The Best American Crime Writing

by Otto Penzler

  Enron was hermetic and pulsing with sexuality. Ken Lay had married his secretary; Jeff Skilling had left his wife and taken up with Rebecca Carter, whom he promoted to company secretary and who earned more than $600,000 last year.

  People who know Kenneth Lay well insist that his destruction can be understood by looking at his longtime attraction to ruthless, brainy alter egos such as Jeff Skilling and Andrew Fastow, who could act out Lay’s ambitions while he played Mr. Congeniality. The aura of fraud permeated Enron from its inception in 1985, when the legacy and corporate style of Michael Milken were imprinted on Lay and his company. It was Michael Milken and Drexel Burnham that helped raise the $2.3 billion needed for the InterNorth-Houston Natural Gas merger. A little-known fact is that Enron stock was one ingredient of the scandal that brought down Michael Milken and Dennis Levine. Tipped off by a banker at Lazard Frères, Levine and his group of insider traders profiteered on the merger, as James B. Stewart has reported in Den of Thieves. They later went to prison.

  Lay thrived in a culture of rivalries. He was a man of parts, a winner of awards and member of committees, generous with young associates, serving them himself when they traveled with him on one of the many Enron planes. “All these planes give my CEOs something to aspire to,” Lay said to an ABC news reporter just months before Enron crashed. Inside the company, Lay overlooked, even encouraged, all the vicious infighting that went on. Lay came from a modest background, had a cheerful salesman’s facade, and wore a Mr. Magoo mask of disconnection. He was a Gatsby of the pipelines, a minister’s son from Missouri fueled with the desire for grandiose status. He earned a Ph.D. in economics at the University of Houston, was a navy officer, and clocked time in Washington as an undersecretary in the Department of the Interior.

  He was attracted to Houston by the hope of staggering returns in the oil and gas world.

  When Lay became allied with Milken in 1985, the junk bond king’s reputation as the genius of inventive financial structures was at its peak. Not long before Drexel Burnham chief executive Frederick Joseph denounced the press for its “outrageous” allegations linking Milken to insider trading and the unsavory affairs of arbitrageur Ivan Boesky, Lay arrived in Beverly Hills in search of the financing he needed to realize his dream. The steady drumbeat of allegations in 1986 concerning Milken’s honesty would have alarmed a more prudent CEO. In a 1987 interview, Milken went as far as to defend his business practices by boasting that he was helping Enron increase the size of its debt offering by an additional $225 million. Lay never cut his ties with Milken, and would later talk about him as a visionary who had been unfairly prosecuted. After Milken got out of jail, Lay invited him to speak at an Enron conference, despite a vocal protest from lawyers inside the company. “Ken always thought Mike was an out-of-the-box thinker who deserved sympathy,” an Enron executive said.

  In one magazine spread, Lay was portrayed as the wizard of energy, his body a glowing electric power line. As for the Kool-Aid, it was the elixir of money. Young traders just out of school were tantalized with promises of $500,000 in bonuses within a year. The Enron car of choice was a silver Porsche; the parking garage in Houston was full of them. Vice presidents and managers preparing to make a budget presentation in front of Lay, Skilling, and Fastow were told, “Here is your number.” The numbers—always larger than what was feasible to demand on a contract—would have to be reached or, the vice president and managers knew, they could be “re-deployed,” Enron language for being switched to another department, often before being forced out in a vicious biannual performance review. These performance reviews, referred to as “rank and yanks,” were a variation on the old English Star Chamber. Your picture was displayed, and your colleagues blasted your job performance, knowing that their own advancement depended on your demise. Originators of deals might find that their numbers had been tampered with so that in the performance review their deal structures no longer made sense. “Because of the complexity of the math, it could take you weeks to figure out what had been changed, and by that time your deal was shot down or you were fired,” one former associate recalled. Skilling would be very blunt with vice presidents who questioned these methods: Change your assumptions. You can always refinance! You can always get the deal done! In addition, the public relations staff had to keep Lay’s competing division heads from getting too many cover stories in Fortune and Forbes. “Ken didn’t like it,” one told me. “He wanted the coverage for himself.”

