Conspiracy of Fools (64 page)

“Jeff has made it very clear that if we don’t make a decision about this by year’s end, then it will be time for him to seriously think about something else,” Lay said. “I don’t believe that is an idle comment.”

Lay glanced around the table. “I think he’s ready for the job, and I am ready to step down.”

The directors made all the right noises. They were disappointed, wished Lay would stay, but could understand his desire to move on. They knew that, at his age, Skilling would not wait around much longer.

“I would like your approval,” Lay said, “to speak with the full board about this tomorrow.”

There was no formal vote, but the directors agreed.

“At this time,” Fastow said, “Enron’s management is recommending the company begin transacting with a new private-equity fund called LJM3.”

It was an hour later, and the finance committee was gathered in the Ponce de León III ballroom, listening to Fastow’s latest report. LJM1 and LJM2 had done their jobs, Fastow said, with the second fund having invested some $500 million in more than twenty transactions.

“Of course, my role in the LJM funds could create a conflict of interest,” Fastow said. “Still, we have put in place important mechanisms to mitigate those conflicts.”

Fastow listed the controls: he still maintained a fiduciary responsibility to Enron, and the board could ask him to resign at any time. “As you know,” Fastow added, “Rick Buy, Rick Causey, and Jeff Skilling approve all transactions between Enron and the LJM funds.”

Nobody seemed to notice the problem. The board had never asked for Skilling to review the LJM deals. And Skilling never had; there was a place for him to sign on the approval sheets, but it was almost invariably left blank. Still, Fastow’s statement was no slip of the tongue. He had included it in his formal report submitted to the board.

Causey and Skilling joined in on the discussion. The LJM funds had brought plenty of benefits, they said. They recommended that the transactions be allowed to continue.

One director, Norm Blake, had concerns. “There are a lot of deals here, far more than we could properly review just once a year,” he said. “I would propose that the finance committee should review these quarterly.”

Pug Winokur, the chairman, had another issue. He wondered how the board was supposed to be alert for signs of conflicts when no one knew Fastow’s compensation from LJM.

“I would propose,” Winokur said, “that the compensation committee review the amounts Andy is receiving both from the LJM funds and from the company.”

The committee unanimously agreed to the two proposals. That meant once the full board gave its nod, Fastow would be required to provide details of his dealings every three months, along with a breakdown of the money he made—from every source.

The power would not come back on, so the board changed hotels, moving down the beach to the Four Seasons. The next morning, Skilling was sitting in the lobby, waiting for his breakfast companion, when he spotted John Duncan, chairman of the executive committee, walking past some lush greenery. Duncan smiled and came over.

The two sat beside each other, chatting about their relief at staying in a hotel with the electricity still on.

Duncan changed the subject abruptly.

“Jeff, I know you’re angry about everything we’ve done on the international side,” he said. “But don’t you think with all the investments we made, we’ve really created an international company?”

Duncan looked him in the eye. “Don’t you think it was worth it?”

A dozen thoughts shot through Skilling’s mind. Duncan was talking about
seven billion dollars
. For that amount, Enron could have taken out ads on every Super Bowl for the next fifty years and simply announced that it was an international company. It could have sent direct mail to everyone on the planet. So much money producing so little cash, dragging down the company’s overall performance.
And Duncan thought it was worth it?
Skilling was speechless.

Another director walked by. “Oh, there’s my breakfast meeting,” Duncan said. “See you later, Jeff.”

Duncan walked away. Skilling had never responded.

Later that day, the full board approved Fastow’s participation in LJM3. At the meeting’s end, after Skilling and other executives had left, Lay announced his plans to step down. This wasn’t the formal handover; that would happen at the end-of-the-year meeting. Even so, some directors had not expected Lay’s announcement. They pressed him to stay on as chairman, to give Skilling time to get his footing.

Lay knew Skilling would be agreeable; whenever the topic of succession came up, Skilling made the same request. It was almost as if the man were afraid of running the show alone. Lay didn’t mind keeping the title for a while. After all, what difference could another year make?

Their own annual meeting. That, Fastow thought, was what the LJM2 investors needed. A nice one in Florida, with ample golf and spa treatments. With LJM3 in the works, it would also be the perfect time to let investors know that Enron still had important deals in the pipeline that could bring fat profits to another fund.

