Conspiracy of Fools (54 page)

Later in the meeting, Jaedicke introduced a new topic. “As you know, we have approved the participation by Andy Fastow in certain investment vehicles called LJM1 and LJM2,” he said. “It is our committee’s responsibility to review Enron’s participation in transactions with those vehicles, to ensure they were done at arm’s length.”

Jaedicke recognized Causey, who proceeded for several minutes to rattle off deals, including the flood from year-end. He left out a few, but no one noticed.

“It is my opinion,” Causey said, “that all of these deals have been conducted on an arm’s-length basis.”

There were no questions. The presentation had taken less than ten minutes. The committee moved on.

Having two chief executives in Enron Broadband just wasn’t working. Rice and Hirko kept stumbling over each other, and they both knew it. Someone had to step aside, and they agreed it should be Rice.

The job had become a bore. Rice didn’t want to manage people anymore and would rather do deals. They made up a title, chief commercial officer. The agreement reached, they went to Skilling with the news. He was delighted that the two had solved the problem on their own. Later that day, Skilling dropped by Rice’s office.

“I really appreciate you guys working this out,” he said. “It’s a pretty good solution.”

“Yeah, I think it’ll work out well.”

“So what’s it going to cost me?” Skilling asked.

Rice didn’t flinch. It had never occurred to him that Skilling would
pay
him to leave a job he didn’t want. It looked as though the first deal he would negotiate in his new position would be one for himself.

“Dunno,” he said casually. “Let me think about it.”

The price tag was big. His years at Enron had made Rice wealthy, so he asked to have his entire salary and bonus converted into stock options from then on. Skilling agreed without hesitation.

McMahon was losing hope of ever falling asleep. LJM2 was eating at him; he knew that he had to do something. He just didn’t know what. About two in the morning, he reached for the television remote and clicked on the set. Beside him, his wife, Margaret, stirred.

“What’s the matter?” she mumbled.

McMahon’s eyes stayed locked on the television. “I’m stressed about this Andy thing. I don’t know what to do.”

“If you’re that troubled, talk to him again.”

McMahon said nothing for a moment. “Maybe I should leave the company,” he said.

“Then leave. No job is worth this. Get another one.”

She smiled. “Just stop waking me up in the middle of the night.”

A while later, McMahon shut off the television. Things couldn’t continue like this. Something had to give.

It was over. He was quitting. Everything he had seen about LJM2 was just too over the top, too unethical. Jim Timmins couldn’t put up with it anymore.

Timmins, Enron’s contact with the pension funds, had at one point been eager about the company setting up its own equity fund. But then Fastow took the idea and bastardized it, putting himself in control, creating conflicts of interest that Timmins found grotesque.

Plus, he was already hearing plenty from his contacts in the institutional-investor world to make him worried. Pension-fund managers were uncomfortable with the whole thing, couldn’t understand what Enron was doing, and told Timmins about their concerns.

Originally, Fastow had wanted Timmins along on the road show for LJM2. But as his discomfort with the deal became evident, Timmins was cut out. He eventually told Kopper that he wanted nothing to do with LJM2, that he feared bad things would come from it. He quickly saw the results: his bonus that year was his worst ever.

Finally, by February, Timmins realized that he couldn’t continue at a company that would do such a thing. He went to see Fastow. His message was blunt. “I don’t agree with what you’re doing with LJM,” he said. “I don’t want any part of it. I want to leave Enron.”

Fastow argued, saying that the fund was good for Enron, but Timmins would have none of it. Still, Fastow wasn’t eager to see Timmins storm out in a huff. He offered to let the executive continue working at Enron for months, so he could use the office to look for another job. Then, when something good came along, he could move on.

Timmins thought the offer was fair. He didn’t realize that Fastow had just set up a situation that made sure no one would have cause to ask the real reason Timmins was leaving.

———

Somehow, Andy Fastow had to get twenty-five million dollars. If that could happen, the bankers at Greenwich NatWest were certain they could persuade him to help rip off their employer.

