ALSO BY KURT EICHENWALD
THE INFORMANT
SERPENT ON THE ROCK
CONSPIRACY OF FOOLS. Copyright © 2005 by Kurt Eichenwald. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. For information, address Broadway Books, a division of Random House, Inc.
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First edition published 2005.
Library of Congress Cataloging-in-Publication Data
Eichenwald, Kurt, 1961–
Conspiracy of fools : a true story / Kurt Eichenwald.—1st ed.
p. cm.
1. Enron Corp.—Corrupt practices. 2. Energy industries—Corrupt practices—United States. 3. Lay, Kenneth L. 4. Business failures—United States. I. Title.
HD9502.U54E5736 2005
333.79′0973—dc22 2004058216
eISBN: 978-0-7679-1180-1
v3.1
To my parents,
Elva Eichenwald and Heinz Eichenwald,
Who encouraged me to fight my windmills
And cheered me when I won.
Contents
Cover
Other Books by This Author
Title Page
Copyright
Dedication
Epigraph
Author’s Note
Prologue
Book One - The Wine of Aspiration Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Book Two - Raptors Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Book Three - The Probability of Ruin Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Book Four - Shattered Chapter 19
Chapter 20
Chapter 21
Chapter 22
Chapter 23
Epilogue
Acknowledgments
Notes and Sources
Reason dreams of an empire of knowledge, a mansion of the mind. Yet sometimes we end up living in a hovel by its side.
—Heinz R. Pagels, The Dreams of Reason
If I remember, I predicted fence integrity would fail.
—The character of Ian Malcolm,
in Michael Crichton’s Jurassic Park
AUTHOR’S NOTE
This narrative account is based on more than a thousand hours of interviews with over a hundred participants in these events as well as a review of tens of thousands of confidential corporate and government documents. Those include FBI notes of interviews and testimony before federal grand juries, the SEC, and other federal bodies. The dialogue comes from those documents and contemporaneous records—including personal diaries—or from the best recollections of participants. This, then, is the full story of America’s biggest corporate scandal, one that, in the end, involved events that even now may seem difficult to believe. But they’re all real.
THE CAST OF CHARACTERS
and Their Primary Roles
WITH THE ENRON CORPORATION, HOUSTON, TEXAS
The Top Officers
Kenneth Lay, chairman and CEO
Jeffrey Skilling, president (1997–2001), CEO (2001)
Rich Kinder, president (1989–1996)
Greg Whalley, president (2001)
In the Finance Division
Andrew Fastow, chief financial officer (1998–2001)
Michael Kopper, head of special projects
Jeffrey McMahon, treasurer (1999–2000), CFO (2001–2002)
Ben Glisan Jr., treasurer (2000–2001)
Raymond Bowen Jr., treasurer (2001–2002)
Jordan Mintz, general counsel
Lea Fastow, assistant treasurer
Michael Jakubik, vice president
Jim Timmins, director, private equity
Tim Despain, vice president
Bill Brown, vice president
The Internal Accountants
Richard Causey, chief accounting officer
David Woytek, vice president, corporate auditing
Rodney Faldyn, vice president, transaction accounting group
Ryan Siurek, member, transaction accounting group
In Risk Assessment
Richard Buy, chief risk officer
Vince Kaminski, vice president of research
Stinson Gibner, analyst
Vasant Shanbhogue, analyst
Rakesh Bharati, analyst
Kevin Kindall, analyst
In Corporate Development
J. Clifford Baxter, executive vice president
Mark Muller, senior vice president
Sherron Watkins, vice president (2001)
The Corporate Staff
Rebecca Carter, investor relations representative, corporate secretary
Mark Palmer, head of corporate communications
Stephen Kean, head of government affairs (1998), chief of staff (1999–2001)
Mark Koenig, head of investor relations
Cindy Olson, head of community relations
In the Legal Department
James Derrick, general counsel
Rob Walls, deputy general counsel
Rex Rogers, associate general counsel
In Wholesale Energy
Kenneth Rice, chief executive
Kevin Hannon, president
Greg Whalley, president (2000)
Amanda Martin, managing director, asset management
Mark Haedicke, general counsel
Kristina Mordaunt, co-head of finance legal cluster (1997–1999)
Timothy Belden, managing director, west power trading division
John Forney, manager, west power real time trading desk
Stuart Zisman, senior counsel
Mark Frevert, president, London (1998), unit chairman (2000–2001)
In Retail Energy
Andrew Fastow, managing director (1996)
Lou Pai, chief executive (1996–2001)
David Delainey, chief executive (2001)
Raymond Bowen Jr., vice president
In the International Division
Rebecca Mark, chief executive
Joseph Sutton, deputy
In the Broadband Division
Kenneth Rice, co-chief executive (1999), chief commercial officer (2000)
Joseph Hirko, co-chief executive
Kevin Hannon, chief operating officer
Rex Shelby, senior vice president
Kristina Mordaunt, general counsel (1999–2001)
At Portland General, an Electric Utility
Kenneth Harrison, chairman
Joseph Hirko, chief financial officer (1991–1996)
At Azurix, a Water Company
Rebecca Mark, chief executive
Amanda Martin, executive director
Colin Skellett, executive director
On the Board of Directors
John Duncan
Herbert “Pug” Winokur Jr.
