Conspiracy of Fools A True Story

by EICHENWALD, KURT

• ISBN13: 9780767911795
• ISBN10: 0767911792
• Edition: Reprint
• Format: Paperback
• Copyright: 2005-12-27
• Publisher: Crown

Summary

From an award-winningNew York Timesreporter comes the full, mind-boggling story of the lies, crimes, and ineptitude behind the spectacular scandal that imperiled a presidency, destroyed a marketplace, and changed Washington and Wall Street forever . . .

Author Biography

has written for the New York Times for more than seventeen years. A two-time winner of the George Polk Award for excellence in journalism and a finalist for the 2000 Pulitzer Prize, he has been selected repeatedly for the TJFR Business News Reporter as one of the nation’s most influential financial journalists. His last book, The Informant is currently in development as a major motion picture. He lives in Dallas with his wife and three children.

Excerpts

CHAPTER 1


The two men pushed through the glass-and-chrome doors of the Enron building and hurried down the polished granite steps outside. Across the street, a white fountain resembling a mammoth three-tiered wedding cake bubbled in the brilliant winter morning. The sounds of splashing receded as the men crossed Smith Street, a main artery for downtown Houston. Rounding a corner, the older man, David Woytek, glanced at his watch. Fifteen minutes to go. Fifteen minutes, he felt sure, till all hell broke loose.

Without a word, he picked up the pace, followed in step by John Beard, a colleague from Enron's internal-audit department. On that morning, February 2, 1987, the two were eager to meet with Ken Lay, to finally prove that two of his underlings had cheated his company. Beard carried the damning evidence—bank records showing millions of dollars siphoned from Enron into personal accounts, transactions so suspicious that the bank itself raised a red flag to Woytek. But, most delicious of all, the executives under investigation—Louis Borget and Thomas Mastroeni, two top officers in Enron's oil-trading unit in Valhalla, New York—would be at the meeting, defending themselves with what Woytek and Beard were certain would be a tangle of lies.

The proof was strong, but the auditors knew it would need to be. Borget was Enron's earnings Svengali, a man whose business reliably brought in tens of millions of dollars in badly needed annual profits. He and Mastroeni, his top finance executive, were rumored to consort with the rulers of Saudi Arabia and Kuwait, contacts everyone believed gave them strong knowledge about the inner workings of OPEC, the Arab petroleum cartel. Taking them down would mean losing their connections and dismantling their profit machine at a time when Enron was struggling.

But Woytek and Beard believed Lay would have no choice; their case was ironclad. Mastroeni had opened an Enron corporate account at Eastern Savings Bank, listing himself and Borget as the signers. But neither had bothered to tell Enron about the account, and it was not recorded in the company's books. Millions in corporate cash had been wired there, about half of which ended up in Mastroeni's personal accounts. The dealings had all the earmarks of some multimillion-dollar scam, with Enron as the mark.

Woytek and Beard turned onto Dallas Street, two blocks from their destination, Enron's other offices at the Houston Natural Gas building. The streets of downtown seemed almost abandoned that morning, with only a smattering of cars around, a reminder that the years-long oil bust was still wreaking its havoc on Houston.

The two auditors walked into the lobby, taking the elevator to the sixteenth floor. There, a receptionist directed them to the office of Mick Seidl, Enron's president. Lay had borrowed the office for the morning meeting while Seidl was on the road.

They arrived in the doorway of the large, wood-paneled office. Borget and Mastroeni were already inside, deep in discussion with John Harding and Steve Sulentic, the home office's nominal supervisors of the oil unit. When the auditors walked in, the conversation stopped.

"Hey," Harding said. "Good to see you."

There were handshakes all around. Borget picked up a thick stack of documents and slid them across the table.

"This is a memo with everything you need to know about these transactions," he said. "All the relevant banking records and other material are attached."

"Thanks," Woytek replied. "We'll look through it."

Beard picked up the documents and left Seidl's office, following Woytek to an unoccupied secretary's desk. He set the documents down, leaning over as he read them. "CONFIDENTIAL," the first page blared. "Memo for the File."

Step by step, the memo described how the transactions came about. In one paragraph it mentioned some attached bank statements. Beard thumbed through the pages and found the records. He studied them for an instant.

Wait a minute.

He scanned the records again, fearful he had made some mistake. No, there was no doubt. He glanced over at Woytek.

"Dave, come here," he said. "Take a look at these."