The three bankers—Bermingham, Darby, and Mulgrew—had been perfecting their plan for weeks. The idea was simple. Nobody at Greenwich NatWest, other than the bankers themselves, knew that Swap Sub, the partnership controlled by LJM1, was now worth millions. Everyone assumed it was valued at nothing. There was no need for the hedge anymore; the restriction against selling the stock was gone. So if the hedge was shut down, there would be tens of millions of dollars in Enron stock locked up inside Swap Sub. Whoever owned it owned the profits.

If all of them worked together—the bankers, Fastow, Kopper—they could pull off the perfect con. Fastow and Kopper could make some lowball offer of their own for NatWest’s stake in Swap Sub, and the three bankers could tell their superiors it was a good price. Then, once they owned Swap Sub, they could turn around and sell its shares for tens of millions of dollars—and divvy up the loot.

Bermingham had been working hard on a presentation for Fastow and Kopper, showing how much money could be made. There had already been some preliminary discussions, and the two seemed amenable. But Mulgrew didn’t like what he saw in Bermingham’s analysis; Fastow might not be getting enough. The more available for him, the greater the chance the bankers would get their millions, too. Mulgrew e-mailed Bermingham with his concerns about Fastow.

“If I knew there was a realistic way to lock in the $40m, and give him $25m, we would jump all over it I guess, since it would give us $15m,” he typed. “I will be the first to be delighted if he has found a way to lock it in and steal a large portion for himself.”

But with all the cash sloshing around, Mulgrew felt sure there was a way to bring Fastow on board. “We should be able,” he typed, “to appeal to his greed.”

Two days later, on February 22, the bankers flew to Houston to meet with Fastow and Kopper. Normally, the Greenwich banker in charge of the Enron relationship, Kevin Howard, would be there. But Darby asked him not to attend, with a cryptic comment about becoming rich.

Once they were all in a room, Bermingham made the presentation. “We’ve put together several alternatives for this transaction,” he explained. “Any one of them will lead to the result we’re trying to achieve.”

The different proposals had the same objective: cheating NatWest. But
there were challenges. Under the rules originally issued by Enron’s board, Fastow couldn’t profit from the company’s shares in LJM1. And that was exactly what would happen here.

There was a way around that, Bermingham said. Once the Rhythms hedge was unwound, perhaps LJM1 could do some sort of transaction converting the Enron stock into another asset, which could then be sold.

But, Bermingham warned, that involved a lot of moving parts and might raise suspicions among NatWest and CSFB.

“It might be too obvious,” he said. “There’s a bigger chance they’ll figure out they’re getting robbed.”

That wasn’t the only problem. “Also,” Bermingham said, “that way, there’s no certainty we’ll make money.”

Cliff Baxter’s effort to sell the international power plants was going full force. He had hired Morgan Stanley Dean Witter to help and quickly concluded that there weren’t buyers around who wanted the whole thing. Probably, Baxter decided, it was best to try and unload them one region at a time.

The first planned sale was called Project California, and it bunched together Enron’s energy assets in Latin America. Any buyer would gain entrée to Guatemala, Brazil, El Salvador, Venezuela—a cross section of the region. Skilling liked the idea and asked Causey to run numbers on each regional slice of the international assets. That way, they would know what to expect as the sales effort moved forward.

It was an exciting prospect, but still it made Skilling a little nervous. What, after all, was Enron going to do with all those billions in cash?

Fastow wanted to know: what was everybody else paid at Enron? The information was locked up pretty tight. About the only person who knew—outside of Skilling and Lay—was Mary Joyce, a human-resources executive in charge of compensation. Maybe she would tell him.

One afternoon, Fastow dropped by Joyce’s office. He needed to see the compensation information for members of Enron’s top management committee, he told her.

Joyce looked at him skeptically. “I’m sorry, Andy. I’m not allowed to give that out.”

“Jeff said it’s okay. I need it for something I’m working on.”

Skilling
approved this? That didn’t sound right. Joyce reached for the hone. “Well, let me call him and ask.”

She got through right away. “Jeff, I’ve got a question,” she said. “Should I

release compensation for members of the executive committee to anyone?”

Skilling laughed. “No! Why would you ask that?”

“I was just checking,” Joyce replied.

She hung up and looked at Fastow. “Sorry, Andy.”