Norman Blake
Charles “Mickey” LeMaistre
Robert Jaedicke
Robert Belfer
Wendy Gramm
William Powers
WITH ARTHUR ANDERSEN & CO.
Joseph Berardino, managing partner (2001–2002)
Andrew Pincus, general counsel
John Rile
y, practice director
Rich Corgel, practice director
In the Houston Office
David Duncan, partner
Stephen Goddard, partner
Thomas Bauer, partner
Carl Bass, partner
Debra Cash, partner
Patricia Grutzmacher, partner
Gary Goolsby, global managing partner
James Hecker, partner
In the Professional Standards Group, Chicago, Illinois
John Stewart, partner
Ben Neuhausen, partner
In the litigation group, Chicago, Illinois
Nancy Temple, lawyer
WITH DYNEGY CORPORATION, HOUSTON, TEXAS
Chuck Watson, chairman and chief executive
Stephen Bergstrom, president
Keith Fullenweider, deputy general counsel
Rob Doty, chief financial officer
WITH MERRILL LYNCH & COMPANY
Daniel Bayly, head of global investment banking
James Brown, head of strategic asset lease and finance
Schuyler Tilney, relationship banker, Houston office
Robert Furst, relationship banker, Dallas office
John Olson, securities analyst
WITH GREENWICH NATWEST, GREENWICH, CONNECTICUT, AND LONDON, ENGLAND
Gary Mulgrew, managing director
Giles Darby, managing director
David Bermingham, banker
WITH J. P. MORGAN CHASE
James (Jimmy) Lee, vice chairman
Rick Walker, relationship banker
WITH KYNIKOS ASSOCIATES
James Chanos, president
THE OTHER CHIEF EXECUTIVES
Dennis Kozlowski, Tyco International
Rupert Murdoch, News Corporation
Sumner Redstone, Viacom
WITH THE LAW FIRMS
At Vinson & Elkins, Houston, Texas
Joseph Dilg, managing partner
Ronald Astin, partner
Max Hendrick III, partner
At Wilmer, Cutler & Pickering, Washington, D.C.
William McLucas, partner
Charles Davidow, partner
Joseph Brenner, partner
William Joor, partner
Reed Brodsky, counsel
At Weil, Gotshal & Manges, New York City
Thomas Roberts, partner
Mary Korby, partner
THE PRESIDENTS
George H.W. Bush (1988–1992)
Bill Clinton (1992–2001)
George W Bush (2001–2004)
AT THE WHITE HOUSE OF GEORGE W. BUSH, WASHINGTON, D.C.
Dick Cheney, Vice President
Andrew Card, Chief of Staff
AT THE UNITED STATES DEPARTMENT OF JUSTICE, WASHINGTON, D.C.
John Ashcroft, Attorney General
Michael Chertoff, head of the criminal division
On the Enron Task Force
Leslie Caldwell, director
Andrew Weissmann, deputy director
With the Federal Bureau of Investigation
Robert Mueller, director
Joseph Ford, special agent
AT THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C.
Arthur Levitt, chairman (1993–2001)
Harvey Pitt, chairman (2001–2003)
Richard Walker, director of enforcement (1998–2001)
Stephen Cutler, director of enforcement (2001–2004)
Linda Chatman Thomsen, deputy director of enforcement
In the Fort Worth Regional Office
Spencer Barasch, associate district administrator
Robert Hannan, lawyer
AT THE UNITED STATES DEPARTMENT OF THE TREASURY, WASHINGTON, D.C.
Lawrence Summers, Secretary (1999–2001)
Paul O’Neill, Secretary (2001–2002)
AT THE UNITED STATES DEPARTMENT OF COMMERCE, WASHINGTON, D.C.
Donald Evans, Secretary
AT THE UNITED STATES DEPARTMENT OF STATE, WASHINGTON, D.C.