  By the mid-nineties, Fastow was the whiz kid of Enron’s financial structuring, always ready with sophisticated accounting arcana such as the “costless collar”—a complex financial instrument which allowed an investor to sell a stock in partnership with a bank at a guaranteed trigger price and yet not have it reported to the SEC. Jan Avery, for one, grew more and more alarmed at the accounting tricks required to support Skilling’s and Fastow’s bookkeeping. She used the term “feeding the monster” to describe the process.

  As the Enron tentacles spread, it became increasingly difficult for Fastow and Skilling to disguise their ambitions. The deal structures became more and more byzantine. At the broadband division, which trafficked in the fiber-optic cable used in high-speed Internet connections, trades called “Barney deals”—meaning “I love you, you love me”—were constructed. Enron would sometimes swap control of its fiber lines with those of another company, only to undo the transaction a few days later, so as to create the appearance of volume. Other maneuvers pushed hundreds of millions of dollars of trading equity around in a circle, a practice employed by such companies as Qwest, Cisco, and Global Crossing, which was headed by Gary Winnick, who had trained at Drexel Burnham. When Global Crossing went bankrupt in January, Winnick was able to walk away with a reported $735 million. At the broadband group, Fastow used the lawyer Kristina Mordaunt, who represented the group in its dealings with the separate partnership of LJM2, which was run by Fastow. In March 2000, Mordaunt was invited into a Fastow venture called Southampton Place. She put down $5,800. She heard a few weeks later that the deal was winding down. Opening her bank statement the next month, she saw a deposit of $1 million. Another friend of Fastow’s, managing director of Enron Global Finance Michael Kopper, would make more than $10 million from a $125,000 investment in Chewco, according to the report released by Enron directors in February.

  “There is someone you should talk to,” Alex Conn told Milberg Weiss partner David Walton in a surprise telephone call. Conn, an Austin software entrepreneur, had met Jan Avery when he negotiated with Enron, and he was impressed by her. Several weeks after Enron collapsed, he reached out to the people at Milberg Weiss to let them know what a valuable witness she could be. It was November 2001, and Walton, a Milberg forensic accountant, arranged a conference call with Paul Howes, who is the Milberg partner in charge of day-to-day operations for the Enron investigation. Howes has thick blond hair, a former athlete’s build, and the empathic conversational style of the Southwest; in his years as a Washington-based assistant U.S. attorney, he radiated such useful kindness that he could get drug lords to confess. After his conversation with Avery, in which she talked about her experience at Enron International, which ran the company’s projects overseas, Howes got on a plane to Houston. From then on, in his research reports Avery was referred to only as “confidential witness.” He had yet to determine whether her information would check out.

  By 1996, Avery had been transferred to Enron International and was therefore in the middle of the drama that would define the fall of Enron. It involved assets versus trading, and a rivalry between Rebecca Mark and Jeff Skilling, which led to the demise of Enron International, frequently referred to as “the purge.” The war was fought over “paper gas,” as the executives at Enron International called Skilling’s ruthless consolidation of his power on the trading side. Skilling’s traders occupied three floors in the Enron headquarters, and the trading room had more plasma screens than any other office in America. The atmosphere, according to one former Enron
manager, was “the Royalton Hotel meets the Death Star.” At the height of Skilling’s power, the company was moving toward a peak moment, when the partnership structures would enable price-earnings ratios of 60, and the stock would surge in 2000 to $90.

  Avery entered Enron International on the tax side and soon began working eighteen-hour days. She kept a picture in her office of Kay, now 11 with long blond hair, but when people asked her, “Who is that?,” Avery would reply only, “My daughter.” She rarely talked about her private life, but during the last weeks of each summer, as Kay got ready to return to her father, Avery was clearly under strain. Kay would lie in bed, crying, “Please let me stay.” By 1999, Avery was earning more than most vice presidents, almost $300,000 a year with her bonus. She was angry that Enron refused to give her the title, and was convinced that, at 49, she was a victim of ageism. She took on an onerous amount of work in order to blot out her anger over her custody problems. Exploring the foreign-tax implications for Enron dealmakers negotiating for pipelines and power plants in Brazil, Bolivia, Peru, Eastern Europe, and Africa, Avery had to learn the tax code for each country. By then “the Skilling atmosphere,” as it is often called, had begun to permeate the department. Avery recalled, “We were told constantly, ‘Keep the debt off the balance sheets.’” This was done not only through off-the-books partnerships but also through loopholes in the tax laws of the foreign countries. Tax meetings would go on for hours, but Avery rarely complained.

