Conspiracy of Fools (97 page)

That same night, at his home in the historic Kalorama section of Washington, D.C., Harvey Pitt gripped a copy of that day’s
New York Times
in fury.

He was reading a lengthy article about Enron in the Sunday Business section. The article provided a comprehensive review of everything that had happened at the company in recent weeks, and the investigation set off by the events. But there was a paragraph that set Pitt on edge. It was a comment from Mark Palmer, Enron’s spokesman.

Mr. Palmer of Enron disputed any suggestion that Mr. Lay did not have a grasp of the investments at issue, saying Mr. Lay was handicapped in talking about them because of the S.E.C. investigation. “There is not a whole lot we can say, or should say, about them.” Mr. Palmer said
.

Enron was refusing to answer the most basic questions investors could ask—and blaming the SEC!
Despicable!
What did these people think they were doing?

Pitt hefted himself out of his chair, heading to his study. He wanted to reread this article, mark it up with a highlighter, and then call a staff meeting right away.

It was past nine on Sunday night. No matter. If Enron was going to blame the SEC for its decision to keep investors in the dark, Pitt decided, then it was up to the SEC to smoke the company out.

Pitt was sitting at the desk in his study, speaking into the telephone. “Their statement here just drove me through the wall,” he said. “We can’t have people claiming that they would tell the world what was going on but for the fact they’re under investigation.”

On the line were several SEC staffers, including Steve Cutler, head of enforcement, and Linda Thomsen, who was running the Enron inquiry. For several minutes the group thrashed through the issues.

Then the idea struck Pitt.
Section 21(a). The
rules on cooperation they had just been revising, the ones Pitt himself had drafted. The rules could be used to compel Enron to talk. It had never been done; a company had never been forced to explain what was going on right in the middle of an investigation. But why not?

“I want to send them a demand under 21(a) that they file something explaining what’s happened,” Pitt said. Enron certainly couldn’t refuse. And it might jump-start the investigation. The SEC staffers agreed that the agency needed to put as many people on it as possible and convert it to a formal inquiry.

“Let’s get it done quickly,” Pitt said.

The next morning, October 29, Don Evans, the Commerce Secretary, returned from a trip to St. Louis and found Lay’s message to call. He phoned right back.

“Don, thanks for calling,” Lay said. He launched into his familiar monologue about Enron’s problems and his suggestion that it called for government monitoring.

But this time he pressed for a favor.

“Our biggest concern is with the credit-rating agencies in New York,” he said. “If we lost our investment-grade rating, it would probably destroy us. If there’s anything appropriate that Commerce could do to be helpful on that, we’d love to have that kind of help.”

Evans’s response was noncommittal. “I’ll look into it,” he said.

Around lunchtime, Evans was in the Treasury building for the weekly meeting of the Administration’s economic team. The policy makers were making their way into the small conference room used by Paul O’Neill.

Evans pulled O’Neill aside. “I wanted to tell you, I received a call from Ken Lay,” he began.

He recounted their conversation. “We’ve decided that we’re not going to intervene in this situation,” he said.

“Ken called me, too,” O’Neill replied, keeping his eyes on Evans as he moved toward the conference room. “We’ve made the same decision.”

Greg Whalley was sitting at his desk, a smirk on his face, when McMahon walked in to speak with him.

“Oh, man, Jeff, you gotta see this,” Whalley said.

More bad news? “What? What’s up?”

They just received a fax from Dynegy, Whalley said, seeking records so that it could judge whether to do a merger.

“And guess what was the number-one document they asked for?” Whalley said, smiling broadly.

Schedule of liabilities? Profit projections?
“What?” McMahon asked.

“The Enron Field naming-rights agreement!” Whalley roared. “First thing they want to know! They want to rename the ballpark after Dynegy!”

The two executives broke out laughing. Whalley pointed at McMahon. “Chuck’s horny for this deal,” he said. “This deal’s gonna get done, ’cause Chuck’s horny for it!”

It was an Indian summer’s day in Manhattan, with pedestrians swarming along Columbus Avenue. Among them was a tourist, William Powers, the dean of the University of Texas Law School, in town for an alumni event.