Colin Powell, Secretary
IN CALIFORNIA STATE GOVERNMENT, SACRAMENTO, CALIFORNIA
Gray Davis, Governor
IN THE UNITED STATES CONGRESS
In the Senate
Trent Lott, Majority Leader, Republican of Mississippi
Phil Gramm, Republican of Texas
In the House of Representatives
W J. (Billy) Tauzin, Republican of Louisiana
James Greenwood, Republican of Pennsylvania
Staff, House Energy and Commerce Committee’s Subcommittee on Oversight and Investigations
Mark Paoletta
David Cavicke
Ken Johnson
AT THE WALL STREET JOURNAL
Jonathan Weil, reporter
John Emshwiller, reporter
Rebecca Smith, reporter
AT FORTUNE MAGAZINE
Bethany McLean, reporter
OTHERS
Bal Thackeray, leader, Shiv Sena, Mumbai, India
Arnold Schwarzenegger, actor, Los Angeles, California
THE PRIMARY DEALS
JEDI
Joint Energy Development Investments. A fund—jointly owned by Enron and the California Public Employees Retirement System, or Calpers—to invest in oil and gas properties.
JEDI II
Also formed between Enron and Calpers, for investments in a wider range of assets.
CHEWCO
An off-books partnership controlled by an Enron executive. Used to purchase Calpers’s interest in JEDI to allow for the retirement system to invest in JEDI II.
LJM CAYMAN
Also known as LJM1. An investment fund managed by Enron’s chief financial officer. Used mainly to provide Enron with a protection against a decline in the price of its investment in a technology company, Rhythms NetConnections.
LJM2
A far larger investment fund, also managed by Enron’s CFO. Used primarily to purchase investments and assets that Enron wanted to sell, and to provide cash to off-books entities that were also doing deals with the company.
THE RAPTORS
A quartet of off-books entities which were, at one point, partly owned by LJM2. They were created for the purpose of providing Enron with a protection against losses from certain investments in other companies and assets.
BRAVEHEART
The code name for a deal involving the sale by Enron of a portion of its video-on-demand business, formed in a joint venture with Blockbuster. Again, the sale was to an off-books entity created by the company.
PROLOGUE
OCTOBER 24, 2001—HOUSTON, TEXAS
Ken Lay settled into his black Mercedes 600 SL, easing out of his reserved parking space at the Huntingdon condominiums. From the lot’s entrance, he turned right onto Kirby Drive, the tree-lined road that served as a main thoroughfare through River Oaks, Houston’s wealthiest and most prestigious neighborhood.
The eight-year-old convertible cruised past the mansions bordering the street, homes that testified to the financial success of the city’s oilmen and corporate barons. Many estates peeked out from behind manicured shrubs and wrought-iron gates, or were far from the road on a ridge sloping down to the Buffalo Bayou. But Lay made no effort to peer beyond those veils of privacy. As Houston’s most influential businessman, he had already been welcomed in most every River Oaks mansion that might interest him.
The neighborhood’s elegance melted into Allen Parkway, a winding stretch of road that offered the most direct route downtown. Ahead, the morning sun was a blazing orange ball, rising behind a glittering glass-and-aluminum tower that defined the architectural rhythm of Houston’s skyline. It was the headquarters of Enron—his Enron—the once-obscure pipeline company that in a matter of years had been transformed into a politically connected energy colossus. Enron was now at the epicenter of Houston’s life, a ubiquitous player in everything from the city’s politics to its sports teams. But for locals, the s
prawling giant would probably just always be known as Ken Lay’s company.
Lay lowered his car visor and glanced at the dashboard clock. Shortly before seven, early for his commute. But already he knew this would not be a normal day. His company was under attack; Lay was sure of it. Stock traders who had bet that Enron’s share price would fall were whispering rumors—no, lies—about his company. The Wall Street Journal was publishing a drumbeat of articles suggesting Enron had played games with its finances. It infuriated him.
They just don’t understand.
By all rights, Lay shouldn’t even have been stuck with the mess. He had stepped down as chief executive the prior February, handing the reins to his handpicked successor, Jeffrey Skilling, the brains behind Enron’s spectacular growth. With market power came world influence, and—as Skilling’s profit machine rumbled along—Lay had emerged as a confidant of presidents, a media celebrity, and, at least in Houston, a household name. When Lay bowed out, he was celebrated as a man of vision who got things done. By year’s end, he was supposed to be ensconced in a new job at Kohlberg Kravis Roberts & Company, the buyout firm, basking in the glory of the empire he had left behind.