And Skilling could be Exhibit A. He had achieved the status of a corporate rock star. If
he
showed up, the investors would get the message: Enron just loved the LJM funds. Fastow dropped by Skilling’s office to sound him out on the idea.

“Hey, look,” he said. “We’re getting the LJM investors together. I’d really like you to come make a presentation, to let them know Enron is still growing.”

Skilling shrugged. No big deal. “Sure.”

Jordan Mintz arrived in the finance division on October 16 as the new general counsel—but with trepidations. He was a tax specialist, not a securities lawyer, and this new job involved a lot of securities work. That day, he met with Fastow to review his duties. After going down the list, his new boss added one more item.

“Oh,” he said, “and one of the responsibilities will be to maintain the files for LJM.”

Standing at a row of metal filing cabinets, Mintz pulled open a drawer and ran his finger across the green hanging folders. Finally, he saw the label he wanted.

LJM. There were no subcategories, just a large brown folder inside stuffed
with paper. Mintz carried it to his desk and pulled out the scores of documents and printed e-mails inside. Before long, his eyes were bulging.

This is unbelievable
. Deal upon deal, totaling hundreds of millions of dollars. All done with an entity controlled by the CFO. How could Enron tolerate this?

There was a lot for Mintz to learn, fast. Enron was not the kind of place where somebody struggling to master a problem would be thrown a rope. More likely an anchor. He didn’t want people to see him trying to get his arms around all this, and end up thinking he was stupid.

Mintz set his course. He would have to educate himself on everything about the LJM deals from the beginning. Review the board minutes, examine the deal documents, talk to everybody involved. Then he’d know the whole story.

It didn’t take long for Mintz to figure out that the LJM acolytes formed their own cult inside Enron. Strange doings caught his attention from the beginning. For one, Kopper was running legal meetings, discussing how Enron could avoid disclosing information about the LJM funds. Then Mintz came under pressure from Kopper and Glisan to fire a lawyer they accused of not being responsive enough during an LJM deal. And throughout the department, Mintz detected an unmistakable odor of anxiety among executives about the conflicts involving their boss that Enron tolerated.

He needed to speak with Fastow again, this time solely about the deals with LJM.

The Raptors didn’t work. After all the careful planning, all the consulting from Andersen, all the confident boasting about the finance group’s genius, the supposedly brilliant hedges were failing just weeks after their creation.

The problem was exactly what Stuart Zisman had detected: executives had used the vehicles as a dumping ground for financial toxic waste. Some investments in Raptor I collapsed in value so quickly that they couldn’t even be hedged before losses piled up. Fastow and his colleagues dealt with that easily—backdating the documents, making it appear the hedges were in place when values of the merchant investments were at their peak. But that immediately locked in huge losses for the Raptors.

Worse, the third Raptor was hit by a double whammy: After a week of trading, New Power’s stock price began deteriorating. Those shares, of course, were hedged by the third Raptor and were its only significant asset. So it owed Enron more money even as its capital dried up.

If something wasn’t changed, the Raptors might be deemed “impaired”—a
five-dollar accounting word meaning that they couldn’t pay their debts. That would leave Enron having to report the losses from its merchant investments.

Fastow and Causey acted quickly. On October 20, they created a “costless collar,” obligating Enron to pay Raptor I for any losses it suffered if Enron shares fell below eighty-one dollars. The idea was to make sure that Raptor I would not suddenly become impaired because of a drop in Enron stock.

Raptor I had become an absurd circle. If Enron’s stock price fell below the target, the company owed Raptor I money, which Raptor I would then have to pass back to Enron to make up for the losses in merchant investments. Enron, by any definition, was hedging with itself.

Fastow made room on his calendar for Mintz on October 23. The two men, both carrying pads of paper to take notes, sat at the office conference table. Mintz asked what Fastow expected from him regarding LJM. Fastow spoke about all the paperwork to be handled—deal sheets, closing documents, and the rest. Mintz listened uncomfortably.

“Let me give you my overview of why LJM exists, and why Skilling and the board approved it,” Fastow began.

