Conspiracy of Fools

by Kurt Eichenwald

  As Buell spoke, Skilling turned to face the prosecutor, clasping his hands in front of him. He didn’t flinch when Buell said that the charges could bring a maximum of 325 years in prison.

  Magistrate Stacy asked Skilling for his plea.

  He stood up straight. “I plead not guilty to all counts,” he said.

  Five months later, on July 8, the final domino fell.

  Early that morning, a silver Crown Victoria pulled into space 35 in the parking area behind the Houston courthouse. Special Agent Paula Schanzle pushed open the front passenger-side door and emerged from the car. She opened the back door, reaching inside and grasping a man beneath the arm. He turned and stepped out of the car.

  It was Ken Lay. After three years of investigation, he had been indicted. He was dressed in a blue sports coat and red tie, and seemed relaxed despite the handcuffs binding his arms behind him. As Schanzle escorted him toward the courthouse, reporters called out from behind a fence, asking if Lay had anything to say.

  “A little later today I will,” he said, sounding almost nonchalant. He was the thirtieth defendant. By then, executives from Broadband had been indicted, including Ken Rice, who would soon plead guilty to misleading analysts about the state of the company’s technology at the 2001 conference. Six executives from Merrill and Enron who participated in the Nigerian barge deal had been indicted—and five of them would eventually be convicted. Only a lowly Enron accountant named Sheila Kahanek would be cleared.

  With criminal cases pushed forward following the discovery of the Stoel Rives memos, federal prosecutors stepped up their efforts in investigating possible illegal trading in the California energy markets. Ultimately, the three Portland electricity traders most involved in the California manipulations—including Belden and Forney—would plead guilty.

  But all of those cases would be little more than a sideshow to this day: the opening salvo in the criminal prosecution of Ken Lay.

  Lay was taken inside the courthouse. He was placed in a holding cell with two men in leg irons, both charged in the smuggling-ring deaths of nineteen undocumented workers.

  One of his cell mates looked at Lay curiously. “I think I saw you on TV last night,” he said.

  For three hours, Lay waited in the cell, where he emerged as the jailhouse celebrity. One prisoner hit him up for some investment advice.

  “Well, I’ve not really thought much about that recently,” Lay responded.

  Later, at 11:40, he was brought into courtroom 701. Standing alone, he glanced around the gallery, looking for a moment at his wife, Linda. He walked to the defense table, sat down, and slowly rocked in his chair.

  Everyone stood when Magistrate Judge Mary Milloy strode into the room. Lay walked before the bench with his lawyers. He stood nervously, swaying on his heels. Again the procedure was the same, including the discussion of the criminal charges.

  Lay had been added as the third defendant to the indictment of Causey and Skilling, but the case against him was markedly different. He was not charged with involvement in or knowledge of the Fastow manipulations; indeed, the case focused on what he said and did in the final weeks before Enron’s bankruptcy. His statements of confidence in the company and its prospects, the indictment said, had been a lie. He was charged with misleading Arthur Andersen that fall about Enron’s plans for its Wessex Water plant, in an effort, the government said, to minimize the impact of an accounting change. And he was accused of lying to the banks that lent him money, by improperly using some of the cash to purchase stocks on margin.

  Lay was asked for his plea. “Not guilty, your honor.”

  But the day didn’t end there. Ken Lay and his lawyers decided to take his case public right away. They arranged for a press conference at the DoubleTree Hotel, down the street from what had once been Enron headquarters.

  Reporters, family members, supporters, and former employees packed the room. Lay, accompanied by his wife, stepped onto a makeshift stage, with Linda taking a seat in the back. Lay strode up to a podium lined with microphones.

  “Ladies and gentlemen, number one, we’re pleased that you came over to spend a few minutes with us,” he began. “It has been a tragic day for me and my family. But we also know that an indictment came down that should not have.”

  He accepted responsibility for what happened at Enron, he said, but added that did not mean he committed any crime. “I firmly reject any notion that I engaged in any wrongful or criminal activity,” he said.

