The Best American Crime Writing (40 page)

Before Perry left Houston, he made a to-do list of nineteen items, which included “locking the system down, getting a warrant to track the Western Union teletypes, because that was how the deals were confirmed in those days.”

Arriving in New York, Perry and Woytek discovered that the trading operation was controlled completely by Borget and Mastroeni. To go there, you had to be picked up in a limo, Perry recalled. “I don’t want the competition to get close to my staff,” Borget told him to explain the quirky privacy procedures. The Houston employees were not allowed to interview anyone on the staff. One member of the Houston team was an Arthur Andersen partner and an expert in oil and gas trading. “Everything is proper,” Borget told Perry. “We’ve just had an audit done.”

Perry and Woytek sat in an octagonal trading room with John Beard, another Enron auditor, trying to unravel the fraud. Two days later a call came from Houston; Perry remembers distinctly that the caller was Rich Kinder. “I am hearing one side of it,” he said. “Woytek was just beside himself. He carried on with Kinder, getting quite aggressive. He was saying, ‘I can’t believe you are going to ask us to do this.’ Kinder told Woytek, ‘Get out of the building and come back to Houston. You are off the case.’” The reason? “They were all scared,” one auditor told me, “that the traders would get upset and they would lose the income.” He is not sure whether the call came from Kinder or John Seidl, the president of Enron, but he said that Perry’s memory is “sharp” and he kept perfect notes.

Perry remembered Kinder saying, “We are turning the investigation
over to Arthur Andersen.” Soon a flotilla of Arthur Andersen auditors arrived from Houston; among them was the young Jeffrey McMahon, who in 2002 would replace Andrew Fastow as Enron’s chief financial officer.

The Houston auditors appeared before the audit committee in April 1987 and reported on what the Enron staff and Arthur Andersen had found in Valhalla. The two groups were in complete agreement. Woytek had managed to retrieve the millions that Borget and Mastroeni had misappropriated, but one auditor recalls Woytek telling Lay and the committee that they had to get rid of the two men. They were adamant; they should have been gone in February, they said. Borget had told the auditors that he was keeping the money in a personal account but that it would soon come back to Enron. One auditor said, “If the Apple Bank had not called, this money might never have been recovered.”

I asked the auditor to read me the minutes from the April 29, 1987, meeting. “Dr. Jaedicke called upon management for a matter that involved Enron Oil Corporation that was investigated by the company and subsequently investigated by Arthur Andersen …. After a full discussion, management [This was Ken Lay,’ the auditor said] recommended the person involved be kept on the payroll but relieved of financial responsibility, and a new chief financial officer of Enron Oil Corp. be appointed. The committee agreed with reservations …. Mr. Orloff [the future general counsel, who is now at Bracewell & Patterson] reported on possible legal consequences. He stated that all legal work for Enron Oil Corp. would now be done in Houston by an attorney reporting to him.”

Fifteen years later, the auditor is still upset. “And when they say ‘management,’ I can remember Ken Lay sitting there saying, ‘I have made the decision!’ … What can I say? He was the CEO, and he felt that they could put controls in place and that he needed those earnings. That was his call …. We all knew those people were crooks! We told him that.”

He became solemn as he read out the names of the people gathered in the room, several of them now familiar players in the Enron drama, who would maintain their silence and remain aligned with Kenneth Lay right up until the corporation collapsed. Robert Jaedicke, the distinguished accounting professor, would appear before the congressional subcommittee this year. Herbert Winokur Jr., a Harvard overseer, would also testify as the chief of the finance committee who in the wake of the scandal finally ordered an investigation. Arthur Belfer’s family would lose about $2 billion in Enron stock. Steve Goddard of Arthur Andersen would be relieved of his management responsibilities.

