Conspiracy of Fools

by Kurt Eichenwald

  “Mike, we’ve got to pull it all down,” Lay replied. “I understand what you’re saying, and it’s a valid argument. But we think this is the most prudent thing for us to do.”

  Carpenter could sense the conversation was over.

  “I have to respect your judgment, Ken,” he said. “And if that’s what you want to do, of course we’ll cooperate.”

  Lay hung up and decided to make one more call. One of Enron’s other banks, J. P. Morgan Chase, had as a vice chairman an old-line Texas banker named Marc Shapiro, a longtime friend. Shapiro should know what was happening, Lay decided. Maybe he would have some ideas on how to help.

  Later that day, Jimmy Lee, a Morgan vice chairman, was in his glass-walled office just off the bank’s trading floor. As Lee scanned his Bloomberg monitor, the intercom on his desk crackled to life.

  “Mr. Shapiro’s on the line,” Lee’s secretary said.

  Lee snapped up the phone. “Hey, Marc!” he enthused.

  “Hey, Jimmy. I know someone, he’s on a couple of big boards, and he really needs your help.”

  “Who is it?” Lee said quickly.

  “Ken Lay with Enron. He has a problem, and I think he could really use your help.”

  “Okay, what’s his number?”

  He didn’t recognize Lay’s name, but he knew Enron. Lee thought nothing of it. Just another company running out of cash or struggling with a bad balance sheet. He’d seen plenty of them and was eager to toss another corporate giant up onto the operating table. He hadn’t lost a patient yet. No reason Enron should be any different.

  The next morning, the streets around Enron were blocked, and security tightened. Regardless of what was found in the crack house, law enforcement had decided to take precautions. Whalley was making his way to the building when an employee saw him and called out.

  “Hey, Greg! What’s with all the stepped-up security?”

  Whalley smiled. He wasn’t about to announce that Enron was working through a possible terrorist threat.

  “Well, we pulled a three-billion-dollar revolver, and we put it in small bills on the fourth floor,” he replied. “So we’re just making sure to guard it”

  The thankless job had been handed to Glisan. Find out about Chewco, dig through the documents, brief the board. He met with executives to discuss the deal, including Rodney Faldyn, head of accounting transactional support. Faldyn never knew much about Chewco, but now, the more he heard, the more uncomfortable he felt. It didn’t sound like the accounting should work. He went to see Causey.

  “Rick, I think we’ve got a serious problem with Chewco,” he said.

  Soon after, Tom Bauer, an Andersen partner on the Enron team, received a call from Faldyn and Ryan Siurek.

  “I need to ask,” Faldyn said, “about the requirements for the three percent equity standard, what it takes for a special-purpose entity to be considered valid.”

  Again? Bauer had explained this concept to Enron repeatedly, and it just wasn’t that hard! For an off-books partnership to be valid, three percent of its capital had to come from an investor independent of the company. Simple. But year after year, Enron just tortured this rule. What about this? What about that? It was tiresome.

  “What’s the issue?” Bauer asked.

  “Does the three percent have to be exclusive or any related-party equity?” Faldyn asked.

  A no-brainer. It wouldn’t be independent equity if it was from a related party. Bauer recited his answer. His words were greeted with silence.

  “This is what I’ve said for years,” Bauer said. “It’s what I told you on Chewco and on the LJM transactions.”

  The silence continued. “Well,” Faldyn said, “based on some new information, Chewco might not meet the standard.”

  It couldn’t be true, Bauer thought.

  Chewco had been used to buy out Calpers’s interest in the pool of energy assets known as JEDI. Those produced lots of cash flow. There was no shortage of investors who would have wanted three percent of that.

  And the consequences of a mistake on Chewco could be devasting. If the three percent wasn’t there, then the partnership wasn’t independent. Instead, Chewco was Enron. That would knock over the next domino. If Chewco was Enron, it couldn’t be half-owner in JEDI. So JEDI was Enron, too. None of them was off-books. All of JEDI’s revenue and income would have been Enron’s. All of the company’s numbers, all of them, would have been wrong, dating to the day Chewco was formed. Back four years. To 1997. It couldn’t be true.

