Conspiracy of Fools (100 page)

UPSTAIRS IN HER HOUSE
, Rebecca Carter stepped into a game room, passing her teenage son’s collection of sports trophies that filled a built-in cabinet. She pulled out a chair and sat down at his computer. Within moments, she was on the Internet, typing in the Web address for the SEC.

It was early on the morning of November 8, and Carter was hoping to learn the latest on Enron. She pulled up the list of filings, and noticed something new had been added that morning, an 8-K. She moved the computer mouse and clicked it open.

Carter’s eyes widened. A restatement—going back five years? Chewco? Accounting errors?

I can’t believe what I’m reading here. The
nineteenth page was the biggest shock of all. There, Carter read about Southampton and the investments made by Enron executives.

Kristina Mordaunt?
Kristina was a friend of hers! She’d invested in some Fastow entity—and now was getting fired? And Ben Glisan! He was a Boy Scout.
What is going on?

Carter jumped up and ran downstairs. That morning, she knew, Skilling was in Washington, meeting with Bruce Hiler, his new lawyer. Somebody had to tell them about all of this. She searched frantically for Skilling’s itinerary. After locating it, she grabbed the phone and dialed Hiler’s office. A secretary answered.

“I need to speak with Jeff Skilling,” Carter said.

“I’m sorry, he’s in a meeting with Mr. Hiler.”

Carter didn’t hesitate. “Interrupt them,” she said.

Skilling was deep in conversation with Hiler when he heard Carter was on the line. Annoyed, he wandered over to a phone and picked up.

“Why are you calling me out of a meeting?” he asked.

“Enron’s restating the financials! And there’s more …”

“Restating the financials?”
Skilling interrupted.

The words caught Hiler’s attention. “Put this on speaker,” he said.

Minutes later, Carter’s voice filled the office as she read portions of the 8-K. She mentioned that the financial restatements went back five years.

Hiler was bothered but not surprised. “This is going to be a problem,” he said.

Skilling shrugged.
Okay, new accountants have a different opinion from other accountants. So what?

“But then this is the worst part,” Carter said.

She read the statement about a deal that had involved numerous Enron executives as investors, including Fastow and Kopper. Then she read the names of the investors. “Ben Glisan, Managing Director and Treasurer of Enron Corp.; Kristina Mordaunt, Managing Director and General Counsel of an Enron division …”

Skilling staggered into a chair. “You’ve got to be
kidding!”
he exclaimed. “You’ve got to be kidding!”

His mouth was open. He didn’t know what to think.

“Kristina?
Ben?”
Skilling asked.

“Yeah, that’s what it says.”

For a moment, he couldn’t speak. For days, he had been reading the papers, thinking that he had known everything that had happened at Enron. But not this. Not this.

Oh, shit
.

Early that same morning, Ray Bowen was getting ready to head back to work, but was already feeling exhausted. With the high-wire act the night before, he had only been able to grab a few hours of sleep.

But today, the final hurdles waited. The proposed merger had been presented to the credit-rating agencies to make sure that they would let Enron keep its investment-grade rating; without it, Enron’s trading business would dry up. Then Dynegy’s largest shareholder, Chevron, had to give its blessing for the deal. After that, smooth sailing.

Bowen glanced at the clock. By now, McMahon must have heard
something
from the credit-rating agencies. The suspense was too much to bear. Bowen picked up the phone and dialed McMahon’s number. It rang and rang. Not a good sign.

Finally, a click. “Yeah?” It was McMahon.

“Hey, Jeff, it’s Ray. Is everything okay? Did we get the right answer from the credit-rating agencies?”

McMahon’s tone was desperate.

“No, Ray,” he said. “They’re fucking us.”

———

An hour later, McMahon and Bowen were in Whalley’s office, struggling to come up with some strategy to please the credit agencies. The big problem was Moody’s Investors Service, which believed the deal offered Dynegy too many outs from the merger before it closed. In particular, Moody’s was concerned about the material adverse change, or MAC, clause, which allowed Dynegy to bolt if there was any dramatic deterioration in Enron’s prospects.

