Conspiracy of Fools (59 page)

Skilling listened, still clearly unnerved by some unspoken fear. “Promise me,” he said. “I’ll take care of you. Just promise me you’ll take care of it.” He drained his glass. “You want more wine?” he asked. Martin declined, and he considered that for a second. “I’m going to get another glass,” he said finally.

Skilling disappeared into the house. Martin was perplexed; she knew he was emotional, but she had never seen him this far gone. What had happened? What was eating at him? A short time later, he wandered back.

“I’m going to show you something,” he said.

He brought out his briefcase and removed some papers, apparently a report of some kind. “Swear to me that you won’t tell anybody you saw this,” he said.

Martin agreed. Skilling thrust the report toward her. It was an accounting analysis on the international assets, he said, put together for the sales effort.

“Look at those fucking numbers,” he said.

Martin studied them. If what she was seeing was true, the entire division might be worth a lot less than anyone at the company had ever believed. Enron might not be able to sell them.

Skilling stared down at his lap. “I don’t know what I’m going to do,” he said, his voice distant. “What do I do with these numbers?”

He shook his head, tearing up again. “I don’t know what I’m going to do. I don’t know what I’m going to do.”

Martin didn’t keep count. But Skilling must have repeated himself at least a dozen times.

In Avon, Colorado, green hills from the Gore mountain range eased down to a patio behind the Park Hyatt Beaver Creek Resort. Dick Cheney and his
wife, Lynne, appeared at the patio entrance, carrying their buffet lunches, and found seats at a table covered by a large gray umbrella.

Cheney—chief executive of Halliburton, the energy-services company—was in Colorado to attend the World Forum chaired by former President Gerald Ford. Despite his close ties with the Republican White House—having served as Ford’s Chief of Staff and as Secretary of Defense under Bush—few would have been surprised if he hadn’t shown up. He had recently been selected by George W. Bush, the presumptive Republican candidate for President, to vet possible running mates. It was the kind of task that could easily push a policy forum onto the back burner.

As the Cheneys settled in, Ken Lay emerged from the hotel with his lunch. He had noticed the Cheneys ahead of him in line and now scanned the patio looking for them. He made his way over. “Mind if I join you?” he asked.

The Cheneys looked up and smiled. “Ken, not at all,” Lynne said. “We’d be delighted.”

Lay sat, removing his lunch from the tray. “Well, Dick, it seems like you have your hands full these days.”

“Quite a bit going on,” Cheney agreed. “It’s been very exciting.”

“I haven’t spoken to George in a few weeks. He set for the fall?”

“It’s going to be a tough campaign,” Cheney replied. “Particularly with the economy as strong as it’s been.”

Lay understood. Bush’s expected opponent, Al Gore, was the sitting Vice President. Strong economic performance usually gave the party in power a leg up.

A voice interrupted. “All right if I sit here?”

Lay glanced up. It was Karl Rove, Bush’s chief political strategist. By all means, he was told. The discussion ramped back to politics. Yes, Rove acknowledged, the economy presented a challenge. Still, there was the wild card of the sexual scandals involving Clinton; there was no telling if that might hurt Gore come November.

The free-flowing discussion lasted throughout lunch. Anyone spotting the group would easily have understood that Lay had secured a place in the inner circle of the next Republican presidential nominee.

Off the boardroom in the Manhattan offices of Deloitte & Touche, Arthur Levitt was loading up a plate with food. It was June 20, just past noon. Levitt, the SEC chairman, was at the firm’s headquarters with a few members of his staff, hoping to avert an ugly public battle.

Levitt’s efforts to stop the flow of fluffed-up numbers coming out of corporate
America had led him on this pilgrimage to the accounting firms, the private sectors’ independent policemen. The firms were supposed to stop games playing, but somewhere along the line, Levitt believed, they had lost their way. Now they relied on their corporate clients to pay huge fees for consulting—helping put together deals, reviewing systems and technologies.

Consulting was an honorable trade, of course. It was just that Levitt believed it shouldn’t mix with accounting. How could a firm receiving millions from a company for providing strategic advice fight management over bad accounting? Auditors were supposed to resign if managers reported misleading numbers; Levitt was convinced that fear of losing consulting work would dissuade them. Auditor independence was being compromised for the worst of reasons: money.

