by Otto Penzler
Lerach, the scourge of the tort reform anti-lawsuit lobby in Washington for his championing of class action suits, from tobacco cases to those involving nursing homes, has a passion for theatrics, and his unruly hair looks as if he had stuck his finger into an electrical outlet. Standing in front of a chart of what he called “the Mike Milken model”—a reference to the Drexel Burnham Lambert architect of junk-bond finance in the eighties, who ultimately went to jail for securities fraud—Lerach pounded on the board with his black marker and then drew an immense daisy. “[Milken] was here in the middle … so what Milken used to do is trade the bonds around …. It goes around and around in a big circle … it creates the phony appearance of a market.” Then Lerach threw out more sinister phrases—“dark swaps,” “massive insider trading.”
Judge Rosenthal studied Lerach coolly, as if she were trying to come to terms with a new set of variables for the Ken Lay who had chaired a campaign for the local United Way, who went to dinners at the White House, and who threw out the first baseball at Enron Field. Lerach, who once directed a civil case against Milken and others that collected damages of almost a billion dollars, appeared hardwired with moral outrage as he told the court, “A member of Enron’s tax group who structured many of these transactions has told us he was told his job was to keep Fastow out of jail!” At that moment, I turned in my seat and saw the woman in purple behind me blanch. Later, I would learn that the remark had been made to her as a joke by Fastow’s friend Jordan Mintz, an Enron senior attorney who in February would testify before the House of Representatives that he had attempted to warn Jeff Skilling in May 2001 that his off-the-books partnerships were questionable. “I am keeping all my papers in a salt dome,” Mintz had told a friend.
Lerach, who calls himself a private attorney general, is a connoisseur of criminal schmutz. He and his partner Mel Weiss run a thriving class action firm which employs about two hundred lawyers from San Diego to New York and twelve private investigators. They target savings banks, drug companies, and offshore scams. Their specialty is securities fraud, a form of plaintiff law that has been stymied by the 1995 tort reform act, which was pushed through Congress by a group led primarily by Chris Dodd, senator from Connecticut, with the financial backing of the powerful insurance lobby. Tort reform advocates insist that it lessens the ambulance chasing that used to clog the legal system; trial lawyers rail that it punishes victims and allows large corporations to get away with outrageous financial manipulations. The act put a stop to virtual automatic discovery of legal documents in class action cases; because of that, lawyers like Lerach say, the standard of proof for legal pleadings has become onerous, and the investigations needed to file airtight complaints have become unduly expensive.
William Lerach is one of the foremost practitioners of aggressive research, and his investigators scour the world for witnesses and class members, an activity that is questionable under the new law, which prohibits lawyers from trolling for victims. Lerach is also criticized for his public displays. Last fall he chose an unusual strategy to win the Enron case. He decided to feed the media openly and ignore the barrage of legal moralists who would take him to task for it. He reasoned correctly that the bigger the story became, the sooner Enron whistle-blowers and witnesses would come out of hiding. Under tort reform, plaintiff firms must compete for the ultimate stake of being the assigned class leader. “I see it as a $3 billion case,” Lerach told a partner, meaning the aggregate of all the claims. The class leader could reportedly earn between 10 and 30 percent of that.
By the time I saw Lerach in court, he was competing with law firms representing Florida and Illinois. Outside in the hall that day, he held forth with fiery indignation. “This is nothing but a Ponzi scheme! There it all was: You have to drink the Kool-Aid!” Within weeks Lerach’s accusations proved to be accurate and made the leads of national news stories. His strategy—called “Leraching” by his detractors—had worked perfectly. According to one of his partners, “After that hearing we went back to the Four Seasons and for two days did not leave the room, there were so many Enron former employees who wanted to talk to us.” (In February, Milberg Weiss won the class-leader position.)
