Conspiracy of Fools (66 page)

The seventieth annual lighting of the California Christmas tree was a welcome reprieve from the sense of emergency that permeated the state, but it was only temporary. At 5:35, the electrical grid was under renewed strain. The Governor quietly pressed the “off” button, and the tree went dark. The crowd wandered away in silence.

Mintz finished his full review of the LJM3 offering documents on December 6. This, he decided, was the means to bring the LJM problems to everyone’s attention. He would write a memo to Causey and Buy. And to some of the other lawyers, too—Rex Rogers in the general counsel’s office, Ron Astin over at Vinson & Elkins.

It wouldn’t be hysterical, just a sober rendering of the facts. But that should be enough. The powers that be at Enron, he had concluded, just hadn’t focused on what Fastow was doing. His memo would change that. The simple facts would set off a panic at the top. He was certain of it.

That same day in Portland, Stephen Hall was in the offices of Stoel Rives, heading for the office of his boss, Marcus Wood. He had finished his memo about the Enron trading strategies and wanted to run it by Wood, the firm’s top energy specialist. Wood reviewed the document and decided it needed to be tougher. By the time the two finished, each sentence had been made more devastating than the last:

“The new effect of these transactions is that Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving
any congestion … By knowingly increasing the congestion costs, Enron is effectively increasing the costs to all market participants … This strategy has produced profits of approximately $30 million.”

The message couldn’t be missed. Enron had big trouble.

Once they printed out the memo on Stoel Rives letterhead, Hall and Wood walked the three blocks to Enron’s Portland office to meet with Yoder. The Enron lawyer’s name was included on the document as one of the writers, and they wanted him to review it before sending it out.

Yoder studied the document, a bit uncomfortable.
It’s on Stoel Rives letterhead, and I’m listed as an author?
He thought about it for a moment. He was involved in this. His name would give the memo more force.

“Okay,” Yoder said. “Let my name be on there.”

Later that day, Richard Sanders read the memo, scarcely able to contain his anger. No one had consulted him, or had even told him this was coming. Here was this document, laying out suggestions that Enron had violated the rules—written while the company was being sued!

He went to see Haedicke, who was even more furious. He thought the analysis was wrong and the memo dangerous.

“Collect every copy,” he told Sanders.

Yoder held the phone to his ear, listening as Haedicke shouted. “What the hell were you thinking, Christian? Why put this on paper without consulting anyone first?”

The whole idea had been to brief everyone, Yoder replied, so they could understand the situation.

“Look, I accept that,” Haedicke replied. “We always need to develop a factual understanding of the issues. But not like this! I’m really upset this memo was produced.”

“Well …”

“Plus, I think there are some factual inaccuracies here. And it sure might be dangerous to our strategy to have something in writing that might not be right!”

After the call ended, Yoder was still glad he had sent the memo up the line to Houston; at least now everyone was sure to know what had happened in California. But he would never hear anything about it from top officers again. It was as if no one in senior management even knew that the memo existed.

———

The next day, December 7, Jordan Mintz sat in front of his computer screen, reading the final draft of his memo on LJM3. No one, he felt sure, could miss his message.

He opened by describing how documents for LJM3 were about to go out, with wording that closely mimicked those from the LJM2 offering. But certain elements deserved particular attention, Mintz wrote. The discussion of LJM3 as an attractive investment because of its access to Enron’s proprietary deal flow. The inside knowledge that allowed Fastow and Kopper to evaluate assets. The board’s waiver of the code of conduct.

After a final read through, Mintz e-mailed the draft to Rex Rogers in the general counsel’s office and Ron Astin at Vinson & Elkins, hoping for their input before he sent the memo to Causey and Buy. He figured the lawyers would come running, eager to fix all of the issues he had found.

They didn’t. So Mintz arranged a conference call. The three got on the phone that day. “So, about my memo,” Mintz said. “Did you take a look at it?”