  Sent to Rio, she stayed for months in Copacabana, mastering the Brazilian tax code in order to facilitate negotiations for a pipeline between Brazil and Bolivia. She also began an affair with a member of the Enron team and for the first time in years felt it was possible to have an emotional life. She then went to Bolivia and Peru, spent weeks in Warsaw, returned to Houston, and flew to Africa, attempting to explain to Kay why it was often nine or ten hours later where she was calling from.

  During this period, she was searching for lawyers in the counties around Eudora, Arkansas, hoping to find a talented attorney who would take on the Avery family. She knew she could not defend her travel schedule in a courtroom; she was on constant call, and, as she confided to her friends, the strain was becoming unbearable. How could she put an 11-year-old through the hell of an ugly custody battle?

  In 1997 she was invited to the Enron International executive retreat in Beaver Creek, Colorado. At lunch during a ski break, she was joined at an outdoor table by Rebecca Mark, who was there with her 12-year-old twins. Mark was also divorced, and they talked about the constant emotional pull exerted on single working mothers. That day Avery resolved that she would try to become a deal originator in order to make more creative use of her time. At the bar, she sought out Mark’s co-CEO, Joseph Sutton, a former brigadier general who resembled Burt Lancaster. Taking power and American investments around the world had made Mark and Sutton well-known in developing countries, but also, at times, the targets of scathing criticism for supporting the alleged imperial exploitation of local workers. In India they were accused of pushing through a $2 billion energy plant at Dabhol with bribes and threats, and of manhandling laborers. The Indian press is notorious for libel, and Enron officials vigorously denied the charges, which were never proved. Sutton was intrigued when Avery told him she had once set up her own pipeline marketing business, and he suggested that she write a letter to Mark.

  I went to Houston determined to meet Rebecca Mark. For the last decade Mark had been a template of female achievement for the business press—named twice to Fortunes list of the 50 top women CEOs. Her style had become famous—the size 6 Armani skirts, the stiletto heels. As the head of Enron International, she had early on taken part, with John Wing, in negotiating the billion-dollar power plant in England called Teesside, and had structured the deals for the Indian facility at Dabhol and the Brazilian pipeline. She and Henry Kissinger dealt with the Chinese premier, Israeli prime minister Ariel Sharon took her calls, Indian taxi drivers in Delhi would ask Enron executives, “Do you know the famous Miss Mark?” Back in Houston, she would work the phone late into the night in her flannel pajamas as her twins complained, “Mother, get off the phone!” She was an absence in the Houston social firmament; her ambitions were global, at the greatest remove from the Houston Country Club. As with Jan Avery, her job was her life, and her attractiveness and her ability to draw crowds in such places as Brazil and Vietnam helped to establish Ken Lay’s political bona fides and extend the Enron brand.

  The day I went to see her, her houseman was hanging Christmas boughs on the front gates of her mansion. Mark lives palatially behind a high wall in River Oaks. As I walked toward the house, two large dogs came bounding up to me, followed by a tall blond with a distinct Texas-rich-girl look, a bouncing mane of hair, and the skintight pale-blue stonewashed jeans that Houston and Hollywood power women pair with a $1,000 blazer and a white Gap T-shirt. Estimates of Mark’s personal fortune vary wildly, from $30 million to $80 million. She married for the second time two years ago to Michael Jusbasche, who was born in Bolivia and owns a chemical company.