  Skilling was going out of his mind.

  For days he waited to hear from Enron, knowing precious minutes were being lost. Finally, on Friday, he couldn’t delay anymore. He was scheduled to fly to Florida that day with Rebecca Carter to attend a boat show with Cliff Baxter. Skilling had to know if he could leave.

  He called Whalley. “Okay, Greg, what’s been decided?”

  Whalley reacted as if he hadn’t thought about Skilling for months. “Oh, yeah. We decided not to do it.”

  Skilling dropped into a chair. “What!”

  “We had a management committee meeting, and the sense of the group was that it wasn’t a good idea.”

  Skilling could almost feel Enron slipping away. “Why?” he asked plaintively.

  “No one knew how this would play out in the press,” Whalley said. It would just confuse people.

  Skilling listened. “Okay,” he said. Then he hung up.

  He sat on his couch, his eyes closed. The reasons were weak; he knew what this was about. Fastow looked dirty. He had taken a lot of money. Fastow had been his guy. Skilling had no doubt. His buddies must suspect he was in on it.

  Rebecca Carter wandered in. Skilling was sitting on the couch, looking wrecked. He looked up at her.

  “They don’t want me back,” he said softly.

  “What?”

  “They don’t want me back,” he repeated.

  He looked down at his lap. “This may be the end.”

  Jordan Mintz seethed. What the hell was the matter with everybody? How could he possibly be scheduled to have a meeting that morning to justify forcing LJM people out of the building? What did it take?

  Mintz had been fighting this battle for months, picking up where McMahon left off. But nothing happened. So finally, with the world crashing down, Mintz found some receptive ears, willing to consider booting LJM out. Then, Kopper protested. He needed more time, he said.

  Mintz couldn’t believe Kopper’s chutzpah. All his dirty little deals had pushed Enron to the edge of collapse, and now he wanted more time to get out? The man wasn’t even an Enron employee anymore! He was working full-time for LJM! The meeting was scheduled for 10:30. Glancing through the glass walls of the conference room, Mintz saw Kopper making his way down the hall, right on time. Unbelievable. The guy was actually willing to argue his case, right in the middle of all this chaos.

  Kopper arrived, and Mintz shot him a look of contempt. Raising his hand, Kopper pointed a finger at him.

  “Don’t start with me!” he snapped.

  The discussion began, and for once Kopper had no supporters in the room. It looked as though finally Enron was going to do the right thing. As the meeting came to an end, Kopper brought out an envelope and tossed it to Mintz.

  “You guys need to take care of that,” he said.

  Mintz pulled open the envelope, and his stomach sank.

  It was a bill for several hundred thousand dollars. Kopper was charging Enron for the expenses that LJM2 incurred on the wind deal. The one Enron never wanted the fund to do.

  The Enron board met that afternoon at 12:10, joined by a stern-looking, mustached man. If not for his expensive suit, the man might have been mistaken for an Irish cop.

  Lay opened the meeting and gestured toward their guest.

  “Joining us today is Mr. Bill McLucas from Wilmer, Cutler & Pickering,” he said. McLucas was in Houston at Enron’s request, Lay said, to help on the current crisis.

  McLucas stood. He
summarized the events of the past few weeks, describing the challenges Enron faced. “It is critical that Enron both establish credibility with the SEC and create confidence in the marketplace,” he said.

  The way to accomplish that, McLucas said, was to form a special committee of independent directors. That group, he said, should engage lawyers—who in turn would hire forensic accountants—to review the related-party deals.

  Lay picked up the theme. “If a special committee will help instill confidence, I would urge we proceed down that path,” he said.

  The directors warmed to the idea, then took things a step further, discussing whether to add a new director to the board, someone uninvolved in the decisions of the past who could lead the special committee in its investigation.

  Jim Derrick thought he knew the perfect person. But first he needed to run the idea by Vinson & Elkins.

  Rick Causey just stared at Ben Glisan.

  “You have got to be kidding me!” he said.

  All day, Causey had been going back and forth with Glisan, Faldyn, and a few others about Chewco. At each step, with each new disclosure, the story got worse.