Rogers replied. “Yeah, the description about the board waiving the code of conduct isn’t wholly accurate,” he said. “Actually, the board just found that Enron’s interests wouldn’t be harmed by the conflict. But the private-placement memorandum is already out, so we’ll just issue a supplement correcting that.”

Mintz paused. “Well,” he said, “aren’t we concerned about this other language, and what it says?”

“It’s not a problem,” Astin replied. “It’s no different than what was in LJM2, and that was approved.”

Mintz couldn’t get out of his chair. Were these two afraid to get in front of a political train? Was he crazy? He typed Rogers’s comments into the memo, then printed it out for Causey and Buy, sending it to them that day.

He never heard back from either of them.

Five days later, on December 12, Lay looked around the packed Enron boardroom, taking in the moment. The directors had been meeting for hours, and now, at 12:30, everybody was ready for lunch. There was one thing left to do.

“All right,” Lay said. “I’m calling for an executive session. So if everybody else could please head on out.”

Skilling, Fastow, Causey, and nine other executives left the room. Lay waited until the door closed behind them. He took a moment to glance around the conference table at his directors. His friends.

“I think we should formally discuss the issue of succession and have a final vote,” he began.

———

Fifteen minutes later, Skilling arrived in a dining room on the fiftieth floor mezzanine, where the Enron directors were enjoying a light lunch. As he stepped in, the directors stood and applauded. Lay approached and shook his hand.

“Well, Jeff,” Lay said, “I’d like to let you know the board has unanimously decided that they want you to be the next CEO of the company, effective in February.”

Lay turned to face the directors. “And I think we’re all looking forward to the excitement that you’re going to be able to create around here,” he said. Everyone clapped again.

The next night, Skilling was in Dallas, alone on a business trip and consumed by depression.

Wow
, he thought.
I just made CEO
.

He was exhausted. Feeling lousy, sorry for himself.

Is this what he wanted? There just wasn’t really any magic to it. He had basically been running the place for years. Now he had to keep doing it, just hanging on, handling the same old complaints, the same old problems.

He wandered into the hotel bar. He needed a drink.

JORDAN MINTZ SAT AT
his desk in shirtsleeves, his sports jacket hanging nearby on a coat rack. It was the morning of December 15, 2000, and he had just ended a call about Fishtail, a new LJM2 deal designed to create about $100 million in profits. The transaction struck Mintz as aggressive, and he was checking to make sure proper procedures were being followed. He opened the files to check the deal-approval sheet. It wasn’t there.

From his examination of the old files, Mintz already knew the approval sheets were a big problem. They were supposed to contain loads of information to allow reviewers to decide whether an LJM deal was good for the company. But often the details in them were skimpy at best.

Mintz wandered out of his office, over to Nicole Alvino, a lower-level staffer who had been given responsibility for managing the approval-sheet process. Standing by her cubicle wall, he asked her to come to his office for a moment. There, the two sat down on either side of his desk.

He threw out a series of questions. Who told her how to prepare the sheets? Why were they put together so late in the process? Was there some other way that the necessary data were communicated? Alvino didn’t have a lot of answers.

“I’ve been reviewing some of the old sheets,” Mintz said. “Some of them have lots of detail, some don’t.”

“Well,” Alvino replied, “people are always sensitive when they prepare these.”

“What do you mean?”

“About how much detail to put in, because of the awkwardness from the related-parties issue.”

Mintz sat back. So now the LJM deals, the ones that should have the
most
review, were getting the least.

“The way it’s been done,” Alvino continued, “is we include enough information to answer the checklist attached to the approval sheet. That’s been the general practice, to keep the information to the minimum necessary.”

The minimum necessary
. Mintz remembered Fastow’s telling him how
important it was that the public disclosure of the facts about LJM deals be as innocuous as possible. Everything was secretive. The worst approach imaginable.

Mintz wrote a memo about his conversation with Alvino and sent it around. But he knew it would barely register in Enron’s collective consciousness. He needed to do something more dramatic, to marshal all the evidence into a single document that would startle management out of its lethargy.

