turned to look.

  A woman was running toward him, screaming something. She brought her arm back. Then, he felt a sharp pain in his head.

  ———

  “Jeff, that could have been a gun.”

  It was a couple hours later. Rebecca Carter was standing in Skilling’s house back in Houston, hearing about the protester at the Commonwealth Club who had hit him in the face with a pie. The attack had left his head bleeding slightly, but Skilling brushed off the incident as just one of those things. Carter wouldn’t have it.

  “I thought they had all these security people there.”

  “They did,” he replied.

  “But this woman got close enough to put a pie in your face?” Carter said sharply. “You could’ve gotten shot.”

  Skilling put up a feeble argument but realized she was right. It could have been a gun. Nothing was worth this.

  About that same time, in Islamorada, Florida, Lea Fastow took a seat in a spa chair at Paul Joseph’s Tiki Salon and slipped off her shoes. She placed her bare feet on the towel in front of an older woman, who proceeded to soak, trim, and shape her toenails.

  Lea and Andy had just arrived in the Florida Keys on Enron’s Hawker 800XP. It was a personal trip, but their use of the plane had been approved by Skilling, so long as they each paid a fourteen-hundred-dollar round-trip fare. That would come on top of the cost of a few days at the Cheeca Lodge and Spa, an oceanfront resort. But Fastow didn’t mind the expense. After all, it was being picked up by the Fastow Family Foundation, the charitable group set up with the $4.5 million he stole from NatWest in the Southampton deal.

  Lea and Andy weren’t the only ones relaxing on the foundation’s dime. It was also paying to fly in two other couples—Andy’s brother Peter and his wife, Jana, along with Lea’s brother Michael and his wife, Lilly. Together, they would enjoy a weekend of spa treatments, personal massages, fly-fishing, and tennis lessons—all on the foundation’s tab.

  The siblings had been appointed trustees of the foundation, and this luxury trip was dubbed their first annual meeting. But, legally, the couples couldn’t just party and relax, not if the foundation was going to pay the bill. So over dinner on the evening of Friday, June 22, the official meeting was held—for all of thirty minutes.

  They reviewed the foundation’s “investments”; almost all of the cash was sitting in a money-market account. Still, with so much on deposit, the foundation had earned interest of almost $280,000. The amount going to charity was far less. In 2000, the foundation had made grants—many for as little as a few hundred dollars—of less than $63,000. By far the largest went to the Fastows’ place of worship and to local museums—just at a time when Lea was striving to reach an elite rung among Houston’s art patrons. So far in 2001, just over $34,000 of the interest on the money had gone to charity, again mostly to museums.

  The patterns seemed to belie a true purpose of the foundation: to avoid paying taxes on the stolen money by taking advantage of the exemptions for charitable groups. And the money the Fastows did give away advanced their position in the most exclusive reaches of Houston society.

  But this slush fund of cash had other uses, and not just financing tax-free vacations to posh resorts. On the night of the official meeting, the family members voted to hire a fund administrator, who would receive both a salary and relocation costs. The perfect candidate? Andy Fastow’s dad Carl, who would soon be flown down with his wife at foundation expense to live in the Houston house Kopper turned over when he purchased the LJM funds. The stolen money could help keep Fastow’s parents comfortable in old age.

  Life was good.

  Hoisting a carry-on bag over his shoulder, Skilling, along with his teenage son Jeffrey, bounded down a ramp at Houston Intercontinental Airport. Their flight to Madrid was scheduled to leave in just a few minutes, and Skilling could hardly wait; another three-week vacation about to begin.

  As they approached the plane the morning of June 27, Skilling’s cell phone rang. He pulled it out of his pocket.

  “Jeff, it’s Joe Nacchio.”

  Skilling sighed. Nacchio, the chief executive of Qwest Communications International, and several of his executives had been riding his tail for days. Qwest had its own broadband division and was struggling like the rest of the industry. Weeks before, Qwest and Enron had begun negotiating a fiber-swap deal; essentially, Enron hoped to sell much of its network to Qwest, which in turn would sell back rights on the system. Skilling liked the idea; Enron could dump its network and all the associated costs while still having the capacity available that it needed to serve customers.

  But the terms Qwest wanted made no sense. If Enron was going to keep its customers, it would need to schedule capacity instantaneously. Qwest said it couldn’t provide that service but still wanted a deal. Skilling refused; why sell the network if Enron would have to find another one?

  Qwest kept pushing, and soon it became obvious to Skilling why. They wanted to pay what Skilling considered a ridiculous price for the network, Enron would in turn pay a ridiculous price for the rights to use it, and everybody would book revenues. Nothing much would really change hands; the entire transaction looked to Skilling like an accounting gimmick.

  Skilling made his lack of interest clear innumerable times. Nothing could be done, he told them. But still Nacchio kept calling. Skilling was sick of it. “Joe,” he said, “I’m heading down the ramp for my plane to Madrid.”

  “You’re going on vacation?” Nacchio asked.

  “Yeah.” Skilling reached the door of the plane.

  Nacchio didn’t relent. Skilling should call back as soon as he reached Madrid, he said. The two sides resumed negotiations, but nothing came of it. For that quarter, Qwest and Enron weren’t able to report the revenues that, in truth, would have brought both companies nothing but trouble.

  What the hell is this?

  Sherron Watkins looked through the Enron assets listed on an Excel spreadsheet, trying to comprehend what she was seeing. She had recently started working for Fastow on the corporate-development side and now was spending her days on work she considered demeaning.
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br />   Watkins had been digging through Enron’s records, looking for assets that could be readily sold. Plenty had lost value, like Elektro in Brazil, but could bring in cash. Then there were other investments—in companies with names like New Power, Avici, and Hanover Compressor—that were hedged by entities called the Raptors.

  What Watkins saw made little sense. The losses in the Raptors were gargantuan, totaling hundreds of millions of dollars. A lot, if not all, of that money was owed to Enron. How could any company make good on a commitment that was so huge?

  Stumped, Watkins decided that to do her job, she needed to understand these entities. She called Causey’s office and asked for someone to teach her about the Raptors.

  In Spain, Skilling gripped the steering wheel of his rented car, passing vineyards on both sides of the road. It was his second day of vacation, and he and his son were driving southward on the first leg of a trip from Madrid to Morocco. Their conversation was free-flowing, and Skilling was grateful to be alone at last with the boy.

  There was a pause in the conversation. Skilling decided to broach a new topic. “Jeffrey,” he began slowly, “would it bother you if I weren’t CEO of Enron?”

  This was Skilling’s last fear, that leaving Enron would cost him his children’s respect. But Jeffrey had no idea what his father was talking about. “No,” he replied.

  “It wouldn’t make you think any less of me?”

  “No, it would be good, because then I’d get to see more of you.”

  Skilling thought about that. “Well, I’ve decided—don’t tell anyone, don’t tell your mother or brother—but I’ve decided to leave Enron.”

  Jeffrey glanced at his father. “Oh, good.”

  As June rolled to an end, it was clear that cutting costs and redeploying staff wouldn’t hold back the tide of red ink at Enron Broadband Services. The division, which had been introduced with such fanfare just two years before, couldn’t stand on its own. Senior managers decided to fold it into energy trading. The glory and the hope were dead, the plans for an intelligent network shelved, the push to build a broadband-trading effort scaled down dramatically.