by Otto Penzler
A former executive at Shell Oil described Mark in Bolivia, determined to sell the government on the idea of giving Enron the contract to assist in building a billion-dollar pipeline between Brazil and Bolivia, a project so politically problematic that even industry leaders such as Shell and Mobil wouldn’t touch it. Mark sailed into one presentation and spoke for hours without notes to three hundred officials, dazzling them with her command of the area’s problems and stimulating them with her assurances of what Enron could bring to the table. She was less successful in dealing with complexities in the Middle East. The Enron team arrived in Qatar to set up a three-country development deal for the richest supply of natural gas in the world. “No one tells us how to negotiate—we are Enron,” Mark allegedly said to one diplomat representing the emir. Moreover, the Enron bids were couched in very aggressive language. “They told us they were doing us a public relations favor, letting our negotiation be a model for good relations with Israel,” the diplomat said, startled at the team’s lack of understanding of the region. In fact, Mark later told me, she had inherited this deal from another division of the company and found herself locked in a negotiating struggle with two governments. “We walked into a mess, and the Qataris were angry,” she said. “But we felt we could not leave a billion dollars on the ground.” Two years later the emir was said to be offended by the low price Enron bid for the gas. Ken Lay tried to smooth out the difficulties and renegotiate. “Not if you send in the same group,” the emir said sternly, according to an official who was in the room.
In 1998, Jan Avery was in Nicaragua as a project developer, supervising the building of a $75 million barge power plant, one of Enron International’s last enterprises. The night before the final approvals, she was on a conference call with Skilling’s aide Rick Buy and the Enron International executive who was presenting the Nicaraguan barge plant to the board. “They were screaming at each other,” Avery recalled. “It was clear how Skilling and his group were out to put a stop to all assets being developed. They were trying to make us lower the assessments, although the numbers had already been presented.” By then Skilling had turned against Mark, telling her in meetings, according to one of her associates, that her assets were a disaster, the worst investments Enron had ever made.
Nine months after Avery moved to Managua, she developed a persistent cough. The working conditions were filthy, she recalled, and the air was full of smoke and pollution. The barge project had caused a political firestorm. The president of Nicaragua was demanding a payment of $2 million to allow the company to finish the work, and a warrant was put out by the Nicaraguan government for the arrest of Enron executives. “You have a spot on your lung,” her doctor told her. ‘You have to go home immediately.” In Houston she was diagnosed with a rare bacterial disease. She spent the next five months in the hospital, and several times her blood pressure climbed so high that she was close to death.
At the top of Enron International, the pressure on Rebecca Mark was increasing. She confided to friends that Skilling’s approach was like Chinese water torture, a subtle, continual bombardment of what she was doing. He was attempting to consolidate his power, moving Enron into a future where it was asset-light, as he said. He was still an icon of the business magazines, celebrated for his Gas Bank innovation, which moved Enron into a new world where it created a market in gas. His elliptical phrases, such as “vertical integration,” became koans of the dot-com era. One day Mark sat him down and asked him how his business worked. She was curious, she told colleagues, about broadband and the emerging energy markets. “I wanted a sense of comparison,” she said. “Are we that bad? Or are they that good?” Mark was operating in a closed system. Enron International had separate accounting and was in a different building. At the height of this internal war, Rich Kinder, who for years had kept a brake on the company’s exponential expansion, was passed over for CEO. Later, Ken Lay reportedly ran into Rich Kinder’s wife and told her that none of Enron’s problems would have happened if Kinder were still at the company. After Kinder left Enron, he started a new energy company, Kinder Morgan, which is traded publicly; he is said to be a billionaire.
One day Rebecca Mark confronted Lay in a meeting. “You are being snookered, Ken,” she told her old friend. “These are profits from the sale of assets. These are not trading profits.” Their conversation was about their European business, and Lay’s response, Mark told someone close to her, was to look at her kindly, condescendingly, as if to indicate that her lack of vision made her a dinosaur. Her assets, at best, could return 14 percent, but she was planning for the long run with equity investments, a strategy designed to hold an investment for decades, and the company had veered inexorably toward the culture of traders, where profits now soared to close to 30 percent every year.