So Levitt planned to issue new rules that month, requiring accounting and consulting to be separate. He hoped to avoid a political battle by persuading the firms to join in the effort. He had invited the three firms he found most uncompromising on the issue—Deloitte, Andersen, and KPMG Peat Marwick—to meet in Washington. They had refused, agreeing to get together only on their own turf.

The mood in the room was frosty. As he spooned food onto his plate, Levitt chatted up one executive, hoping to drive a wedge between members of the group. No luck. He wandered out of the kitchen and set his lunch on the conference table. His chief accountant, Lynn Turner, and legal counsel, Harvey Goldschmidt, joined him. The accounting firm honchos—Robert Grafton, Andersen’s chief executive; Stephen Butler, chairman of KPMG; and James Copeland, chief executive of Deloitte—sat across from them, stony-faced and curt. This was not a receptive crowd.

“I’m glad we’re meeting on this issue,” Levitt began. “It will be much better if we were together on it, with something we can all agree on.”

The faces across the table registered nothing.

“We don’t want to have this become a public cause,” Levitt continued. “Both sides here have everything to gain by coming to an agreement here.”

Levitt laid out his plan, explaining how the goal was to ensure firms did not consult for clients that they audited. There would be plenty of time for a transition, Levitt said, but the ultimate goal would be nonnegotiable. He finished. Copeland from Deloitte was the first to speak.

“Arthur,” he said, “we might as well shut down the firms if this is what you’re going to do.”

The accountants couldn’t perform good audits without consulting, he said, and would certainly be hard-pressed to generate the income they needed to stay in business.

“There is absolutely no evidence that consulting for accounting clients causes any problems,” Copeland said.

Levitt and his staff tried to explain how, in the long run, ensuring auditor independence would be in the firms’ best interest. But the executives would hear none of it.

“Arthur,” Grafton from Arthur Andersen interjected, “if you go ahead with this, it’ll be war.”

The meeting lasted ninety minutes, with the firms holding fast—a huge miscalculation, Levitt thought. The world thought of accountants as benign, boring defenders of the public interest. But here they were, grubbing for cash like any greedy Wall Streeter. Their image protected them for now, but in the end, Levitt wanted the truth to do them in. He had already decided to hold public hearings to force the accountants to show their hand.

He walked onto the elevator with Turner and Goldschmidt. “Okay,” he said. “Now we go to war.”

Andersen was working hard to guide Enron through its growing thicket of deals. LJM2 proved a lifesaver time and again, allowing the company to sell assets when no real buyer could be found. But each time, Andersen had to structure the deals to meet a literal reading of the rules. A few times, Enron executives held back on some details—like secret guarantees and buyback agreements—out of a fear that even a compliant accountant might balk.

Much of the work centered on Raptor. Talon hadn’t hedged anything yet, but already Enron executives were rushing in, brandishing wish lists of assets with values they wanted locked in place. Stock prices were getting more volatile; they could start falling anytime.

Still, Talon could only hedge so much before running out of capital. So on June 22, Fastow and Glisan went back to the directors, seeking authorization for Raptor II. The board approved it readily. LJM2 would be the investor again, with the same lucrative terms.

But Raptor was only one of many deals cooking. After all, it was late June. The quarter was about to end, and Enron needed to make its numbers.

Broadband Services had to unload something fast. Its profits weren’t strong enough, and a quick sale was the only option to push them up.

Fortunately, there were assets it could market. For example, the division had laid far more network fiber than it needed, believing it could sell what it didn’t use. But now fiber prices were slipping, and EBS wanted to find a buyer for some quickly before values dropped further. So far, no luck.

So the division turned to LJM2. One of its primary negotiators on the deal was Larry Lawyer, who had worked years before on Fastow’s first attempted crime, the Alpine deal which later evolved into RADR. Lawyer had secretly been given part of the return from RADR for his Alpine work. In fact, months before, he had received his last check, for more than thirty-nine thousand dollars—all tax-free, since he had decided long ago not to declare the cash as income.