  The Chewco paperwork was a shambles. No one seemed to have a complete set; documents were filed haphazardly all over the place. The secrecy imposed around Chewco had allowed everyone to be slipshod in handling the records. Now Enron was paying the price.

  Even so, the fragments that had been assembled painted a gruesome picture. It appeared Kopper may have invested in Chewco, but it wasn’t clear yet how much. And Dodson, Kopper’s lover … How did the accounting rules view homosexuality? If Dodson was Kopper’s wife, they both would have been considered related parties to Enron. That would obliterate the three percent outside equity.

  Worse, Kopper had presented the cash put into Chewco by Barclays as independent equity. But there were problems. When Enron repurchased Chewco for thirty-five million dollars, Kopper took a ten-million-dollar cut. Barclays, which put up all the real cash, got its money back, plus a bit. The money from Barclays sure looked like a loan.

  Then there were Kopper’s instructions on where to send some Chewco distributions. Not to Barclays. Not to the general partner created. Instead, to the attention of Lea Fastow. At her home address. Causey shuddered.

  Was it possible there was no outside equity in Chewco?

  It was early evening in Houston, and Ken Lay was sitting at his desk, building up to his next move. He had no choice. He called to his secretary. “Rosie, I need to talk to Alan Greenspan.”

  Within minutes, Lay was connected to the Fed chairman.

  “Alan, I was calling to update you on our situation,” Lay said. “We’ve had a pretty rough ten days or so.”

  “Yes, Ken, I’ve been reading in the papers,” Greenspan replied. “Sorry you’re going through all this.”

  “Thank you,” Lay replied. “Well, things are still very rough. We’re beginning to see troubles with our trading partners.”

  He gave a rundown of the events of the last few days and of Enron’s desperate attempts to shore up its liquidity.

  “I think it would be a good idea for the Fed and the Treasury to begin monitoring what’s going on,” Lay said, “just to see what might happen if we don’t pull this out.”

  Of course, Lay said, he fully expected Enron would survive. “But,” he said, “I think it’s best to have an effort to monitor things, just to prepare for the worst.”

  By early that evening, Lay had tried to alert every top finance official in the government of Enron’s precarious state. In addition to Greenspan, he had phoned his friends Don Evans, the Commerce Secretary, and Paul O’Neill, the Treasury Secretary. Neither had been in, but an O’Neill assistant had suggested that Lay phone the Secretary on Sunday at his Washington apartment in the Watergate complex.

  Lay didn’t have big plans for the calls. He wouldn’t explicitly ask for government assistance, but he would let his old friends know how dire Enron’s situation was. If one of them offered to extend a lifeline, all the better.

  At seven o’clock, Lay walked down the hallway to Jim Derrick’s office. His general counsel had just called him to say that they needed to meet. Causey was there, looking distraught.

  “You need to hear this, Ken,” Derrick said.

  Causey explained that they had been reviewing Chewco. They hadn’t yet drawn definitive conclusions; they still needed more documents. Lay felt the anxiety creeping over him. This was too much throat clearing.

  “Okay,” he said. “So what do we suspect?”

  Causey glanced at the floor, then looked at Lay.

  “We may have a serious problem,” he said.

  The lockout began that same night. After weeks of warnings to employees, both in home letters and in e-mails, Enron’s retirement plan was officially changing administrators. Now, scheduled for weeks to come, employees could make no changes in their retirement accounts until all of the paperwork was transferred. That day, Enron’s share price had closed just below fourteen dollars.

  After passing the security gate at the Huntingdon condominiums, Chuck Watson drove toward the parking area. It was the morning of October 27, a Saturday. The meeting that day with Lay probably wouldn’t amount to much, Watson figured; a merger between Dynegy and Enron seemed far-fetched.

  On the elevator, Watson pushed the button for the thirty-third floor. A minute or so later, the doors opened; the entire floor was Lay’s. Watson stepped off, and Lay appeared. The two men greeted each other and headed to a kitchen area.

  “Would you like some coffee?” Lay asked. “I made it myself.”

  Soon they were in the living room, loaded up with coffee and sweet rolls. Watson brought out a handwritten list of issues he wanted to discuss. Lay had a typed version of the same thing. Watson quickly took charge.