At least two people in the room that day questioned Lay’s judgment. One was Ronald Roskens, then the president of the University of Nebraska, who would leave the board two years later to join the government. The other was Carolyn Kee, from Arthur Andersen. “When we walked out of the room, Carolyn Kee turned to me and said, ‘I am just sick about this,’” one auditor remembered. Kee was concerned about the lack of internal controls and would spend months dealing with the fallout from future shareholder suits and the SEC inquiry. Within three years she left Enron and is now in private practice in Arkansas.

For the Enron auditors, the April board meeting was prophetic. “It was obvious to us and to Arthur Andersen that [Borget and Mastroeni] had opened fraudulent bank accounts, and we felt that they were going to continue to manipulate transactions,” one auditor told me. “Lay read the report and he read his budget, and estimated how much they made and if they were fired what he could lose …. My conclusion was that this is a guy who puts earnings before scruples, rather than reacting to the dishonesty right in front of him.”

Does that establish a pattern of fraud? I asked Herb Perry, a question I had often asked Jan Avery. “It is certainly the indicator that there is significant collusion between the executives at Enron and the senior people at Arthur Andersen. They were willing to tolerate improprieties.”

Lay’s designated watchdog was delayed in getting to Valhalla in 1987, and soon Borget and Mastroeni had spun out of control. They bet long on oil as the prices dropped and shorted when the prices rose. Borget called Houston and said, “There is going to be a huge loss. About a billion dollars.”

I asked one auditor what it was like around Enron when that staggering figure was revealed. “Bad,” he said. “We were all concerned because we thought that someone would be made a scapegoat.” According to the auditor, the in-house lawyer Gary Orloff asked for the files. “They came to us and said, ‘We want all of your files. We want everything ….’ Kinder was the chief operating officer and … Orloff seemed to be protecting Lay in this thing.” When Jan Avery went to work at Enron, she could hardly have known that the files on Enron Oil she tried so hard to find had vanished six years earlier.

By the autumn of 1987, federal prosecutors in New York working under then U.S. attorney Rudolph Giuliani had detected the crime. The prosecutor who ran the case, James Comey, now has Giuliani’s former job. Lay’s inability to operate within the strict rules of corporate propriety had left his company close to collapse. What had started as “an expensive embarrassment” had become herculean. Lay had had to dispatch an Enron team, led by Mike Muckleroy, from Enron Oil Trade & Transportation, to unwind many of the deals. Muckleroy was able to reduce the loss to $185 million, a figure closer to the number Jan Avery first saw.

In September 1993, the year Jan Avery went to work for Enron, Perry learned that Arthur Andersen would be taking over all of Enron’s auditing functions at the end of that year. The company
said it was a cost-saving measure, but Perry believes that the real significance of the change was that internal investigation of offshore partnerships and off-balance-sheet partnerships were no longer pursued. The new Arthur Andersen model, Perry was told, would be used as an exemplar for the rest of the industry. Perry remained on assignment for Enron Oil & Gas, a subsidiary of Enron which had gone public and had a separate accounting staff.

On February 8, a week before Howes went to New Orleans, Jeff Skilling appeared before the House Energy and Commerce Oversight Subcommittee, one of a dozen government panels investigating the Enron debacle. Executives still working at the corporate headquarters in Houston watched him on television. One of them recalls hearing Andrew Fastow on any number of occasions mention his conversations with Skilling about the off-the-books partnerships Skilling was now telling congressmen he knew very little about. Earlier that day, Skilling had sat with cold eyes and an odd smirk on his face and told the committee, “I was not aware of any financing arrangements designed to conceal liabilities or inflate profitability …. I did not believe that the company was in any imminent financial peril.” At that, several financial officers screamed at the set, “Bullshit!” One kept saying during Skilling’s testimony, “Now Jeff will say, ‘I don’t recall,’” and twenty-seven times Skilling did not disappoint him. These Enron executives, who had cheered Skilling when he was named CEO, now studied him on the screen with contempt.

Congressman Ed Markey of Massachusetts, who had been the chairman of the House Telecommunications and Finance Subcommittee that investigated Michael Milken in the 1980s, said of Jeff Skilling, “He testified like he was a guest on
I’ve Got a Secret
He was treating Congress like he had treated his shareholders.”