As Powers walked south, the Nokia cell phone in his pocket began to ring. It was Harry Reasoner, a friend and the managing partner with Vinson & Elkins.

“So, Bill,” Reasoner said, “have you been following what’s been going on at Enron?”

“Not really,” Powers replied. “I’ve seen a little in the paper, but I haven’t really followed the details.”

There was an issue at the company involving some transactions done with related parties, Reasoner said. “Now Enron wants somebody to join the board and investigate these transactions. They’d like it to be you.”

Powers was still walking down the street. “Well, I’ll think about it,” he said. “When do they need to know?”

That same afternoon, Bill McLucas and his partners from Wilmer, Cutler received a call from the SEC. It was Linda Thomsen, alerting them to the agency’s concerns about both the partnership transactions and Enron’s failure to provide more detailed information to the public about them.

“You guys need to explain a lot, in pretty short order,” Thomsen said.

Enron had until November 5, Thomsen said, to disclose what it knew about LJM and any similar arrangements. It needed to file a document, known as an 8-K, laying out every detail. In exactly seven days.

One thing was already becoming apparent to Jimmy Lee from J. P. Morgan Chase. Enron was a lot sicker than most of his corporate patients. While Enron had billions of dollars in assets, they were almost all junk. All they had
were the pipelines. It was as if Enron had spent the past decade just throwing cash out its doors.

But all was not lost. The pipelines could definitely be used to secure loans for a billion dollars. Then this Dynegy deal was brewing. Maybe, he figured, if Dynegy wanted Enron, it would inject some money into it first, to help keep the company afloat. Big money.

Scores of trunks lined the hallways in Andersen’s main offices. They had been loaded with documents and carted over from Three Allen Center, where the Enron team worked, so the paper could be destroyed quickly. But even with the higher-speed equipment in the main office, the shredders couldn’t keep up with the demand.

Mike Luna, a facilities manager, wandered down the hallway, perplexed. Why were trunks everywhere? He noticed Sharon Thibault, the supervisor of records, digging through a box, reviewing each document before it was shredded.

Some time later, Luna saw Thibault again and walked over to speak with her. The main topic of conversation was the implosion of Enron and the chaos that had set off for Andersen.

“Well,” Thibault said, “maybe that’s why they sent over some shredding. Maybe they are cleaning the office.”

Mark Palmer was in a conference room on the thirty-third floor when one of his colleagues came by with a message: Ken Lay wanted to speak with him right away. Palmer picked up a nearby phone and called Lay’s office.

“Look, Mark,” Lay began, “the reason we can’t right the ship is we’re not doing a good job in dealing with the press.”

The real issues surrounded the
Journal
, Lay said. “They’ve got a hate-on for us.”

Palmer closed his eyes. “Ken, we cannot say that. If you want the media to really go crazy, blame them for our problems. You can’t do that.”

“Well, I wouldn’t,” Lay responded, his voice edged with anger. “But that’s our real problem here.”

“Ken, you can’t even think that. We’ve got forty billion dollars in obligations and no cash flow.
That’s
the problem.”

How can Lay not understand this?
“The one thing you’ve got to accept, Ken,” Palmer said, “the facts keep turning out to be
worse
than the reporting!”

In the late afternoon of October 29, Steve Bergstrom, Dynegy’s president, strode into the Hyatt Regency hotel through a door off the garage. Directly ahead, he spotted Greg Whalley, waiting at a table in the sunken bar.

The negotiations for a possible Enron-Dynegy merger were only a couple of days old but had already hit choppy waters. Enron was acting haughty, dragging its feet. Bergstrom wanted to get things back on course.

Over drinks, the two men discussed possible stumbling blocks and painted their visions for what the combined business would look like. Bergstrom asked about what had happened at Enron. Whalley took a swig of his beer.

“Corporate guys screwed up,” he said. “Made a mess with these partnerships. But it can be cleaned up.”

The explanation was a little too glib for Bergstrom’s taste. Whalley was brushing offa disaster as a distraction. But he chose not to challenge him for now.

Bill Powers was back in his Austin office the next morning, on the phone with Jim Derrick, whom he considered a friend. And that was the problem. Before he could take this Enron job, he needed to know what Derrick’s role had been in the meltdown.

