The room was silent for a moment. “Yeah,” Duncan said softly. “I know you had some views on this.”
Days later, on September 25, Bass fought disgust as he reviewed the Raptor memos. Repeatedly, Duncan had misrepresented his advice, saying Bass had concurred with ideas that he had opposed tooth and nail.
Bass started typing an e-mail. He was going to expose every error he had found.
That day, Mark Palmer received the list of questions from The Wall Street Journal. Each was more aggressive than the last, shots across the bow signaling the reporters’ unwillingness to keep wasting time playing footsie with the company’s executives.
Did Enron know the general partner of LJM2 had a profit participation in the partnership that would earn him millions of dollars? … Were LJM2 investors promised they would receive special access to Enron investment opportunities, including the purchase of company assets?
Palmer winced. The company couldn’t just ignore this. He needed to get past Fastow and push Lay to make a decision about how to deal with this.
At about 9:15 the next morning, Ken Lay ambled into a communications room on the forty-seventh floor of the Enron building. He was there for a session of “E-Speak,” an opportunity for employees to ask him questions over the Internet.
A typist who would record his responses was there, and a number of questions had already come in. Lay settled into a chair, waiting for 9:30, when the first answers were scheduled to be posted. Minutes later, it was time to begin.
“Good morning,” Lay said. The typist wrote his words and the questions poured in. Anxiety jumped off the screen. So many people had sunk their savings in Enron stock that a near rebellion was taking place as the price tumbled. In response to their fear, Lay went into his full booster mode.
“My personal belief is that Enron stock is an incredible bargain at current prices,” he said. “And we will look back a couple of years from now and see the great opportunity that we have.”
Employees should spread the good word, he said. The company was sound, its balance sheet strong, its liquidity never better. When asked why more senior executives weren’t buying stock, Lay assured the questioner that plenty were, including himself. He mentioned nothing of his tens of millions of dollars in stock sales to the company to help meet his margin calls.
Lay’s soothing words were exactly what the troops needed to hear. Everything would be fine.
September 28, 2001, the day that would forever change Nancy Temple’s life, began normally enough for her.
Temple was a young lawyer in Arthur Andersen’s Chicago office, having joined the previous year from the law firm Sidley & Austin. This morning her supervisor, Donald Dreyfus, came by to talk about a new assignment.
“There’s going to be a conference call at one o’clock today to deal with some accounting issues for Enron’s third quarter,” Dreyfus said. “I’d like you to sit in on it.”
Apparently, the team handling the Enron account was in deep disagreement with the Professional Standards Group. There had been some accounting issues that could result in either a restatement of Enron’s performance from the first quarter or big charges in the third. Either way, the news would be bad, and Andersen might have problems. It made sense for the legal team to start becoming part of the discussions.
“Sure,” Temple said. “I’ll be there.”
She thought nothing of it. Until that moment she hadn’t even known Enron was an Andersen client.
The words were music to Ken Lay’s ears: Enron stock was terribly undervalued. He was on the phone with Robert Hurst, vice chairman of Goldman Sachs, who was delivering the news that his top investment bankers had been studying Enron and were alarmed at the stock’s market price.
“We are very concerned,” Hurst said, “that Enron is in danger of being targeted for a hostile-takeover attempt by someone trying to buy it on the cheap.”
Lay agreed to meet with the Goldman bankers and listen to their proposals for takeover defenses. Maybe, he figured, they might even have ideas for how to get the price back up.
Vince Kaminski was at his desk when two of his top analysts, Vasant Shanbhogue and Rakesh Bharati, appeared in the doorway. Both men seemed upset as they walked in.
“We have something very important to tell you,” Shanbhogue said.
The two had been working for days on the Raptors. Once Enron decided to shut them down, Kaminski had been asked to calculate some values, and had assigned Shanbhogue and Bharati to the task. The job also gave Kaminski’s group its first opportunity to see the full picture of the Raptors, and something terrible had emerged.
“What’s the problem?” Kaminski asked.
Shanbhogue nodded to his colleague. “Rakesh has discovered that the restrictions against hedging and the hedges of Enron stock reside in the same vehicles.”
The room went silent. Kaminski’s face flushed as he asked to hear more of the details.
This couldn’t be. Enron had sold stock at a discount to the Raptors because they were restricted from hedging. But then the company turned around and agreed to hedge the shares for the Raptors? The Raptors would pay Enron for losses in its merchant investments only after Enron paid the Raptors for losses in its Enron stock.
In essence, LJM was getting a huge ownership stake in Enron through the Raptors, then pushing any losses it incurred back onto the company. It was as if a man bought insurance on his house from his wife, with her backing up the obligation through the money in their joint bank account. It did nothing. It was meaningless.
Kaminski stayed silent for a full minute. His world, his career, just fell away. This company … is criminal. They were lying to investors. They were playing a shell game, hiding losses to make themselves look successful.
I have to fight this to the bitter end, Kaminski thought. This is the end of my employment with Enron.
“We have to deal with this,” Kaminski said. “We have to talk to these people right away.”
“All right, then,” Lay said. “What are the choices?”