The three executives got on conference calls with Moody’s, then with Jimmy Lee at Chase. They debated the possibilities; Dynegy was soon brought in. Without changes, this deal was dead. Backed into a corner, Watson agreed to toughen up the provisions allowing Dynegy to scotch the deal, and to make a few other revisions to satisfy Moody’s.

The executives at Enron couldn’t have been more pleased. Now it would take some sort of financial tsunami for Dynegy to get out of this merger.

Enron had to pay its bills that day. But if Moody’s didn’t give the nod, the merger, its last chance for survival, would slip away. It would go bankrupt, and then deeply regret having wired out all of its cash.

Bowen came in to see McMahon and Whalley, pressing them to make the call: pay the bills or not?

“Okay, here’s the problem,” Bowen said. “I’ve got like $400 million in cash on hand. If Moody’s shoots us down and we’re on the path to bankruptcy, that’s money that I would rather have here. But we’ve got a lot of bills due today that would eat up most of that cash”

Whalley ran a hand through his hair, exhaling. “What happens if we don’t pay our bills?”

There could be problems, Bowen said. A lot of the bills were related to settlements of energy trades. That money normally would already have been shipped out. Trading partners were probably wondering where it was, getting itchy about extending Enron any more credit. If Enron stiffed them, it could easily be shut out of the markets.

The three men thought in silence for a moment.

Whalley decided. “Ah, the hell with it, let’s wait,” he said. “Don’t pay them.”

Bowen called Mary Perkins, Enron’s executive in charge of cash transfers. “We’re not going to pay our bills today,” he said simply. Perkins paused. “Oh,” she said. “Okay.”

Got to admire her composure, Bowen thought. He had no doubts that his instructions had thrown her off stride.

In the morning, Bowen said, they were going to hear from Moody’s. If the
credit agency gave the green light to the merger, then everybody would have to be paid immediately. That meant all the wires needed to be set up, ready to go.

“Well,” Perkins said, “I can get the payments loaded into the Fed system early in the morning. Then the payment will flow when the Fed opens.”

Fine, Bowen said. In that event, Enron would pay what it owed, plus overnight interest. Everybody would likely just assume Enron was a little more disorganized than usual.

The answer from Moody’s came back early the next morning. It agreed to grant Enron a BBB-minus rating, the lowest ranking within the critical investment-grade level. It wasn’t great, downgrading Enron by one notch, but it would keep the company alive. Bowen immediately called Perkins.

“It’s a go!” he said. “We’re making the payments.”

“Thank God!” She hit the button.

The next morning, a voice mail and an e-mail were waiting for David Duncan when he arrived in the office. They were from Nancy Temple, the Andersen lawyer working on the Enron debacle. Andersen, she told him, had finally been served by the SEC with a subpoena in the investigation. He should suspend the use of the firm’s document policy, she said.

Duncan punched a few buttons on his phone, forwarding Temple’s message to his secretary, Shannon Adlong.

“This is from Nancy Temple,” he said. “Make sure everyone is notified to suspend the policy.”

Just past noon, Adlong listened to the message. She opened up an e-mail, addressing it to most of the assistants in the office. She placed the cursor in the subject heading.

No more shredding
, she typed.

But it was too late; the crime had been committed. Hundreds of e-mails had been deleted, and thousands of pieces of paper documenting details of Andersen’s dealings with Enron were now little more than confetti.

Late that afternoon, what seemed to be the final obstacle to the merger was cleared away. The Chevron board approved the deal. Chuck Watson called Lay to let him know.

“It’s all set,” he said. “They signed the merger papers.” Dynegy would now invest $1.5 billion in Enron to keep it afloat and was authorized to invest $1 billion more at closing. Lay felt both relieved and deflated. His company was saved; he was losing his company.

“Congratulations, Chuck,” he said softly, muttering a few words about how far they had come so quickly.

Watson was eager to proclaim his victory. “We want to announce it tonight,” he said, “as soon as possible.”

Lay sighed. “We’ll be right over.”

The press conference that Friday night embittered Enron’s senior managers. Any hopes they had of clinging to shreds of power, or even respect, were shattered.

Watson placed strict limits on the number of them who could attend, and Lay was given all the prominence of the janitorial staff. He was allowed to say virtually nothing and made little effort to hide his dissatisfaction. Dynegy was the victor. Enron was on its knees, vanquished by its smaller rival; the white flag had been unfurled.

