Conspiracy of Fools (27 page)

In a flash, almost half a million dollars zipped into the federal banking system. Within seconds, it appeared at J. P. Morgan Chase, ready to be credited to the Fastows.

The loan to Kopper for the wind-plant purchase had been repaid. In just over three months, the Fastows had received back the money they had fronted to the bogus investors in RADR, plus almost sixty-three thousand dollars in profit.

It was just the first in a steady stream of cash they would receive from the deal for years to come.

Ron Astin stared at the inch-thick document on his desk. It was September 4, 1997, and Enron had just sent over its latest draft of the Chewco private-placement memorandum. The document, which would be used to solicit investors, was loaded with the required arcane information so potential investors could make informed choices.

Astin had reviewed most of the details before; the first draft had landed back in July. This would be another structured-finance deal, meaning Enron only had to raise three percent of the total capital—in this case, still a hefty chunk of change, about eleven million dollars.

Turning the pages, Astin studied portions of the document marked in the margin with a straight black line, a designation by the word-processing program of a revision. One new entry took him aback.

A group of Enron executives, including Fastow, would be investors in Chewco. The
intertwining of Chewco and Enron had always made Astin uncomfortable, but he signed off on it. But now Fastow was trying to make it a vehicle for personal profit. That went too far.

Astin didn’t know it, but Fastow thought he had finally found a way around the accounting problems that had killed Alpine Investors. Chewco wasn’t buying anything from Enron; Calpers was on the other side of the table. With the Chewco structure, Fastow and a few select colleagues would post a little cash and gain control of a quarter of a billion dollars in JEDI assets.
Enron knew exactly what reserves JEDI owned; at this point the partnership was just clipping coupons, receiving a reliable stream of cash. The investors would be rich, with almost no risk.

But Enron, not Fastow, was Astin’s client. And this deal looked bad for the company. He reached for the phone.

Four days later, on September 8, Fastow scowled as he and Kopper led a small cadre of lawyers to a conference room. He closed the door and slumped into a seat. The new Chewco documents had set off alarm bells at Vinson & Elkins, and now three lawyers—Astin, Joe Dilg, and Bob Baird—had marched over to Enron to air their concerns.

Even before coming over, the lawyers had raised the same arguments Fastow had heard before: executives couldn’t be investors in their own companies’ structured deals. That left Fastow burning. He hadn’t
invented
the concept of special investments for insiders. Wall Street did it all the time. And Chewco wasn’t even buying anything from Enron, for heaven’s sake! What was the problem?

This time Fastow wasn’t going to give up the money without a fight. His staff had called around to Wall Street firms and gathered information about their investment deals. He had also made sure to bring a few Enron lawyers along to the meeting—Mordaunt, Carol St. Clair, and Rex Rogers.

Fastow’s expression oozed contempt as Astin spoke.

“As we told you earlier,” Astin began, “this new provision allowing Enron employees to be investors has raised some serious concerns for us.”

Fastow listened impassively.

“Now, no matter what is ultimately done here, there is one absolute,” Astin continued. “Chewco cannot proceed in its current form unless Enron’s senior management specifically approves of the inclusion of this provision”

Shaking his head, Fastow tossed up a hand. “Oh, come on, Ron. What, we have to drag in Lay and Skilling? What in the world is the big deal here?”

“It’s a business issue, Andy. The timing and the form of this are not sound from a business perspective.”

“It’s got nothing to do with Enron!” Fastow snapped. “We’re not negotiating with the company.”

“That’s not the problem, Andy,” Astin said. “Look, the business units in Enron have a lot of rivalries. With your group getting special investment opportunities, that’s only going to make that problem worse.”

Fastow said nothing.

“But the most important element here is the substance,” Astin continued. “This may trigger Enron’s conflict-of-interest policy. And if it does, the board
has to approve it. You are an executive officer, and there are serious legal issues raised by that.”

Astin suggested that Fastow’s involvement in Chewco might even have to be disclosed in Enron’s financial statements. After several minutes, he finished up. Fastow sat silent for a second, then leaned forward in his chair.

“You done?” he asked.

Before Astin responded, Fastow launched his rebuttal.