In the early days of the scandal, Houston reverberated with the social and legal conflicts arising out of all the possible Enron prosecutions. Judge Rosenthal’s husband, Gary, is an attorney who used to work at Vinson & Elkins, Enron’s lawyers, and the Houston Press would later report that Ken Lay had once lobbied unsuccessfully to get Lee Rosenthal a circuit judgeship. Within weeks, Judge Rosenthal recused herself from the case, as did the entire Houston U.S. Attorney’s Office. By the time I arrived in the city, fear verging on panic was spreading through the River Oaks set. As a South Texas native, I had a modest acquaintance with the folkways of Houston, but Enron had turned the village of oil into an almost unrecognizable society. One truism remained: The city has never been neutral about the poetry of money. The collapse of Enron had caused the cave dwellers to begin to reconsider their friendships with Ken and Linda Lay. Lay had ascended into an orbit so rarefied in Houston that his very presence at parties could change the atmosphere. He would stand in one place, as a king might, and allow himself to be greeted with fulsome praise. He brought a new persona to Houston, appearing to be a kindly naïf, in contrast to Oscar Wyatt, the former head of Coastal Corporation, the energy company. Houston has long tolerated the foibles of Wyatt, who revels in his flamboyant reputation for buying oil from Saddam Hussein.
By early December the easy hyperbole of Texans swearing eternal loyalty to friends who are potential felons was sounding thin. Ken Lay and chief officers Jeff Skilling, who had left the company abruptly in August, and Andrew Fastow, who had been fired by October, were at ground zero in the Texas endgame, victims of the “tall poppy” syndrome, the phrase Australian Enron traders used for unspeakable hubris.
On my first night in town, at a grand dinner in the Huntingdon, a luxurious River Oaks high-rise, several floors away from the Lays’ 13,000-square-foot, $7 million spread, Ken Lay’s friends were speaking in code about the loss of his fortune. “Ken went to see Fayez to ask him for help,” one said. “Fayez told him no way.” In the Houston big-money world, this haiku spoke volumes. Fayez Sarofim, the secretive Egyptian money manager with multiple mansions, Rolls-Royces, and wives—one of whom died after collapsing mysteriously on Mount Kilimanjaro two years ago—could have delayed Lay’s fate with a single call, but he dismissed him peremptorily. “I wouldn’t dream of recommending Enron,” he said. His remark circulated quickly through the Tudor mansions of River Oaks and Shadyside, many of whose owners are Sarofim clients. That same week Lay appeared pink-cheeked and cheerful to have lunch at the Coronado Club, implying in the casual tone he had learned to use that he was in communication with the president and Laura. But, as Lay’s intimates could tell you, their friend was out selling. It was known that Ken’s fervent phone calls to “the Oval” were not being returned.
“Hi, I’m Jan Avery, the president of Southwest Reserves and their only employee. I am a WMBE—a woman in a minority business enterprise—trying to move MM BTUs from the Permian Basin to the California border.” That’s how Jan Avery would cajole representatives from the pipeline companies who worked the booths at gas trade shows and energy conventions in New Mexico and Oklahoma. It was 1990. Avery had invested $250 to start her one-woman corporation, taking advantage of a new regulation which gave women and minorities special advantages. She had the legs of a model and did not play down her good looks, but she was also adept at fending off advances at a time when a subtext of sexual favors permeated the wildcatter atmosphere. Avery was struggling with a vicious divorce. She had run away from a grueling marriage to a rich lawyer from Arkansas and was living with her 7-year-old daughter, Kay, short for Katherine, in a small rented house in Santa Fe. The only telephone was in the hallway, and all day long she would make calls on it, pretending she was in an office, trying to get people to buy her brokered gas.
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bsp; When Jan Avery talks about her history, she tends to skip over difficult periods. She grew up in Leeds, Alabama, outside Birmingham. Her father was a sheet-metal worker, the son of an heiress whose only remaining legacy was her insistence on fine linens, good manners, and a full-time housekeeper. She taught her granddaughter to appreciate finery and to excel in school. After attending a junior college, Jan worked as a receptionist for a forklift company. She also helped out with the books and became so intrigued with accounting that she enrolled in night school. In 1974 she married her first husband, Gary Kirsch, and soon followed him to Houston, where at 29 she got a job at Arthur Andersen. In the office she met Bob Avery, who worked near her in the tax department. Her marriage broke up, but she and Kirsch remained friends. Avery moved to Tulsa, and Jan followed, getting a job at Arthur Young, just when oil was moving toward $60 a barrel. There she had her first view of the sea of criminality surrounding the wildcatter crowd. When she came to believe that one of her clients was defrauding investors, she and Arthur Young walked away from the account.