It became clear, Mark told a few intimate friends, that Skilling was trying to shove her out. She began to negotiate a partnership agreement with Shell to sell half of Enron International’s assets, which would have brought $3.2 billion of equity to the company. They negotiated for several months, a Shell executive remembered. Inside Enron International, it was generally assumed that Mark’s position as a CEO of the new company would ensure her prestige, but the Shell executive said that the fluctuating stock price made the deal impossible to close. Mark was made a vice-chairman—a position known as “the ejector seat”—and allowed to take a bold gamble and explore treating water as a commodity in the international markets. The board approved the $2.3 billion purchase of an English water company called Wessex Water, which would become the backbone of Enron’s global water company, Azurix, and which looked to be a great source of profit, but which turned into a disaster when Britain changed its water rates. Soon the whole water business changed, and Azurix was losing so much money that it was affecting the price of Enron’s stock. When asked to respond, Mark said, “It wasn’t a disaster. We couldn’t survive as a public company because we didn’t have earnings sufficient to support the growth of the stock.”
As Skilling moved against Mark, Cliff Baxter found himself in an increasingly untenable position. He was a lieutenant with a conflict, whose responsibility it was to enforce the new Skilling culture, and his loyalty, many believe, was what would ultimately drive him to suicide. By 1997, Skilling had consolidated his power and had assembled his own team, which included Fastow and Baxter. The group was known as “the beautiful people” or “the seven dwarfs.” One day the accounting staff at Enron International learned that Skilling’s team had reaudited Mark’s assets and was planning to sabotage her in front of the board. She arrived at the meeting to hear Skilling say, “These assets are a disaster. Not just Azurix—everything. They are returning 3 percent, not 14 percent.” Mark tried to remain calm and responded, “I take issue with these numbers. My analysis is there for anyone to see.” According to an associate of Mark’s, however, Lay conveyed a few days later that it made no difference to him what her analysis said about the assets; he wanted no debate about getting rid of all of them, because he wanted the cash for the trading operation. In August 2000, Mark was asked to leave the company she had helped start. She immediately sold all of her Enron stock.
For Jan Avery, Enron had become incomprehensible; nothing she had experienced since Nicaragua had prepared her for the internal chaos she found. Sent to Abu Dhabi in October 1999, Avery watched Skilling torpedo nine months of negotiations on the $3 billion Dolphin pipeline. The projected pipeline would link the United Arab Emirates with Qatar in a deal so innovative that Conoco, Amoco, and British Petroleum were all vying for it. The pipeline business had once been the very basis of Enron’s financial strength, and this deal—which required Enron to invest $300 million—was projected to return tenfold profits to the company.
In Abu Dhabi, Avery supervised a ten-person team through months of due diligence and negotiations. The Dolphin pipeline became a symbol of the Middle East’s emergence into the twenty-first century and a staple in the European press. Surrounded by computer m
odels and sheikhs in robes, Avery was oblivious to what was going on in Houston. Skilling was directing his attention to broadband, to which he had pledged $3 billion. Three days before the press conference announcing the successful acquisition of the Dolphin contract, Avery received an agitated phone call from Joe Sutton, who was now sitting in the ejector seat as vice-chair. “Stop the press conference,” he told her. “This cannot go through. Skilling has put a stop to it.” But it was too late. The Dolphin pipeline had been announced throughout Europe and the Middle East. Nevertheless, within months Skilling had walked away from the deal. “I don’t want any assets,” he announced.
In Houston, Avery went to Broadband Services, and during her interview there she was asked to take a look at the projected trading models. It would be her job to help determine the pricing for the broadband swaps—trades that would later provide the basis of Bill Lerach’s invective in court, when he would compare them to Michael Milken’s fraudulent operations.
