Conspiracy of Fools Read online

  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.

  BROADWAY BOOKS and its logo, a letter B bisected on the diagonal, are trademarks of Random House, Inc.

  Visit our website at www.broadwaybooks.com

  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

  Larry Thompson, Deputy 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.