Avery and Jan went out for three years before they married. Avery’s wealthy father owned an oil field machinery company. The couple moved to the Avery family plantation in Eudora, Arkansas, but when the marriage crumbled, Jan took her baby daughter and fled. She struggled over custody issues while trying to maintain a relationship with Avery. “I loved him,” she said, “and I wanted Kay to have a father.” When Kay was 5, Jan moved to Santa Fe, where she worked part-time as an accountant and sold gas on the phone in the hall. A neighbor recalls that Jan said she was terrified of Avery.
Through cold-calling Jan met the chairman of Gas Mark in Houston, and he agreed to back her on her first deal to move gas on Enron’s pipeline to Southern California. Then the market changed, and only big players could stay in the business. Jan became clinically depressed and for a time followed a doctor’s advice and took lithium, a fact she confided to Bob Avery. That year Kay went to see her father and his new wife and children over spring vacation, and Avery, a part-time district attorney, filed a motion for custody. According to Jan, he refused to allow his daughter to return home, using the fact that Jan had once fled as a way to convince the court that she was an unfit mother.
Jan finally had to agree to an onerous custody situation; she could visit Kay four weekends a year and have her for summer vacations and alternating holidays. They were allowed to talk on the phone once a week for fifteen minutes. Jan always spoke to her daughter as if she were an adult. “I am going to fight for you, but it is going to be very expensive,” she told her. “You know how much I love you, and I will do everything in my power to get you back.” (Robert Avery rejects Jan’s version of events.)
Avery moved to Houston in order to be closer to her daughter. Through friends at Arthur Andersen, she started working part-time at Enron. She became married to her job, spending long hours working on the tax aspects of the multiplying partnerships—there would be about 3,000 by the time the company imploded. She was often sharp with her colleagues, quick to assert herself: “I am the only person who can work on that deal. I know how they work,” she would say. Her bonuses depended on the earnings value of the deals she structured. The more money I make, she thought, the sooner I can afford the legal fees to fight for Kay.
When Jan Avery arrived at Enron, she already possessed an understanding of the arrogance of the company’s culture. Of all the energy companies she knew, only Enron didn’t deal with businesses owned by women. “I could never get them to give me the time of day,” she told me. “And they controlled the best pipelines.” By 1993, Ken Lay had established his system of rivalries. Forrest Hoglund ran the oil and gas division, Stan Horton was in place at the staid and traditional pipeline company, Jeff Skilling had arrived to set up a trading operation, and Rich Kinder, the chief operating officer, kept a brake on the financials, discouraging Lay’s grandiose schemes with a droll Texas remark, “Let’s not drink our own whiskey, Ken.” From time to time Kinder would lose his temper. “Goddamn it, how can we be doing all this?” He was uncomfortable with the rapid expansion, and Lay would say teasingly, “I’ll die with a lot of friends, and Rich will have all the money.”
And then there was Rebecca Mark, a young banker who in 1982 moved to what would become, in 1985, Enron’s treasury department. With her blond hair and gold earrings, she looked like a Texas sun queen. Her mentor at the time was John Wing, a West Point graduate and canny negotiator, whom she reported to. She and Wing went to work opening power plants, but her division was partially sold to help cover the debt incurred by the rogue-trading scandal. In 1988 she took time off, bundled up her toddler twin boys, and entered Harvard Business School. She negotiated the contracts for a power plant for Enron outside Boston, and after she earned her MBA she returned to the company full-time. Soon she was setting up power plants and pipelines in England, India, and the Philippines. Mark would ultimately spar with Jeff Skilling, who had been a Baker Scholar at Harvard Business School and a consultant at McKinsey & Company before joining Enron. “Jeff may have been the single best student I ever had, and he did not suffer fools,” said Chip Bupp, a professor of Skilling’s at Harvard. Bupp likened Skilling’s personality to the icy capability of Robert McNamara, President Kennedy’s secretary of defense.