Avery studied the models and told the head of the division, “There is no way that these can work.” She then walked away from the job and was moved to the international group, where she worked on a deal to create a trading hub for liquid gas in Malaysia. Skilling’s purge had now infected the entire company, and there were waves of firings. While in Kuala Lumpur to negotiate with the local oil and gas company, Avery learned of the “ethnic cleansing” being used to close down her division. “Don’t worry, they are keeping the best people and re-deploying them,” she was told.
She was next assigned to Enron Energy Services (EES), the playground of Lou Pai, who had set up a division to trade energy in California. The move meant changing buildings and giving up her large office for a trading desk. Enron Energy Services sold “bundled energy” to customers such as Starwood Hotels, JC Penney, Quaker Oats, and Owens-Illinois, the glass company. The “bundle” was a promise of future service—meaning air-conditioning replaced, lightbulbs changed, wiring fixed. In her first weeks, Avery approached a commodity analyst who was proposing a price that would absolutely guarantee a loss to Enron. “We can’t do this,” Avery told him. “How can you be selling something that is a negative?” The commodity analyst replied belligerently, “Just do it. We sell negatives all the time.”
That was during last year’s California brownouts, and Avery made a startling discovery. Enron had sold contracts to retail customers, including the University of California and the Simon Property Group, which owned malls in San Francisco. As the cost of power soared, Enron returned the power to the utilities, employing a loophole the Enron salesmen had cleverly provided. The resulting cost to the state of California by one estimate was close to $500 million, but within Enron there was no acknowledgment of the larger meaning. Avery remembers that the press releases were still rosy. No mention was made of Enron’s reduction of a buying price from $1,500 per megawatt to $10. “This was disguised as normal business procedure,” Avery said. “What it meant was that all their contracts were under water.”
“Margaret, this is insane,” Avery said to Margaret Ceconi, who sat next to her at the trading desk. Like Avery, Ceconi was new to the department, having been hired from GE Capital with the promise of annual bonuses as high as $1 million. Ceconi was voluble and freewheeling, a person who would throw pool parties and invite several boyfriends only to describe their reactions with bursts of laughter the next day at work. “We have to find some new men for you, Jan!” she told Avery, and soon they were spending time together. “This place is going down,” Ceconi said to Avery, “and we have to get off the ship.” They talked about financial analysts they could tip off, finally settling on Carol Coale at Prudential, who for months had been cautioning that Enron was not sound.
One day in the summer of 2001, Skilling arrived at the EES floor and jumped on a desk. By then the new-business developers were frequently logging on to thomsonFN.com, which tracks insider trading. “Why are you selling your stock, Jeff?” someone shouted at him. According to Ceconi, Skilling, after citing a list of dubious reasons for unloading his shares, reassured the developers that “life was good” and that they should keep buying Enron stock. After that, Ceconi said to Avery, “You and I are going to write a letter to the board, Jan.” Avery was wary. Two weeks before Skilling’s abrupt departure, both women lost their jobs. It was early August, shortly before Kay Avery, finally in her mother’s custody, was to leave for Baylor University. Without a job, Jan could no longer afford the $20,000-a-year tuition.
“You don’t know me,” said Margaret Ceconi in a phone call to Carol Coale, “but I’m a friend who wants to tell you what’s really going on at Enron.” Ceconi, who didn’t reveal her identity at first, began writing to Coale from an e-mail account with the address Enron-truth. “We are sending you a lengthy letter that we have sent to the Enron board,” Ceconi wrote. The letter, like Sherron Watkins’s now famous warning to Ken Lay, spelled out $500 million in false profits Enron had claimed in the last year. Unlike Watkins’s straightforward, cogent criticism, Ceconi’s letter began with a litany of complaints about the company. More reasoned analysis of the financials was buried on subsequent pages.