Woytek strolled over and skimmed through the statements. They were from Eastern Savings Bank, in the name of the oil-trading division. Nothing seemed surprising; the discovery of that account had set off the investigation. With an almost imperceptible shrug, Woytek looked at Beard, waiting to hear what he was missing.

"These are the same statements we already have from the bank," Beard said. "But this copy has been altered."

"You've gotta be kidding me. Show me our copy."

Beard fished through his briefcase, pulling out an almost-identical set of the statements. Woytek laid the pages side by side with the records from Borget.

Unbelievable. The statements were from the same account on the same date, but the numbers were different. The original records showed hundreds of thousands of dollars sloshing in and out. In this new copy, those transactions had simply disappeared. Woytek held Borget's records up to the light. No lines. No shadows. No telltale signs anywhere of an alteration. Somebody had put a lot of effort into this.

Woytek chuckled. These traders were planning to defend themselves to Lay—using dummied-up records? This meeting was going to be even more interesting than he had thought.

"Well," he said, looking up, "that settles it. Those two are gonna be fired today."

As the two auditors spoke, they saw Lay and Rich Kinder, Enron's general counsel, walking toward Seidl's office. Woytek and Beard gathered up their papers and stood to greet them. Everyone immediately followed Lay into the office and took a seat around the conference table.

After some chitchat, Lay opened things up. "Well, we know why we're here. So, Lou, why don't you go ahead?"

Borget handed out copies of the memo with the attached bank records. "As everyone's aware," he began, "questions have been raised about some of the trading operation's financial transactions. We want to go through them so that you know why these were done. I think everyone will be very satisfied with what they hear."

Borget and Mastroeni took turns laying out the story. Because of their huge profits in 1986, they explained, company managers had asked them to find a way to shift income into 1987, the current year; that way, Enron would have a jump on hitting its profit projections.

"Now, we were told to get that done using whatever legitimate business practice we could," Borget said, moving his hands as he spoke. "So we set up a system that's used by lots of other trading companies."

The idea was to conduct twinned trades that canceled each other out, known as a "book-out" or a "net-out." So, Mastroeni explained, they tracked down three trading companies—Isla Petroleum, Southwest Oil & Commodities, and Petropol Energy—that wanted to boost their 1986 earnings. Then, that December, Mastroeni and Borget entered into trades that gave profits to the competitors and losses to Enron. The plan was to reverse the trades in 1987, with Enron gaining the profits and the three others getting the losses. All the parties would walk away even and with exactly the results they wanted. The Eastern Savings account had been opened as a precaution, Mastroeni explained, to hold the money until the trades were completed. But since it was in the company's name, Mastroeni said, he had transferred the money to personal accounts, ready to be returned to Enron once the 1987 trades were conducted.

"How many other transactions have you guys done off the books?" Woytek asked.

"This is it," Mastroeni replied.

As the traders' words tumbled out, Woytek breathed deeply. This is the stupidest thing I've ever heard.

Sulentic broke in, looking Lay in the eye. "This was all just a misunderstanding, Ken. Lou and Tom really believed they were acting in Enron's interest. I say we accept that mistakes were made, do what needs to be done to correct them, and move on to a profitable 1987."

Lay nodded grimly, seeming lost in thought. "This is obviously not the type of thing we want to have happen," he said finally. "I understand what you were trying to do, but this is not the way to accomplish that."

Everything would be undone, Lay ordered. The transactions must be reversed and the off-books bank account shut down. And there would be other consequences. New controls, new oversight. This would not happen again.

Lay sat back. "Does anybody else have anything?"

"Well," Woytek said, "I have a couple of problems."

There was a short discussion about taxes and when the income would be reported. Heads nodded all around; they agreed Enron would report all of its 1986 profits in that year and pay the taxes. Woytek glanced at the traders. By raising such a tangential issue first, he seemed to have lowered their guard. They looked relaxed, confident.

Time to move in for the kill.

He held up the banking records from the memo. "But the real problem I have is that these bank statements you guys brought here today have been altered."

Woytek pulled out the second set of statements, describing the discrepancies. All the while, he stared at the traders, looking in their eyes for a flicker of shame or embarrassment. None. Just pure, controlled fury.

"Now, wait a minute!" Borget snapped.

"I can explain that," Mastroeni interrupted.

There was this trader, Mastroeni said, who had been fired at the end of 1985. After Enron paid out its bonuses for the year, the trader had hired a lawyer, threatening to sue the company if he didn't receive a bonus.

"There was so much going on at Enron at the time we didn't want to start a new political problem internally," Mastroeni said. "So we set up a closeout transaction for him and paid him a $250,000 bonus. But that was it."