Skilling thrived on confrontation and had a perfect command of the minutiae of deals. In interviews he could stun financial writers with his grasp of details, but that same superiority made corporate meetings enervating for his colleagues. His vision was messianic. Skilling kept a sign on his desk: I.R.I.S., which stood for “First they Ignore you, then Ridicule you, then Imitate you, and then Steal your idea.” From the beginning, colleagues say, Skilling’s pattern was to scapegoat others without leaving a trail that could lead back to him. In meetings that Ken Lay chaired, Skilling was often silent, letting Lay believe that he was completely in control. But at other times Skilling could be very volatile. He was divorced, and his office was a shrine to his children; on long plane rides with colleagues he might spend hours talking about them. He would often blurt out astonishing remarks in public—he once, famously, called a stock analyst an asshole during a conference call—and the public relations staff worried each time he gave an interview.
Andrew Fastow, a Skilling protégé, was recruited early on in Skilling’s first fiefdom, Enron Capital & Trade. As Skilling consolidated his power, he and Fastow allegedly designed the partnerships that were constructed to hide losses and maximize profits. Testifying before Congress, tax lawyer Jordan Mintz recalled sending a memo and leaving messages for Skilling asking him to sign off on crucial legal documents. Skilling testified that he had no memory of that. Last December, The New York Times had Skilling saying that the partnerships were Fastow’s idea. Bupp, who remained close to Skilling, is now confounded. “I can’t believe he did not know what was going on, yet I can’t believe Jeff would lie … [The partnerships are] a clear black-and-white conflict of interest. Holy smokes!”
One day in 1995, Jan Avery sat in a conference room and watched Andrew Fastow, standing in front of a whiteboard, grapple with how to deal with a coming loss on the books of his group’s investment in an MTBE fuel-additive plant outside Houston. Fastow and Skilling had gambled on the toxic additive used in gasoline, but as a result of a steady attack from the media and environmentalists, the market for MTBE had virtually disappeared. Fastow exuded anxiety, Avery remembered, raising his voice, barking orders. “We have to be able to come up with something! We have to construct a structure where the loss could be camouflaged.” Most of Enron’s now notorious partnerships were still in the future, but Fastow had already seen the possibilities they offered. There were already roughly three hundred in place. “Losses were never allowed at Enron, even then,” Avery said. “You did not recognize losses.” She remembered that the meeting stretched on for much of the day, and Fastow became increasingly agitated. Avery recalled thinking, This has gone too far.
“We sat there and bounced it
around,” she said, while Fastow frantically drew circles representing subsidiary corporations all over the board—partnerships within partnerships—to suggest how to move the loss. Fastow also asked them for ideas on how to maintain the value. “That was our language for hiding a loss. We called it ‘maintaining value,’” Avery said. “I knew that this was something that was ultimately going to drag the company down, because you could not maintain this level of loss. It was hundreds of millions of dollars, never acknowledged on the books.” Isn’t that fraud? I asked. “It was still within the realm of accounting rules, but they were way out in the gray zone. It became criminal when they continued it to such a degree that it put all the shareholders at risk.” Did anyone raise an objection? “All the time. We called it house-of-cards accounting and would openly discuss how crazy it was. In meetings, we were always told the same thing: ‘You have to be able to come up with a solution.’ There was no alternative.”
Fastow’s wife, Lea Weingarten, was in the room; she too worked at Enron, which was not unusual in the culture. Fastow had met Weingarten, the daughter of one of Houston’s prominent Jewish families, when they were at Tufts. The Weingartens’ fortune had come from a chain of grocery stores. Around town the couple was thought of as a study in opposites; Lea Weingarten was low-key, with the casual style of old money Texas.