The SEC opened its inquiry into Enron’s accounting on October 22. Ken Lay continued to tout his company’s stock in a conference call the following day. On October 24, Carol Coale, fed up with Enron’s rosy predictions, downgraded the stock to a “sell.” The company filed for bankruptcy six weeks later. Ceconi’s letter was given to Apache Oil, an Enron competitor. It ultimately found its way to the congressional committees working on the investigation into Enron. The day Ceconi’s letter was published in the Houston Chronicle, sixty-five news organizations contacted her. She was on Good Morning America, being interviewed by Diane Sawyer, at the same time Linda Lay was telling NBC’s Lisa Myers, “Other than the home we live in, everything we own is for sale.”
“Good God, it’s a Rorschach test,” Paul Howes said to Jan Avery during one session in Houston as he studied a diagram of an Enron partnership. It was the first time the lawyer had ever seen the circles and boxes that would soon confound even the most sophisticated economists. “It is simple to understand,” Avery told him. “The more circles and boxes, the bigger the bonuses, and the more the customer is confused.” Howes had weighed Avery’s unhappiness over her treatment by Enron with her expertise on the financials and had decided to use her as a consultant. He was working on the Enron case with a team of investigators and Frank Karam, a partner from the New York office, as well as with Lynn Hodges, whose California firm, L. R. Hodges & Associates, specializes in “witness development.”
In January, Howes and his team were fielding more than a hundred calls and e-mails a day. “This is the most exhausting case I have ever done,” Hodges told me. “All I am doing at the moment is reacting.” She had received that morning an e-mail with a photograph of a shredding company truck parked outside the Enron building. One Saturday, Howes spent eight hours in a hotel room with an auditor from Enron International, another “confidential witness.” He and a second auditor told Howes that Robert Jaedicke—then dean of the Graduate Business School at Stanford and the head of the Enron audit committee—visited the internal audit staff in March 1989. “How do you view your role as an independent director?,” Jaedicke was asked. “I’m here to support management. I’m here to support Ken Lay,” he replied. The two auditors took this remark as an indication of where Jaedicke’s loyalties lay. Later, they told Howes, Enron International developers in pursuit of bonuses put through projects rife with engineering problems, which later became budget nightmares. They had been disgusted to be outsourced to Arthur Andersen. “Jeff Skilling ran a casino for a business side and a day care center for junior auditors,” one said.
In early February, Howes told me he had finally tracked down Herb Perry, the auditor who fifteen years earlier had gathered an investigative file on the rogue trading operation at Enron Oil that had so mystified Jan Avery in her first months on the job. Avery had told Howes about t
he missing file, and Howes finally persuaded Perry, who had just retired, to see him. The day before Sherron Watkins testified in Congress, Howes flew to New Orleans and drove for an hour to a house near the water. A 10-year-old sheltie came out to greet him, and Howes, who is passionate about dogs, played with her before he said hello to Perry and his wife. “Well, if our dog likes you, you must be all right,” Perry’s wife said.
The men drove to a nearby café and shared a shrimp po’boy sandwich. To an investigator, Perry’s background was impeccable. Before going to Enron in June 1986, he had spent seventeen years at Shell on internal audits and fraud investigation. His specialty was white-collar crime. He found Enron’s accounting department in disarray, he later told me; the new corporation was still trying to integrate InterNorth and Houston Natural Gas. The board had six members from each, and the group was fraught with tension, because the Houston executives had profited in the merger, and the InterNorth members had not. Ken Lay and Rich Kinder, who had been together at Florida Gas, were running the new company, with Kinder as general counsel.
On January 23,1987, Perry says, his boss, David Woytek, the vice president of audit, got a call from a security officer at Apple Bank on 42nd Street in New York. “Hey, something interesting happened. You should know about it. There are unusual cash transactions from the Isle of Guernsey coming into my bank from Enron in $100,000 increments!” the officer said. The approvals of the transactions, he went on, were not coming from authorized corporate treasurers but from two executives in Valhalla, New York, named Louis Borget and Thomas Mastroeni. “Borget and Mastroeni appear to be writing checks to themselves,” the bank officer said.