It would take almost three months to complete.

Andersen’s accounting team was flummoxed by Fishtail, the latest LJM2 deal. A J. P. Morgan Chase entity would be listed as an “investor,” even though it wasn’t putting up any cash; the only up-front money would come from LJM2. This one went past the edge of the envelope.

Needing help, the accountants turned to the Professional Standards Group. The questions landed on the desk of Carl Bass, who had joined the PSG months before.

Bass plunged into the documents, getting progressively more disturbed. With only LJM2 ponying up the money, nobody had enough skin in the game for Fishtail to be counted as a true off-balance-sheet entity. If nothing else, LJM2 had to put up more cash, eight million dollars.

He called Duncan and let him know. And unknowingly upended his career.

Eight million dollars!
The verdict came as a shock to the Enron executives involved in the deal. Somehow, they had gotten the idea that Andersen had signed off on Fishtail and already closed the deal. Now everyone had to restart negotiations and extract more money out of Fastow’s fund.

Fastow was furious. He complained to Causey, who told him not to worry. He would take care of everything.

Carl Bass closed his eyes as he pinched the bridge of his nose. He was on the telephone with Deb Cash, an Andersen partner on the Enron account, venting about the company’s latest accounting horror.

It involved another off-books deal, this one called Braveheart. Enron had decided that its video-on-demand agreement with Blockbuster could be partially sold to a partnership. But the Enron-Blockbuster relationship was struggling. Each side bickered that the other wasn’t living up to its end of the agreement. They held everything together by striking a deal in December that prevented the arrangement from being terminated until March 2001.

All of that made Braveheart shaky enough. Worse, Bass thought, there wasn’t a real business here, just a test market. But Enron wanted to use that as the basis of a sale to bring in more than $100 million in revenues. The only way that could be done, Bass ruled, was by getting an independent appraisal, showing that the value was there.

As Bass complained about the Braveheart deal, he mentioned that one of the outside investors in the off-books partnership was Canadian Imperial Bank of Commerce.

“You know,” Cash said, “we found a side agreement on another Enron deal with CIBC. They gave them a letter protecting the bank’s equity interest.”

Bass sat up. “Really?” he said.

This was big. If Enron guaranteed the investment by CIBC, then
Enron
was at risk in the deal, not the bank. In truth, there were no outside investors, just a bank willing to be a front for Enron itself. This violated every rule.

“What did you do about it?” Bass asked.

“Well, they fixed it.”

Bass snickered. “How do you fix that? They made the offer. How do you make sure they took it away?”

“It shouldn’t have happened,” Cash said. “They just made a mistake.”

That same week, Bass was on a conference call with Duncan and some other Andersen partners, thrashing through Project Braveheart one more time.

“Listen, I want to ask,” Bass said. “I understand from Deb that there was some side agreement in another CIBC deal protecting their equity. Are we sure we don’t have that happening here, too?”

Duncan bristled. “You’ve got your facts wrong, Carl. That wasn’t the case.”

Bass was about to speak.

“Anyway,” Duncan said, “it got fixed.”

Bass hardly knew what to say.
It hadn’t happened, but it was fixed
.

In fact, it wasn’t. The original side deal survived Andersen’s discovery. And Bass was right: Fastow had provided the same guarantee to CIBC in Braveheart.

On a morning in December, Skilling looked up from a report as Causey walked into his office. He placed the document on his desk and headed over to his conference table, ready to review the problems in California.

For the last couple of days, Skilling had been hearing lots of bad news about the state. He had learned about how EES had taken a position in the California markets and been clobbered. Worse, he had been told Enron was
facing growing financial exposure to Pacific Gas and Electric or Southern California Edison—two giant utilities in the state—which his executives were sure would soon implode.

The utilities not only were slow in paying their bills; the wild market had triggered a quirk in the rules, transforming a fee that Enron was supposed to pay into something the
utilities
were supposed to pay to
Enron
. And the amounts owed just kept growing as Enron did business with its own retail customers in the state.