  He had believed in the company, he said. He had never lied. Now he wanted a speedy trial. “We are anxious,” he said, “to prove my innocence.”

  He invited questions and answered everything thrown at him, insisting repeatedly that he had done nothing improper. After thirty minutes he signaled that he was done.

  He and his legal team were ready to keep answering questions in the days and weeks to come, Lay said.

  “We are entering into this new period,” he said. “You will be hearing quite a bit from us.”

  He thanked everyone and walked over to Linda. As the couple headed off the stage, a group of supporters on one side of the room stood and applauded, cheering on Lay as he entered into his last and most desperate battle.

  ACKNOWLEDGMENTS

  THIS BOOK HAS PLENTY OF UNSUNG heroes. It’s time to sing about them.

  At The New York Times, Brent Bowers played the essential role of primary reader, adviser, editor, and sprinkler of magic. His keen insights and suggestions found their way onto every page. From the first day that I made the long jump from tracing terrorist financing to covering Enron’s demise, Glenn Kramon, then the business editor, was an enthusiastic supporter. Jim Schachter, then deputy business editor, was with me every step of the way, fielding innumerable late-night and weekend phone calls from me as we wound our way through the Enron morass.

  Rich Oppel was the first to introduce me to players in the Enron tale, and his wise counsel has been an important asset for me ever since. David Barboza, a top-notch reporter, ripped up Houston as he delved into aspects of the story; during this project, Dave was always available with thoughts, advice, and assistance. And, as always, Floyd Norris was there, serving as a guide to Enron’s complex financial machinations. He is, quite simply, the smartest financial reporter in the business today.

  As the years passed, new players took over at the paper, and I owe them my thanks. In particular, Larry Ingrassia, who arrived as business editor during my work on this book, has been endlessly patient and encouraging. As deadlines passed with no end in sight, his support was critical in allowing the manuscript to finally see the light of day. Others at the Times to whom I owe thanks include Tom Redburn, Dan Niemi, Diana Henriques, Donna Anderson, and Maureen Balleza.

  I also had the support of numerous researchers and document managers. In Texas, David Wethe, now at the Fort Worth Star-Telegram, was an eager and top-notch investigator, with both the skills to conduct a penetrating interview and the work ethic to dig through thousands of pages of documents rapidly. In California, Nick Grudin, now a graduate student at the Kennedy School, dove into projects with an endless enthusiasm, digging up sources and records at a blinding pace. More than a few times, I was delighted to see a giant box of new documents arrive at my home, courtesy of Nick’s dogged efforts.

  When I hired him, Jordan Wolf was a seventeen-year-old with a willingness to handle the unenviable task of placing tens of thousands of documents in chronological order. After he demonstrated an industriousness and maturity far beyond his years, his responsibilities soon branched out to more complex research tasks. Now in his first year at Yale University, I have no doubt that all of us will be hearing great things of Jordan in the future. When Elizabeth Keeler, a dynamo and a friend, stepped in to take over for Jordan, I was astonished at her alacrity, good cheer, and efficiency. Elizabeth, you made so much possible. Thank you.

  Finally, I had two assistants who provided endless support. Diane Obara, with me on a book for the third time, wa
s always available during the hard slogging, ready to take on any task I threw at her. And this go-round, she was joined by Debra Piedra, who amazed me with her ability to jump in on any last-minute assignment, providing not only what I needed but also tossing in special extras from name indexes to additional research. She is an absolute delight.

  Friends played key roles. Tim Perkins was my resident computer genius, directing me to software I needed and teaching me to download thousands of Enron documents stored on compact discs. Others read the manuscript and offered suggestions, including Denton Watumull, Deborah and David Michel, Robert Keeler, and Margie Tippen.

  I also want to thank (and apologize) to Elva Eichenwald, Tim and Samantha Durst, Laurence and Alma Alden, Margie and Terry Tippen, Greg and Cynthia DeMars, Marcia Jones and Jeannie Caldwell, Linda and Joe Altick, Katherine and David Stewart, Magdelana Malczyk, and Errington Thompson. The guys of 2010 Blues—David, Denton, Greg, Robert, and Terry—were amazingly patient with my troubled schedule and frequent exhaustion. And Freya Manston was once again there for me, offering her keen insights as this book moved from idea to manuscript.