That night, the younger Enron managers went to Kenneally’s, the dimly lit Irish pub. Gloom hung in the air. These were executives who for years had delighted in deriding Dynegy as a cheap imitation of Enron. Now the upstart was running the show—and rubbing their noses in it.

Someone tried to liven up the mood. Dave Delainey, the head of retail, hoisted a glass. “Guys, this is a reverse merger,” he thundered. “They may think they’re buying us, but give it two months, and we’ll be running the place!”

Nearby, Ray Bowen laughed and swigged his Foster’s lager.

“Maybe,” he said softly. “Whether this merger happens or not, time will tell.”

Three days later, Monday, November 12, one of Andy Fastow’s last remaining financial land mines exploded.

The shambles of the finance division’s records made it almost impossible for the new team to find every detail—in particular, the triggers embedded in structured deals. To get better pricing for the deals, Fastow had agreed to terms allowing banks and investors to demand money or stock from Enron if its share price fell to certain levels or its credit rating dropped—usually below investment grade.

But not always. There was one deal where the critical trigger had been placed at BBB-minus, one notch above junk. The rating just bestowed on Enron by Moody’s.

The first person at the company to learn about it was Bowen, in a call from Bill Fox, a banker from Citibank.

“Hey, Ray,” Fox said, “now that you guys are BBB-minus, I seem to remember that Rawhide had a trigger event at that level.”

Rawhide
. Bowen knew it was one of the finance group’s off-books entities, used to raise more than half a billion dollars a few years back. He didn’t know anything about the terms, but he couldn’t imagine this was true. What idiot would put an
investment-grade
trigger in a finance deal?

“Why don’t you guys go check it and see if we’ve got an issue here?” Fox asked.

Bowen got off the phone and called someone in finance. “Hey, can one of you guys go look at the Rawhide documents, ’cause Bill Fox is telling me we’ve hit a ratings trigger.”

The answer came back soon. Fox was right. And the trigger was a doozy. Enron owed all the money it had borrowed through Rawhide. Some $690 million, due fifteen days after the trigger was hit. And until Fox called, no one at Enron knew the repayment clock was already ticking.

“That
can’t
be right,” McMahon protested, throwing up his hands. “That’s just insane!”

Bowen was standing in front of McMahon, having just broken the news of the Rawhide trigger. “It’s right,” he said simply.

“Ray, we’ve
never
done deals where we allow for debt acceleration in the investment-grade category!” he shot back. “Why would someone
do
that?” Bowen shrugged. “I have no idea. But we’ve checked it. That’s what they did.”

McMahon put a hand over his face. This was too much.

In Washington, a mealtime crowd filled Il Radicchio, an Italian restaurant near Capitol Hill. A waitress made her way through the mass of people, placing an iced tea in front of David Cavicke, a staff member on the House Energy and Commerce Subcommittee on Oversight and Investigations. At the other side of the two-person table sat Mark Paoletta, chief counsel and a top investigator for the subcommittee.

For days, Cavicke had been lobbying Paoletta to go all-out on Enron. The subcommittee investigated issues relating to business and energy, with a bent toward potential wrongdoing. By that standard, Enron seemed to hit the trifecta. Cavicke, who spent years working on Wall Street, had been telling Paoletta that the Enron affair seemed huge. So today Paoletta had taken Cavicke out to lunch, giving him the time to make his case.

“What happened at Enron is amazing,” Cavicke said, his voice animated. “It is just the most massive fraud!”

Cavicke had been reviewing the documents, particularly the recently filed
8-K. He spelled out everything he had learned from the records. More important, he said, this pointed up fundamental issues relating to the reliability of company financial reports. It was
exactly
the kind of thing the subcommittee should be jumping on.

For about an hour, Cavicke walked through the details of what happened at Enron. By the time Paoletta’s chicken sandwich arrived, he had pretty much made up his mind. This was something he needed to raise with Jim Greenwood, the congressman who chaired the subcommittee.

Enron employees had been blocked from making changes in their retirement plans for ten workdays. But too much was happening; it was, executives decided, a terrible time to prevent the workers of Enron from being able to make decisions about their investments, particularly since the vast majority of them held huge stakes in the company’s stock.