“Look, Ron, you guys are getting worked up over nothing. I mean, take a look at Wall Street. A lot of investment banks have compensation plans that let their best executives take equity interests in deals.”

He poked his finger onto the table. “And damn it, Enron is not just some pipeline company. We’re like an investment bank. We do the same things. And if investment banks can do this, there isn’t a damn reason Enron can’t.”

Astin sat for a moment in the ensuing silence. Fastow’s eruption had surprised him. The man clearly wasn’t weighing all the issues here.

“Andy,” he said, “Enron isn’t an investment bank. It’s an energy company. And even if at the end of the day we decide that it’s fine from a legal and policy perspective, that doesn’t change the fact that the board and the senior management have to approve this.”

Fastow didn’t miss the message. If he was in the deal, the board had to get involved.

“Look, Andy,” Astin continued, “you might not be CFO of this company, but you’ve sure taken on a lot of those responsibilities. Given your position, you really need to think about how this kind of arrangement is going to affect this whole company. I know Chewco seems like a great opportunity, but you’ve got to consider Enron’s interest.”

There was a long silence.

“I’ll think about it,” Fastow mumbled.

The solution was obvious.
Michael Kopper
.

When Fastow got knocked out of an official role in the wind deal, Kopper had stepped into his place. He had proven reliable and trustworthy. He wasn’t an executive officer—the thing that seemed to bother the lawyers so much. If Fastow couldn’t manage Chewco without triggering problems, Kopper was the ideal substitute.

But Astin had raised other concerns. It was clear he wasn’t going to endorse the involvement of Enron employees in Chewco unless Skilling or Lay approved. But that didn’t worry Fastow. He knew how to speak Skilling’s language.

A few days later, Fastow walked down the wide fiftieth-floor hallway past a line of cubicles. Since Skilling’s appointment as chief operating officer, he
had moved up to the top-floor executive suites. Fastow had called ahead, telling Skilling he wanted to bounce an idea off him.

Fastow breezed into the office, and Skilling broke into a smile; he seemed more energized than he had in years. The two wandered to the seating area on one side of the room.

“Okay,” Skilling said. “What’s up?”

“We’ve got an idea for how we can really do some great stuff for Calpers on JEDI.”

Skilling smiled again. God, he loved Fastow. The guy was always finding new ways to get an edge.

“I’m intrigued,” Skilling said. “What’s the idea?”

“You know, we could get Michael to do this. I’ve talked to him, and he’s willing to put together a deal.” Skilling nodded.

“He’s willing to do it at a higher price than we could get if we sold it to a third party,” Fastow continued.

“Why?”

“Two reasons. First, he doesn’t have to do any due diligence. He knows the assets. If we try to find investors like General Electric or someplace like that, they’re going to have to go through every single one of the assets.”

“Mm-hmm.”

“The engineering would be very expensive, because they have to figure out the geology, that kind of stuff. But Michael trusts the geologists we’ve already used, so there wouldn’t be any money spent on that.”

Skilling liked that idea. Enron was going to pick up the sale costs; this meant lower expenses for the company.

“And because he’s so familiar with the assets,” Fastow said, “he’s not going to give us as high a discount rate as an investor like GE might.”

Even better. The discount rate would be used to calculate the present value of JEDI’s future cash flows. If Kopper was willing to use a lower discount rate, that meant a higher present value—and so a higher purchase price.

“So,” Fastow said, “would you consider that?”

Skilling laughed. “Hey, Andy, if we can make Calpers more money that way, you bet.”

Fastow nodded, hesitating for a second. “Listen, also, what would you think of my family investing in this? You know, the Weingartens, Lea’s family?”

Skilling sat back and crinkled his nose.
Enron putting together family investments?
That felt kind of low-rent.

“I don’t think so, Andy,” Skilling replied. “That doesn’t sound like something I want to be messing with.”

The small pushback was all Fastow needed. “Fine, we won’t do that,” he said quickly.

Finishing up, the two men stood. Skilling slapped Fastow on the shoulder. “Sounds great, Andy,” he said.