  “If this happens, Ken, it’s going to have to be as a merger of equals, with no premium,” he said.

  Lay was taken aback. Watson was talking about buying Enron at its current market price, with no added cash for shareholders. That, he thought, just wasn’t right.

  “This is a company that not long ago was trading at ninety dollars a share,” Lay protested. “The only reason our share price has fallen so far, the only reason we’ve had recent problems, is because of short sellers and the media”

  Watson studied Lay. His voice was strong and emphatic. Lay either believed everything he was saying, Watson thought, or was the most accomplished liar he had ever met.

  “Ken,” Watson said, “if you want me to step in front of the train, this is the only way it’s going to happen.”

  They reached several understandings. A deal had to happen quickly; Enron was fading fast. Watson also wanted Lay to formally stand behind the company’s numbers, including its projections for 2002. Lay agreed.

  Dynegy wasn’t going to take everything. The international projects looked like dogs; in fact, Watson wanted nothing outside of North America, except London trading.

  “I have to ask you, Ken,” he said. “Is there another shoe to drop?” Lay shook his head. “The banks, the lawyers are all over the company. They haven’t found anything.”

  What about the name of the new company? “I believe it should be called Enron-Dynegy,” Lay said.

  No way, Watson retorted. “Ken, the Enron name has to go,” he said. “It just has become too sullied.”

  Lay protested. If not Enron-Dynegy, what about Dynegy-Enron? Again, no. After a few more times at the plate, Lay gave in, for now. He tentatively agreed to plain “Dynegy.” Watson said he would run the merged company; Lay could stay on the board, perhaps as chairman emeritus. As for management, Watson said he would keep Whalley. But that was it.

  After hours of fighting for scraps, Lay had had enough for one day. Now they were both getting hungry. Lay glanced at the kitchen.

  “Nobody left any food,” he said.

  Later that day, a contingent of Andersen accountants trooped into Causey’s office for a Chewco update. The gr
oup, including Duncan, Bauer, and Deb Cash, was shown a whiteboard where a sketch of the Chewco structure had been drawn. Bauer took out a piece of paper and copied it down.

  Causey laid out the details, beginning with Kopper’s possible control and the role of his lover, Bill Dodson. Bauer was astonished; he had worked on Chewco, and this was the first time he had heard about Dodson’s connection.

  From there, Causey described the issues that had emerged relating to Barclays, the failure of the bank to receive a significant return from the Chewco purchase, and the decision to send distributions to Andy Fastow’s wife.

  Causey looked stricken. “I didn’t know about any of this until I spoke with Ben,” he said. “I promise.”

  The room was heavy with tension. “This is deeply troubling, Rick,” Duncan said.

  Bauer agreed. “Based on this information, it looks like Enron may have actually sponsored Chewco,” he said.

  But they still didn’t have enough evidence to prove it.

  The first team of lawyers from Weil, Gotshal arrived in Houston that afternoon. Tom Roberts and Mary Korby, a partner from the Dallas office, were led through Enron, meeting executives in the trading division.

  From the beginning, some things seemed oddly out of whack. For one, the lawyers still hadn’t met with Derrick, the general counsel—and effectively, they never would. The trading division was in revolt, struggling to salvage itself, regardless of what happened to the rest of the company. That made Mark Haedicke, the top lawyer in that division, Weil, Gotshal’s primary contact.

  Then the executives themselves seemed almost psychologically damaged by the past few weeks. One top trader kept pulling his shirt over his head in the middle of conversations. Other corporate chieftains spoke in too rapid a clip, racing after solutions that weren’t there.

  Finally, Roberts and Korby were taken to a conference room, where they met with Whalley, McMahon, and the trading team. The executives spent hours describing Enron’s structure, communicating a strong message: the traders cared only about saving their operation, the rest of Enron be damned.

  One suggested finding an equity fund, like the Blackstone Group, to inject a few hundred million into trading. Another brought up the idea of borrowing money against company assets. But there wasn’t a lot to choose from. All of the international projects were underwater, worth less than the amount already borrowed against them.