  My agent, Andrew Wylie, was an enthusiastic supporter of this project from its inception and, along with Jeff Posternak, was always available with solutions to problems I encountered. Andrew and Jeff were an absolute delight.

  At Doubleday Broadway, my editor Stacy Creamer suffered through experiences that are sure to be cited in some future nomination for sainthood. Her fabulous assistant, Tracy Zupancis, was always there to gently nudge me along to meet my next obligation. And Ingrid Sterner put in what was simply the most amazing performance I have ever witnessed by a copyeditor. She saved me in more ways than I could express. Meanwhile, Sean Mills, the production editor, served as my air traffic controller inside the publishing house, bringing us all in for a safe landing. There are far more people in the Doubleday Broadway family to whom I owe my gratitude; put simply, they are total pros who made this experience enjoyable. I thank you all.

  I’m at a loss how to express my debt to my family. My wife, Theresa Eichenwald, never wavered in her support—bucking me up, assuming extra workloads, keeping me sane. I love her dearly, and cannot thank her enough. Theresa, you are the greatest gift in my life—with the possible exception of our three boys, Adam, Ryan, and Sam. Their endless patience and support made all of this possible. Guys, I love all of you and cannot thank you enough. Now, let’s start having game night, just like I promised.

  NOTES AND SOURCES

  THIS BOOK GREW OUT of my three years of covering the Enron scandal for The New York Times. It is based on more than one thousand hours of interviews with more than one hundred participants in these events, as well as thousands of documents. Every person who plays a significant role in this story was contacted—either directly or through a representative—and given the opportunity to be interviewed.

  The primary documents for this book filled more than two hundred thick three-ring notebooks. Secondary documents took up twenty file-cabinet drawers. The records included notes of interviews prepared by various government bodies, including the Federal Bureau of Investigation and the Securities and Exchange Commission, as well as secret testimony before a federal grand jury investigating the Enron and Andersen debacles, the SEC, the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission, and the bankruptcy examiner in the case. In addition, notes of interviews conducted by various other groups and bodies, including congressional investigators and lawyers, were obtained.

  Other documents included e-mails and memos, internal government records, personal diaries and notes, schedule books, expense and travel records, telephone logs, SEC filings, board minutes, bank documents, video and audio tapes of described events, contemporaneous transcripts, reports, and presentations, an array of other investigative records, books, and newsclippings.

  All of the interviews—with both principals and others whose names are not generally known but who witnessed specific events—took place during the time of ongoing criminal and regulatory investigations as well as untold numbers of civil suits. As a result, those who agreed to speak with me, almost without exception, did so on the condition that their identities not be revealed.

  At times, recollections and documents conflicted. To resolve these problems, I established standards of credibility: Tapes and transcripts of events trumped all other recollections and documents. Second were contemporaneous documents: expense records, e-mails, travel documents, diaries, notes, memos, schedule books, phone logs, and so on. Following that were sworn testimony or statements provided to government investigators. Last were interviews. In essence, the story was built on a foundation of documents, then fleshed out with information from interviews that was corroborated by those records. No one got a free ride; the renditions in this book are the events in which the interviews and the documents are in agreement or are consistent.

  Some dialogue comes from direct transcripts of conversations. However, most of them were reconstructed with the help of participants or witnesses to conversations, or documents that describe the discussion. In a few instances, secondary sources were informed of events or conversations by a participant. If the secondary sources agreed on what they were told, and it was corroborated by documents, the dialogue was used. The dialogue and events reconstructed with secondary sources were never incriminating.

  Because of the many sources used in reconstructing dialogue, readers should not assume that any individual participant in a conversation is the source of the statements or even among the sources. When a person is described as having thought or felt something, it comes either directly from that individual, from a document written by that individual, from notes or other records of that individual’s comments to a third party, or from others to whom the individuals in question directly described their experiences.