LJM could move quickly, he said, and be available for any crisis when Enron needed to sell fast. “LJM is close to the company, we understand the deals. There won’t be weeks of negotiations, with lawyers dragging everything out.”

Mintz scribbled notes, trying to hide his revulsion. What Fastow was describing was simply perverse, like justifying incest because the brother really knew the sister well.

Or was it? He thought of all those gold-plated names he had seen on LJM documents: Arthur Andersen, Vinson & Elkins. Their experience was much broader than his, and they had pronounced LJM squeaky-clean. Maybe there was something he didn’t understand.

Fastow launched into the history of his funds, lauding his own work on the Rhythms hedge as a stroke of genius.

“Because LJM1 was so successful with Rhythms, we started LJM2,” Fastow continued. “And LJM2 allowed us to hedge even more investments, through the Raptors.”

The lawyers and accountants were always filled in on every detail, he said. “Nobody’s hiding anything from anybody,” he said. “Everything is just an open kimono.”

Open kimono
. Mintz hated that phrase. Too many people at Enron said it. He had never heard it anyplace else.

“That’s why Enron’s comfortable,” Fastow said. “They’re comfortable it’s me and Michael. They know we wouldn’t do anything that wasn’t in Enron’s interest.”

But, he went on, Enron didn’t have to rely on their integrity alone. Plenty of controls were in place, from Enron’s right to refuse to do a deal, to the requirements for a sign-off from Causey and Buy. Plus, Fastow said, the company disclosed everything in its annual proxy sent to shareholders. It was all there, in the section on related-party transactions. Mintz nodded silently; these were the disclosures he knew Kopper was working to
remove
.

Fastow looked at Mintz sternly. “Now, the money I make from LJM doesn’t have to be disclosed,” he said.

In case Mintz wanted to know more, he named the lawyers who had worked on the LJM disclosures the prior year. “Our approach in the past,” Fastow said, “has been to try to keep our disclosures as innocuous as possible.”

Mintz wrote down the words “keep innocuous.”

The meeting ended after forty-five minutes. Mintz headed to the elevator, eager to put together a plan of how to substantiate everything Fastow had just told him. He didn’t want to leave anything to chance.

Rick Buy was behind his desk, acting aloof. It was two days later, October 25, and Mintz was questioning him about LJM. Buy struck Mintz as torn: convinced the deals were good for Enron while plagued by doubts about the wisdom of using the funds.

Buy explained that a lot of the analysis on the LJM deals was handled by Dave Gorte, in Risk Assessment and Control. For a few minutes, he discussed the economics of the transactions. He paused, glancing away.

“I don’t know,” he said. “What a great deal Andy’s got for himself here.” He looked back at Mintz. “In fact, he’s sort of talked to me about going over there, joining LJM. I may do it. I don’t know.”

Mintz sat motionless. Buy, one of the people charged with reviewing the fairness of LJM deals,
had been approached about working there?
Just
making
the offer deepened the conflict. Wasn’t anybody bothered by all of this?

Jeff McMahon couldn’t stop laughing.

It was the next morning at 10:30. Mintz had just walked into McMahon’s office for a briefing about his experiences with LJM during his time as treasurer. McMahon communicated his thoughts fast, breaking into laughter before Mintz said a word. Mintz understood immediately. McMahon hadn’t joined the cult. He could skip the political niceties.

“Jeff,” Mintz said, “what the fuck is this LJM stuffall about?”

McMahon broke up again. “Well, you’ve got your hands full now that you’ve gone over to the dark side.”

“What do you mean?”

“Fastow, Kopper, and that group. Never a dull moment.” McMahon sighed. “It’s a real conflict. And fucking Andy is so blind he doesn’t even recognize he’s got a problem. People are afraid to talk about it.”

He paused. He wasn’t laughing anymore. “Andy knows he’s got everybody by the balls,” he said. “Buy just rubber-stamps those deals, and Andy rolls right over him. Andy’s trying to get our bankers to invest with him and holding out a threat that they might lose Enron business if they don’t. And Causey’s in a big dilemma because, at the end of the day, he’s responsible for the financial statements, and LJM helps make the numbers.”