The top lawyer for EBS was Kristina Mordaunt, who had just received more than one million dollars for her secret Southampton investment. Fastow and Kopper had the satisfaction of knowing that two key people on the other side of the table were financially beholden to them.

After the final terms were negotiated, the deal-approval sheet, or DASH, went around for everyone to sign. There was a line for Skilling’s signature, but he was on vacation in Africa. So the sheet instead was shipped over to Lay.

He studied the document. Four people had already signed, including Mordaunt, Lawyer, and Glisan, all secret participants in Fastow’s schemes.

Lay didn’t know how to run the numbers or how to assess the valuation. But he knew he could trust his people. He signed with a flourish.

Kopper answered the phone in his office. Andy Fastow was on the line, giggling.

“What would you think,” Fastow said, “about the Nigerian barges coming back to LJM?”

Enron’s commitment to take Merrill Lynch out of its investment in the Nigerian barges by June 30 was starting to look like a disastrous miscalculation. Merrill executives were banging on Enron’s door, demanding their money back. But the company could find no takers.

So Enron turned again to Fastow and LJM2. There were no negotiations. LJM2 simply paid Merrill more than $7.5 million, giving it the 22 percent return that had been promised so many months before.

Now Merrill’s problem was Fastow’s; he didn’t want an interest in a bunch of Nigerian barges either. He persuaded Enron to shift its guarantee to LJM2; it would find another buyer and take the Fastow fund out of the deal with a profit. The obligations and risk of ownership remained with Enron six months after it reported the profits from the “sale.”

The rolling commitment left some Enron executives queasy. Sales were supposed to be clean, not weighed down with secret side agreements. One Enron accountant, Alan Quaintance, heard rumors about what was going on and approached the lead finance executive on the deal, Dan Boyle.
Quaintance mentioned what he had heard about secret guarantees and said he considered it inappropriate.

Boyle seemed surprised. “I don’t see why,” he said.

Enron’s trading business was going great guns, but not enough to offset the huge expenditures—and investment losses—piling up all over the company. Even with the LJM2 shenanigans, Enron would miss Wall Street’s predicted earnings of thirty-two cents a share for the second quarter.

Fortunately, it had some airplanes to sell—airplanes that, according to the company’s books, were worthless. The planes had been part of a deal begun in 1997, called Cochise. In essence, Enron had shuffled a bunch of paper to create expected future tax deductions. Then—for lack of a better term—it “marked to market” those expectations, reporting the future deductions as current income. Using the tax credit the deal created reduced the book value of the planes from $46.7 million to zero.

So in the final days of the quarter, Enron sold the planes for $36.5 million to an entity controlled by Bankers Trust. Now the energy company could report every penny of its airplane sale as income. But the bank wouldn’t be stuck with the planes for long. There was already an agreement that a few weeks later, one of Enron’s innumerable entities would buy them back. For the same price.

Fax machines were starting to annoy Rick Buy.

The company’s chief risk officer had purchased a new summer house in New Hampshire, a bucolic retreat from the hurly-burly of his job. But as the end of the quarter approached, deal-approval sheets, particularly for LJM2 deals, kept scrolling out of the fax machine.

It was, after all, near the end of the quarter, and it remained Buy’s responsibility to review such deals. No one had ever formally told him that the directors wanted him to handle the job; instead, Skilling and Fastow had just let him know informally about his new duties. But they didn’t instruct him specifically on what he was supposed to be looking for.

Pages from a new approval sheet churned out of the fax machine. Buy eyeballed the terms to make sure they struck him as reasonable. It looked fine. He signed it.

It was 3:45 on the afternoon of June 26. In some parts of California, temperatures exceeded a hundred degrees. Air conditioners were going full throttle. The electricity grid was approaching a danger point. Another stage-two alert. Customers voluntarily shut off their electricity.

———

The evening stars pierced the African sky above a forest belt surrounding Mount Kenya. There, Skilling, his younger brother, Mark, and his oldest son were vacationing, spending that night in early July in one of a series of rustic cabins. Skilling was relaxing on the back porch with Mark. He dragged on his cigarette as he watched the sky.