“I need to ask, Jim,” Powers said. “Are you being investigated?”

“Not to my knowledge,” Derrick replied.

Powers asked about the inquiry, and Derrick described the conflicts of interest in the Fastow deals.

“You know, I’m not a corporate lawyer,” Powers said. “I’m not an accountant.”

“That’s not going to be necessary,” Derrick replied. “You’ll have experts at your disposal. You’ll be overseeing things. We want somebody who is neutral in all of this.”

He needed an answer soon, Derrick said, and Powers promised to call back. It took him a few hours to decide, but he agreed to oversee the first major investigation of Enron.

Later that day, Derrick glanced up from his desk. One of his best lawyers, Kristina Mordaunt, now the general counsel in corporate development, was standing at his doorway. Anxiety was written all over her face.

“Kristina?” Derrick said. “What can I do for you?”

Mordaunt walked in. She seemed at a loss for words. “There’s something I want you to be aware of,” she finally said. “I don’t want you and Ken to be surprised.” She paused. “And I don’t want you to hear it from someone else and be disappointed in me.”

Mordaunt glanced at the floor, then plunged ahead. “I invested with an entity affiliated with LJM,” she said.

She didn’t say the word “Southampton.” She didn’t mention the million-dollar
return shoveled her way after a few weeks. Derrick’s reaction was almost grandfatherly.

“Kristina,” he said, “we’ve all done things we regret.” But this had to be examined more closely, he said.

“Go down and find the folks from Wilmer, Cutler,” he said. “I want you to share this with them.”

Mordaunt nodded slowly. “Where are they right now?”

Within the hour, Mordaunt was in a room with Joe Brenner and Reed Brodsky, two Wilmer, Cutler lawyers handling the investigation.

“I have a duty as an Enron employee to answer your questions, and I’ll fully cooperate,” she said. “But I don’t want to be part of any political witch hunt”

She told the tale without embellishment. She had been approached more than a year before by Kopper, who she thought was acting on Fastow’s behalf. He presented this investment opportunity, and she took it.

“Why do you think Kopper came to you?” Brenner asked.

“I don’t know.”

“Was anybody else approached?”

Mordaunt shook her head. “I don’t know.”

A pause. “I can’t get into Andy’s head,” she said.

Mordaunt promised to provide all of her records from the investment, and the meeting ended. No one asked her how much money she made on her investment or how fast.

It was that deer-in-the-headlights look.

David Stulb, head of Andersen’s forensic investigation unit, had seen it before in the faces of partners threatened with litigation. Now it was David Duncan’s turn. Stulb almost felt sorry for him. Every Enron decision he had ever made was being dissected in search of errors.

On October 31, Halloween, Stulb was standing on Andersen’s floor in Allen Center with Duncan, who was reviewing a hard copy of an e-mail, along with attachments. It had been written months before by the Andersen accountant who was contacted by Sherron Watkins about her concerns. The e-mail jokingly suggested that everyone review the attached memo about that call, in search of “smoking guns that you can’t extinguish.” Duncan almost winced.

He grabbed hold of the top page. “Another smoking gun,” he muttered. “We don’t need this.”

Stulb watched in shock as Duncan prepared to tear off the top sheets of the document. “Dave!” Stulb interjected. “I’m not sure if you’ve had any discussions, but you really need to keep all this information.”

Duncan looked back at him impassively.

“There’s a strong likelihood that we’ll be the subject of litigation,” Stulb said. “And the SEC, the Justice Department, and everybody else might be interested in this type of information.”

Duncan shrugged and put the document down. It was saved. But Andersen’s destruction of thousands of other Enron records continued unabated for another nine days.

The first package of information provided for Dynegy’s due diligence arrived from Enron that same day. Hugh Tarpley, Dynegy’s head of mergers and acquisitions, pored through the numbers, trying to calculate the potential financial performance of this would-be merger partner.

Tarpley found the answer deep in the package. Enron projected earnings per share of $1.80 for 2001. But the real delight was 2002—$2.25 a share.
Impressive
. But how? There was nothing explaining what Enron was planning to do to achieve such stellar results.

During a negotiating session later that day, Tarpley decided to ask. He looked across the table at Dave Delainey.