Outside a terminal at Houston Intercontinental Airport, Ken Rice tossed a suitcase in his car, ready for the trip home. It was March 1, a Wednesday, and Rice was just back from the opening of Enron’s new London office. In minutes, he was out of the lot, driving onto Interstate 45.

His car phone rang. “Ken Rice.”

“Ken, hey, it’s David Cox.”

More business
. Cox was one of Rice’s favorite deal makers in Broadband. If a transaction needed doing, Cox was the guy. His calls always meant something big was up.

“Yeah, what’s going on?”

“I’m in Dallas, been negotiating with Blockbuster Entertainment. I’m on the verge of closing a twenty-year exclusive deal with them for video on demand.”

What?
Rice didn’t know what Cox was talking about. No one had mentioned a Blockbuster deal before. How fast had Cox put together this two-decade commitment?

“Think you better explain this to me,” Rice said.

The idea was simple. Enron and Blockbuster would form a venture to provide videos over a broadband network. Customers could choose from a library of films, place an order, and watch the video at home. No returns, no leaving the house. Enron would provide the network, and Blockbuster would secure the films through its studio connections.

It sounded promising. But, still, Rice was on Interstate 45. Couldn’t this wait? “You’re not ready to close this today, are you?”

“Yeah,” Cox replied, “we are.”

“Surely this can wait for a few days.”

“No, we want to sign right away.”

Rice understood. When somebody was ready to do a deal, dithering was always a bad idea.

Well, we can clean up things later if we have to
. “Okay,” Rice said. “Let’s go for it.”

Later that week, two Greenwich NatWest bankers, Bermingham and Darby, flew to the Cayman Islands for the next step in their plan. The directors of Campsie Limited, a Caymans entity set up by NatWest to invest in LJM1, were meeting to consider the proposal to sell Swap Sub to a partnership controlled by Fastow and Kopper.

Darby made the presentation to Campsie directors on March 3. This new partnership—at this point called NewCo—had offered one million dollars for Campsie’s interest, which Darby called a fair offer. Bermingham, a director, urged the board to authorize formal talks.

The board approved the plan. And why not? Selling an asset for its value certainly wasn’t controversial.

The next evening in the Caymans, the soft rays of the setting sun lit up the horizon in streaks of gold and crimson. Bermingham was in a local restaurant, enjoying his dinner. With him was Fastow, there to keep tabs on the Campsie vote. It was a complicated deal, and lots could go wrong. Bermingham, Fastow said, needed to move quickly.

Skilling learned the basics from Greg Whalley, the executive now in charge of the wholesale-trading desk.

West Coast rainfall was down. The amount of hydroelectric power, generated by the flow of water, would decline. California imported hydro from Canada and Washington, and had not built new power plants in years.

In the meantime, temperatures were rising even as California was in the midst of an Internet-fueled economic boom. Demand for energy to keep its factories humming—and to cool the homes and offices of its residents—was about to explode, even as supplies shrank. And under the state’s two-year-old electricity program, rising costs wouldn’t dampen demand; most customers’ rates were locked in place.

“It’s a classic supply-and-demand mismatch,” Whalley said. “California is going to hit a wall sometime soon.”

“Okay,” Skilling said. “So what’s your plan?”

“We’re setting up a long position, a big one.”

A long position
. Enron was setting up some trades that would allow the company to profit from rising electricity costs.

It sounded solid. “Great,” Skilling said.

The Swap Sub purchase was looking like a blowout winner. Maybe, Fastow and Kopper decided, it would be a good idea to let others have a taste.

Glisan was an obvious candidate. He’d spent plenty of time on LJM matters; his work had already enriched Fastow. Then there were people like Anne Yeager, who had helped negotiate the Sails deal. And Kristina Mordaunt, a lawyer who had worked on LJM1 and was now general counsel for Enron Broadband Services. Why not spread around the wealth?

Fastow sounded out Glisan, who quickly agreed to invest. Kopper
headed over to Mordaunt’s office to talk. He went inside and closed the door behind him.

“An interesting opportunity has come up,” he said.

The Royal Bank of Scotland was taking over NatWest, and some of the bank’s managers were leaving, Kopper said. A few of them, including Gary Mulgrew, had approached them about buying part of the NatWest interest in LJM.