In Louisiana, Herb Perry spent Valentine’s Day in his La-Z-Boy armchair watching Sherron Watkins testify before Congress. After the criminal investigation of Borget and Mastroeni began, Perry had turned over a copy of his Valhalla file to his boss, David Woytek. What happened to Perry’s fifty cartons of documents about Enron’s dealings over the years? “I shredded those,” he said. “I did not want to carry them around, and I certainly did not want to be dragged into legal issues with Arthur Andersen.” Watching Watkins in front of the committee, Perry was at first impressed with her stolid manner and muted outrage, but he began to revise his opinion as Watkins mused about Ken Lay’s personal culpability. Watkins described a moment where she had tried to explain the cascade of partnership accounting fantasies to Lay. “He did not seem to understand,” she said. Sitting with his wife and his dog, Perry laughed out loud. “I said a lot of language I can’t repeat,” he told me. He said he was mystified that an intelligent woman could have made such an assertion without fully understanding the history of the company. I asked Perry what he thought when Watkins asserted, “Mr. Lay was duped.” He laughed. “Ken Lay duped? Well, I guess now you know better, don’t you?”

There she was, in the courtroom in Houston, the mysterious woman in a purple suit, nervous and in disguise. I was drawn to her immediately. She seemed to know something about a case that had just entered the American language and would rage in the news for the months ahead. In fact Jan Avery did have a secret—a big one. She would help to illuminate a vast web of corporate crime. Avery, now in hot demand to scour the books for lawyers pursuing white-collar crime, first heard about the auditors who had spirited away the files
from Enron’s dark history. The rogue traders of the 1980s were an important clue that Ken Lay had decades of secrets to be found
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Now Enron has become its own adjective to describe an era of fraud and concealment. Enron taught America hard lessons—that numbers could not be trusted and the finest accountants manipulate facts. It was a business story that the public understood easily—bad guys in private jets, living in mansions in Houston hiding the truth from employees whose savings were tied up in a virtual company that evaporated overnight. The term “Ponzi scheme” was used by the lawyers to describe what had happened in Enron, but the trick seemed closer to three-card monte. Cards pushed this way and that, a crowd gambling and fooled by its own delusions
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And what of the players? As this book goes to press, Andrew Fastow, indicted for his role at the company, braced for a possible new indictment. Jeffrey Skilling, holed up in his River Oaks mansion, had become the Greta Garbo of the town. Ken Lay, the fallen Alpha yet to do the perp walk, was a pariah in Houston, but as pink-cheeked and smiling as ever, worked the tables at local restaurants glad-handing anyone who would greet him. Christmas of 2002 found him far from the Bush White House as in palmier times, but at his sisters condo near Galveston. He was, as ever, obsessed with image, hinting of onerous margin calls. He dropped hints in the business news that he was a pitiful figure, down to his last $6 million, and how could he ever afford to keep up his string of vacation homes and staff? I wondered reading this if Lay’s trick was picked up by studying the career of the late Clark Clifford, the adviser to presidents who became ensnared in a messy banking scandal. At the height of the BCCI caper, friends of Clifford worked the phones: “We are taking baskets of food to poor Clark.” The Lays as well played it for all it was worth; Linda Lay, who once told NBC from her multimillion-dollar penthouse how low the family had fallen, now could be found at a thrift shop boutique she ran to sell off the family’s silver trays
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By the winter of 2002, Arthur Andersen was prosecuted by the government in an unwieldy case that left many unsatisfied, but lawyers widened their net and targeted law firms and banks that had participated in the Enron mirage. Traveling from Florida nursing homes to South Texas ranches, the class action lawyer Paul Howes continued to work massive hours talking to potential witnesses. “An eighty-year-old is willing to get on an airplane and sit for a deposition because he said, ‘They lied to me and they lied to the market and we have to do something about that,’” he said
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