  Of course, I am not claiming that the dialogue in these pages is a perfect transcript of events dating back some twenty years. It does, however, represent the best recollection of these events and conversations by participants, and more accurately reflects reality than mere paraphrase would. Invariably, subjects of interviews would find that my pressing them for ever more detailed descriptions and dialogue—at times aided by documents I placed before them—led to greater recall of the events.

  In some instances I was unable to determine the exact date that an event occurred. In those cases I have presented the relevant scene at the point in the narrative that is most consistent with the information contained in related documents and interviews. In such scenes I give no indication of the event’s date. For ease of reading, if a scene was moved a few days out of order to allow for a theme in one chapter to be completed, the next chapter moved back in time to an unrelated event, launching a new story line. Such instances are described in these notes.

  Descriptions of individual settings come from interviews, documents, or personal observation. Most details of weather conditions come from records on file with the National Climatic Data Center.

  PROLOGUE

  1. Details of Ken Lay’s car from records on file with the Texas Department of Transportation, Vehicle Titles and Registration Division, for a 1993 Mercedes-Benz 600 SL Roadster, vehicle identification number WDBFA76EXPF079413.

  2. Information about River Oaks from personal observation, and from Claudia Feldman, “Casas Grandes,” Houston Chronicle, Oct. 27, 2002, Lifestyle section, 1.

  3. Details of Fastow’s Oct. 24, 2001, e-mail to his wife from the original document.

  4. Details of Jazid from observation of the location and interviews. Also see Ben Crandell, “Rubies and Jade in a Perfect Setting: A Cool Night at Jazid,” South Florida Sun-Sentinel, Nov. 23, 2001, 58.

  CHAPTER 1

  1. Date of the meeting between Lay and the internal auditors from documents prepared for the presentation, and details from Woytek’s schedule book.

  2. Weather conditions of that morning from the National Climatic Data Center of the Natio
nal Oceanic and Atmospheric Administration. The data were collected on the morning of Feb. 2, 1987, at the William P. Hobby station in Houston, which climatologists said was most reflective of the conditions in the downtown area.

  3. Details of the Mastroeni and Borget account at Eastern Savings Bank from an internal memo at the bank’s successor, Apple Bank for Savings, Jan. 29, 1987. The memo relates to account no. 0704101069 in the name of InterNorth International Oil. It lists transactions in the account, showing $4.8 million wired in and some $2.25 million disbursed in Mastroeni’s name. Also, some details from an investigative memo prepared Feb. 1, 1987, detailing questions that the Enron internal-audit department wanted to have answered.

  4. The traffic and related conditions of Houston as of Feb. 1987 in the wake of the oil bust from David Maraniss, “Houston Learns There’s More Than Growth to Growing Up,” Washington Post, Feb. 4, 1987, A3.

  5. Details of the contents of the packet of documents provided by Borget from the original records, headed “CONFIDENTIAL/Memo for the File: Enron Oil Corp. Banking Program,” Feb. 2, 1987. This includes purported Teletypes to Isla Petroleum, Southwest Oil, and the other bogus entities.

  6. Copies of both the original and the forged bank statements for account 0704101069 at Eastern Savings Bank, a.k.a. Apple Bank for Savings, were obtained by the author.

  7. The Borget explanation, in part, from the Feb. 2, 1987, memo headed “CONFIDENTIAL/Memo for the File: Enron Oil Corp. Banking Program.”

  8. The transactions involving the oil trader from the original banking records, with supporting details from the trader’s personnel records and a Feb. 6, 1987, memo written by Mark van den Dries, an executive in the oil-trading division, to David Woytek and John Beard. Additional information from certain tax records of the trader, as well as a June 1, 1984, memo written by Thomas Mastroeni about the conditions of the trader’s employment. Details are also from a preliminary report, “Reporting of $250,000 Payment to Former Employee,” Feb. 9, 1987, which was prepared by the internal-audit group.