Sitting across from him were Mark Palmer and Andy Fastow. Palmer had requested the meeting to come up with a response to the Journal. Fastow’s strategy—stop returning their calls! ignore them!—was definitely out of the PR Suicide Playbook. From the questions, this piece was going to be devastating. The paper couldn’t be ignored.
Palmer spelled out the situation. “Ken, Andy says these things are too complicated. He says by the nature of their questions, the reporters don’t want to know what the purpose was, they just want to beat up on us.”
Palmer spoke for several minutes, with Fastow silent throughout most of the discussion. Finally, Fastow leaned forward. “Ken,” he said, “if you want me to talk about LJM, I’ll do that, if that’s what you think is best.”
Palmer glanced at Fastow, wanting to wring his neck. All the screaming, and now—oh, whatever you want, Ken. It was like something out of a movie, with Fastow in the role of the obsequious yes-man. Lay considered the situation.
“It goes against every bone in my body,” he said. “But if the best thing is not to go into detail because they don’t want to hear the truth, then we’ll give them a written statement.”
That was the decision. Enron would not offer up Fastow—or anybody else—to answer the Journal’s questions.
Kaminski stared at the speakerphone in the center of the table, struggling with his anger. At his insistence, he had been brought in on a discussion with accountants from Andersen and Enron who were involved in the Raptors. And he was letting them know that he believed, in the early days, they had deceived his analysts by withholding information.
Kimberly Scardino, an Andersen accountant, asked for the analysts’ opinions about a valuation issue. Kaminski wasn’t about to get drawn into this again.
“We cannot answer your question,” he said. “We don’t know the facts. We haven’t seen the legal documents.”
The line had been drawn. Kaminski was telling the accou
ntants that he would no longer trust them, that he had to review everything—everything—to be sure his team’s answers were not going to be used for illicit purposes.
Ryan Siurek, an Enron accountant, glanced across the table at Kaminski, looking annoyed. “Kimberly,” he said, “give us a few minutes. We’ll get back to you.”
Siurek pushed a button on the speakerphone and disconnected the call.
There was no holding back anymore. Kaminski stood and walked to the whiteboard. Scribbling pictures and numbers as he spoke, he explained how the deals within the Raptors were filled with contradictions, shifting risk back and forth to no end, giving discounts for no purpose.
He turned to look at the group. “Something,” he said, “is drastically wrong here.”
Later that day, John Stewart was speaking to Nancy Temple from the Andersen legal department.
“What documents should we keep on all this?” Stewart asked. “Historically, we keep everything.”
Temple asked how many records existed. Plenty, Stewart said.
“We’ve got three or four buckets of e-mails,” he said. In addition, there were flowcharts, memos put together to justify certain decisions, and then lots of records of the back-and-forth debate over the last couple of weeks.
Andersen had a policy on document retention, Temple said. He should keep the original Duncan memos and final drafts. But everything else should be destroyed, including the e-mails. That’s what the policy required.
“I need the earlier draft versions of memos,” Stewart protested. “I need it for my own files, because it captures the work that the PSG did on this.”
It couldn’t be done, Temple said. “Andersen has a policy,” she said. “You should follow it.”
The next morning, Kaminski declared war. He had spent the night tossing in bed before deciding to make a clear break. He prepared an e-mail for Scardino at Andersen.
Questions could not be answered, he typed, until his team was given access to all of the underlying documents. He spelled out his concerns about the stock-price discounts and the vanishing hedge restrictions. It was basic, he wrote. No one could have their cake and eat it, too.
The following day, Kaminski burst into Rick Buy’s office. If his career at Enron was going to go down in flames, he planned to make a lot of noise on the way.
“Listen, Rick,” he said as he stormed in. “We have discovered a very serious problem with the Raptors.”
Buy looked up from his desk, a pained expression on his face. He was tired of hearing all of the complaints about the Raptors.
Kaminski plunged ahead. “I am not going to sign off on anything related to the Raptors,” he said. “And I don’t care if I’m fired for it.”
Buy raised a hand. “Whoa, wait a minute, I don’t think you’ll be fired,” he replied quickly. “Now that Skilling’s gone, we have a different mantra at Enron.”
He looked Kaminski in the eye. “We’re expected to be honest,” he said.
The break between Kaminski’s group and Enron Global Finance worsened with each passing hour. By October 3, he had instructed every analyst to refuse any assignments from the division unless they were provided in writing.
At the same time, Kaminski began to suspect a cover-up had begun. Analysts noticed that messages were disappearing from their Microsoft Outlook mailboxes. They had no idea how it was being done, but Kaminski wouldn’t stand for it.
He went to speak to his team. “Everyone!” he said. “I want you to start forwarding your personal messages to private e-mail accounts!” If anyone was trying to hide the truth, he would do his best to stop it.
That morning at eleven, Kaminski and two of his analysts, Shanbhogue and Bharati, responded to a written request from the finance group for help. They met in a conference room on the nineteenth floor. When Kaminski and his staffers arrived, five finance executives were waiting.
Kaminski started speaking as soon as he stepped in. “I am very uncomfortable with what is going on,” he said.