Banks provide loans, money that has to be paid back, with interest. Chewco needed equity, a third-party investment at risk of being lost. But equity from an independent investor meant the profits would have to be divvied up. That’s why Fastow and Kopper wanted to get the money for Chewco from banks.

So how to finagle it so that loans looked like investments?

A proposal was floated with Barclays Bank, which had been involved in the original financing of JEDI: The bank would “invest” several million dollars in Chewco. Then Chewco would hire Barclays as a consultant, at a cost of one million dollars a year. If the bank injected five million into Chewco, the consulting agreement would last five years; if six, then six. On October 20, Barclays’s operations committee met to discuss the idea. Every dime it put in, Barclays would get back. With its maximum potential loss at zero, Barclays thought it could classify the “investment” as a loan on its own books.

Then the accountants nixed the advisory fee idea. Without that tit for tat, Enron lost interest in the bank’s consulting expertise. After all, what good was Barclays’s advice if it didn’t help manipulate the accounting?

Jordan Mintz, Enron’s newest tax lawyer, plastered a fake smile on his face, trying to mask his loathing of Kopper. He barely knew the guy and couldn’t stand him.

The Chewco deal had grown endlessly complicated, and Mintz had been brought in to review its tax consequences. As best he could tell, Enron needed to provide a tax indemnification to Chewco. Often, an entity like Chewco will be deemed to have reportable income—and be required to pay tax on it—before it actually receives the cash. So Mintz was crafting a document requiring Enron, in the event of such a timing mismatch, to advance Chewco the money. Then, when Chewco got its cash, it would repay the loan.

While the concept was simple, the details were complex, and Mintz asked a series of questions to make sure he had everything right. “Michael,” he said, “I need to understand more about the full structure, the investors—”

“I can’t do that,” Kopper interrupted. “Enron doesn’t have a right to know more. We’re negotiating for Chewco, but it’s behind a black curtain. You’re not supposed to know what’s there. That’s what all the parties have agreed to.”

Mintz took a breath. This was ridiculous; he was being asked to write up
a legal document without having access to the necessary information. It was like being told to fly an airplane with his eyes closed.

He gave up on Kopper, but for the next few days Mintz nosed around the office, seeking information. While he picked up scraps, no one would say anything about Chewco’s investors. There were intimations that the money was coming from wealthy Middle Easterners, but nobody volunteered details.

The more the secret eluded him, the more Mintz wondered: what was really hidden behind that black curtain?

The Chewco negotiations took on a through-the-looking-glass feel. Everybody at the bargaining table was from Enron, but it wasn’t clear whether
anyone
solely represented the company’s interests.

Kopper kept musing about his concerns for the Chewco investors. Bill Brown, a chief negotiator on behalf of the company, had believed Fastow would give him a chance to
be
a Chewco investor. Everyone knew conflicts were rampant, but no one seemed to understand where they all were.

Despite Fastow’s suggestions, Brown took a tough line on Enron’s behalf. By his calculation, Kopper wanted terms that could cost Enron millions of dollars. He fought them.

One day, after some tough haggling, he heard from Fastow.

“How are the talks going on Chewco?” Fastow asked.

“We’re making some progress. It looks pretty good.”

That sounded great, Fastow said. “I hear you’ve been negotiating pretty hard on this thing,” he added.

Maybe a compliment was coming. “Well,” Brown said, “that’s my job. I just want to get a good deal for Enron.”

“Yeah, I understand that. But we really need to close this deal. I mean, how far apart are we?”

Well, Brown replied, if Kopper got his way, he said, it could cost Enron as much as thirteen million dollars.

Fastow scoffed. “Come on, Bill, that’s pocket change to Enron,” he said. “And it hardly seems unreasonable, given the risks Chewco’s investors are taking.”

Something’s not right
. Fastow wanted to leave money on the table? Fastow, who fought for every dime in a deal?

“So,” Brown said tentatively, “you’re okay with us walking away from the thirteen million?”

“Yeah. Let’s just get the deal done.”

The discussion over, Brown got back to work. His exuberance over his
progress on the Chewco deal was replaced by a cold apprehension. He couldn’t shake the feeling that he had just been warned by Fastow to back off—a warning he figured he probably better keep in mind.