  Like Ken Lay, Mark came from a small town in Missouri, one of four children in a farm family with deep fundamentalist beliefs. Her conversational style has been polished in Texas, and she is a master of “hillbillying,” the trick of playing up one’s humble origins. “Sometimes it was so cold in our farmhouse that frost was on the quilt,” Mark told me as we sat in her vast drawing room with a grand piano in it and looked out on the garden. Within Enron International, Mark presented herself with the same down-home attitude, along with a rapier-sharp skill in marshaling rigorous arguments for deals. She was a booster of talent, particularly in women, and she created an atmosphere that felt familial. She would throw Christmas parties for as many as nine hundred people at her house, with carolers, clowns, and rides for the children. As a CEO operating under terrible tension, she told me, she taught herself to conceal her anger behind a midwestern-sorority-girl smile, particularly as she felt the Enron culture turning increasingly ruthless. She had a trick: When other executives excoriated her in meetings for not producing enough profits, she would not fight back but would simply tell herself that she was the smartest person in the room. “I was looking at them but it wasn’t real,” she said. “It was like an out-of-body experience.”

  At the time I met Mark, she was angry about an ongoing attack on her abilities in the business press. Moreover, she was bound by a confidentiality agreement and had been named as one of the twenty-nine officials who are potential defendants in the class action cases against Enron. As she told me later, “I am prepared for two stories: the ‘I had sex with everyone in the universe’ story and ‘Rebecca’s assets stink.’ If they have a reason to try to destroy me, it will be over the quality of my business and what they will make up about my love life. The sole reason will be to put less credibility on the side of the asset business I built up.”

  There appear to be few people in Houston who do not hold strong opinions about Mark’s investments. One economist who knows her well described her as “a bundle of energy … but she and John Wing figured out a way to take a juicy bite of the apple with their power plant development, and the credulous banks went along with them … loaning 95 percent financing on the basis of pro formas that no fool would believe …. The poor Indian and Chinese residential electricity consumers would have been spending half their disposable annual income on electricity.” A prominent money manager who shorted Enron stock in 2000 said, “Almost everything that Mark touched at Enron was catastrophic in terms of investment return. The company had to either recognize the losses or cover them up. To Skilling’s detriment, he chose to cover them up.” When I asked Mark about this, she said, “None of the money managers have ever read the contracts backing up these businesses. The companies we created around the world are not bankrupt.”

  Some insiders theorized that Mark’s “special relationship” with Ken Lay may have given her carte blanche to operate with no checks and balan
ces. It was commonly thought that Rebecca Mark and Jeff Skilling had had an affair; they were both divorced, had children the same ages, and often went to school sporting events together. Mark’s detractors suggest that she also had relationships with several members of her development team. Mark has become used to hearing this type of sexual branding, and believes it is a classic attempt to diminish her tenacity and achievement. “These were people outside the international arena who did not know how we worked,” she said. “I used to make jokes about this in speeches and say, ‘I had no idea I was so staggeringly attractive.’ And how in the world would I ever have time, when I have passports so thick they look like volumes of the Bible.”

  For years, Mark operated under the protection of Ken Lay and Rich Kinder. She represented the assets-based side of Enron, which went back to the early days of the company, when Lay realized that gas could be traded as a commodity. By then the government had forced the utilities to accept the notion of unregulated power. Mark’s great skill as a CEO was always in presentation, her colleagues say, not in operation, which was routinely handled by other executives. Mark was able to persuade the Indian government to change its policies and reverse its course on the power plant at Dabhol, and she negotiated ironclad agreements protecting the assets in the event the government should change. She understood that her ability to survive at the highest level required her to project certitude, a sense that she was comfortable in her own skin.

  In the early days of Enron International, Mark was told repeatedly, “You eat what you kill,” and initially she and her team worked without bonuses. However, she was able to come up with a lucrative contract-value-percentage arrangement that ultimately earned her close to $80 million in stock options and reportedly enraged Jeff Skilling. “I think they gave us this deal because they were convinced we couldn’t get anything done,” she said. She and Joe Sutton operated on sheer nerve. Sutton would tell her, “Act like we’ve already won,” as they went into meetings with foreign leaders.