"So why alter the records?" Woytek asked.

Borget scowled. "We just didn't want to cloud up this meeting with this stuff about bonuses. It has nothing to do with what we're talking about. So we just took it out."

The back-and-forth continued for several minutes. Lay just watched, expressionless as he listened. Woytek wrapped up his interrogation and sat back, ready for the hammer to drop.

Lay clasped his hands on the table. "Well," he said finally. "Okay."

Oh, shit, Woytek thought. These guys had just presented forged documents, and they're going to get away with it?

"I just don't want this to happen again," Lay continued. "If something like this comes up again, call us. We can handle this bonus situation. But these profits have got to be reported properly."

The meeting ended, and the traders, somehow, had survived. Everyone began filing out.

"Dave, John, stay behind a minute."

The two auditors looked back at Lay, who was signaling for them to return to the conference table. They took their seats; Lay stayed silent until the office door closed.

"Okay," Lay said. "Go to Valhalla and look through their records. If I find out Borget is trading on inside information, on tips he's getting from somebody in OPEC, I'll make sure he never works in the industry again."

Woytek and Beard nodded, taking notes.

"So, John," Lay continued, "you go ahead and get that going, and Dave and I will run through some details."

Beard gathered his papers and strode out of the room. Lay leaned in, his eyes boring in on Woytek.

"I want you to go up there and take your top people," Lay said. "Make sure every penny of this money is returned to the company, even this bonus Borget was talking about. I want all of it back. And I want you to go today, now."

"All right," Woytek replied. "We're on it."

Both men stood, and Lay escorted Woytek to the door. He felt confident that his message had been heard. He wasn't going to stand by and be played for a fool. Besides, the trading unit had always struck him as a little wild and woolly; maybe this was the chance to get the place under some more watchful eyes. Lay liked that idea; he liked to see the possibilities, the upside. As anyone who knew Enron would say, Lay and his company had long ago learned that every challenge could be transformed into opportunity.


The dilapidated black truck rumbled over the rural Missouri road, veering ever closer to the edge. In the flatbed, dozens of crated-up chickens squawked, scratched, and clucked as the truck headed out of a speck of a town called Raymondville. It was 1948, and Ken Lay's father, Omer, was struggling for the second time to keep a general store afloat. Omer had taken to purchasing chickens from local farmers, selling them at a profit in nearby cities, and on this day he had gambled everything on a single shipment. But his driver had knocked back a few drinks and now was weaving all over the road. The weight of the truck shifted, until it flipped over in a terrible crunch of metal and wood. The driver survived, but most of the chickens were killed—right along with Omer's business.

The accident was a turning point for the struggling, deeply religious Lay family. With two daughters and Kenny, their six-year-old middle child, Omer and his wife, Ruth, had hoped the store might allow them to settle down, maybe own their own place. Now those dreams were gone.

Omer took a job in Mississippi selling stoves door-to-door, bouncing his family around the state but never seeing enough success to make ends meet. The family hit bottom one Thanksgiving when Ruth--the spark plug of the household who delighted in nothing more than whipping up family feasts—could only afford to serve luncheon meat. Admitting defeat, the Lays moved to a Missouri farm with some of Ruth's family until Omer could get back on his feet. Soon he found work in sales and a spot preaching at a church.

Around that time, young Kenny—he was usually "Kenny" as a child, never "Ken" and rarely "Kenneth"—scouted up some jobs for before and after school so that he could help the family. He delivered newspapers, mowed grass, baled hay, anything he could find. Between Omer and Kenny, money was coming in, and the Lays were able to settle in a home just off a dirt road cutting through Rush Hill.

Within a few years the financial troubles returned. Lay's older sister, Bonnie, headed to college, and the cost was far more than the family had anticipated. The only way the family could scrape together the money for college, they decided, was for the kids to live at home. So the Lays moved again, this time some fifty miles southwest to Columbia, the college town for the University of Missouri.

Lay's big moment in college came in his sophomore year, when he signed up for introductory economics, taught by a popular professor, Pinkney Walker. Lay found himself mesmerized by Walker's lectures laying out free-market theories; this, he decided, was what he wanted to study. Walker was impressed with the smart young man and became a mentor for young Lay. With Walker's encouragement, Lay stayed on at school after his senior year to obtain his master's degree. But that was enough for Lay; he was eager to get out and start earning some money.


From the Hardcover edition.

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Excerpted from Conspiracy of Fools: A True Story by Kurt Eichenwald
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.