Ryan Siurek answered. “Vince, you aren’t the only one. That’s why we’re unwinding the Raptors.”
But before they went further, Siurek said, they needed to talk about Kaminski’s e-mail to Andersen. The message really made waves around Enron. No one but Causey was supposed to communicate directly with the accounting firm.
“Okay, fine,” Kaminski said. “If this is the procedure, I won’t send any more messages to Andersen.”
He pointed a finger across the table. “But I want you to know that what is going on is unacceptable. You guys made me look stupid and dishonest at the same time.”
An executive with corporate finance spoke up. “We understand, Vince,” he said. “But we need your help now. We have made a commercial decision to unwind the Raptors and pay Kopper and LJM a certain amount of money. And we want your help to calculate the numbers, so we can back into that amount.” The total amount, thirty-five million dollars, wasn’t mentioned.
Were these people insane? “How on earth can you justify paying anything to Kopper?” Kaminski said. “The Raptors are underwater!”
Well, the executive said, Raptor II had some positive value.
“And how is that? Not the last time I looked.”
There had been a deal between Causey and Fastow, the finance executives explained. Back in May, the two had agreed to remove certain poorly performing assets from the hedges. So now Raptor II was worth more. The result was that Kopper, as the new general partner of LJM2, was owed money.
Kaminski threw up his hands. It’s a hedge until it loses money! Then Enron takes it back! “This looks better and better!” he shouted. “Two insiders make a verbal agreement to benefit another insider!”
Kaminski could not contain his disgust; he stormed out. Siurek ran behind, begging him to return. Kaminski walked back in and stared at the finance executives.
“Listen, I want to make this very clear,” he said. “We’re not doing any work for you unless we see all the legal documents.” He glared at the men.
“But I guarantee you,” he growled, “I see something in those documents I don’t like, I scream loud and clear.”
Kaminski left the room, followed by Shanbhogue and Bharati. They were shaken. Shanbhogue sidled up to Kaminski.
“There’s only one phrase to describe what they are doing,” he said. “They’re siphoning off company funds.”
The Morial Convention Center in New Orleans, just walking distance from the French Quarter, was buzzing with activity on the morning of October 5. Andersen partners from all over had arrived in town for their first meeting under their new chief executive, Joseph Berardino.
Since taking over earlier in the year, Berardino had signaled his plans to reshape the firm and, for this meeting, wanted to rekindle its spirit. His speech would feature a dramatic stunt; in answer to a rhetorical question about who would lead Andersen into the future, the back wall of the stage would turn, becoming a line of mirrors that showed the reflection of the audience.
That would follow a video celebrating the best of Andersen’s best, the partners who represented everything good about the firm. People like David Duncan, whose Enron work would be featured. Berardino had just notified Duncan that he had been selected for the CEO’s advisory council, designed to help plot strategy; there was no better signal that Duncan was the type of partner others at the firm should emulate.
Berardino was hanging around the convention center, sipping coffee and talking shop with his partners. An Andersen official approached him, saying he had news.
“There’s an issue down at Enron,” the official said. “We’ve got people on the ground with the team, but it’s going to be real hard, and we have some real hard decisions to make in the third quarter. We may need your help.”
Fine. “Let me know what I can do,” Berardino said. But he wasn’t worried. Their team at Enron was top-notch.
Enron had finally calmed down. In early October, when the board arrived in Houston for the
quarterly meeting, the company seemed poised to turn a corner.
In meeting after meeting, the news was upbeat. At the audit committee, Causey presented a list of charges the company would take against its third-quarter earnings—all nonrecurring events, he told the directors. David Duncan chimed in, assuring the assembled directors that the accounting associated with the Raptor losses was appropriate.
The audit committee heard about Sherron Watkins as well. Dilg and Hendrick presented the results of their investigation succinctly: While there was discomfort about the perceived pressure on employees created by the Fastow related-party transactions, the lawyers reported, everything about the deals appeared to be on the up-and-up.
“Our firm does not feel that any further investigation is necessary,” Dilg said.
The directors asked a number of questions, then instructed the company managers to thank Watkins for coming forward. Everything seemed under control.
The news out of the finance committee was equally upbeat. Fastow announced that Enron’s liquidity—the cash available or accessible for operations—was significantly above the minimum levels required by the board.
“We have tested our liquidity for the possibility of very negative market events,” Fastow said. “And even in such instances, it remains adequate.”
Enron had already been through a big test in the aftermath of September 11, after all. Now, listening to Fastow’s assurances, the directors felt confident this company could withstand whatever the world threw at it.
The meeting of the full board was a celebration of Enron and its potential. Bankers from Goldman made their presentation about the threats from the low stock price. The directors agreed to consider takeover defenses, to ensure Enron would not be at risk from a lowball hostile bid.
Then came the business presentations. Dave Delainey, head of Enron Energy Services, told the board that the retail division was putting in a great performance. The elements were in place, he said, for increased growth and profitability. The same held true for the wholesale division. Its head, John Lavorato, reported steadily increasing earnings, with volumes growing significantly.
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