Friday, February 02, 2007

Literature: Conspiracy of Fools: A True Story by Kurt Eichenwald

This review concludes a survey of a quartet of books devoted to a general treatment of the Enron Scandal. At 4:28 AM on December 2, 2001, lawyers for Enron filed for bankruptcy protection via Internet through the United States Bankruptcy Court in New York. At the time, Enron’s was the largest corporate bankruptcy to be filed, this after claiming $111 billion in 2000. Enron claimed debts in the tens of billions of dollars at the time of the bankruptcy filing. Enron’s graft and subsequent loss in their bankruptcy would be dwarfed by that WorldCom just eight months later on July 21, 2002.

Unlike WorldCom, which employed standard accounting malpractice, Enron set a new standard of graft by the misapplication of “mark to market” accounting (accounting for multiyear revenues in the first year of contract, no accrual accounting) advocated by Jeffery Skilling and the Andrew Fastow off-the-books special purpose entities to shift debt off of Enron’s books, making the company look better to investors. These illegal activities, coupled with the intense money-losing fiascoes of Rebecca Mark in Enron International and Azurix and Ken Rice in Enron Broadband and Enron’s fate was all but sealed early.

Since the dust settled from the Enron Bankruptcy, many books have been written trying to explain, with differing levels of success, the course of events leading to the energy company’s demise. Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean and Peter Elkind concentrated on the inattention of CEO Ken Lay, the aggressive accounting of Jeffery Skilling and Richard Causey, the pornographically poor judgment of Rebecca Mark, and, necessarily, Fastow’s shell entities. This book was well-researched and fairly unbiased.

Pipe Dreams: Greed, Ego, and the Death of Enron by Robert Bryce, a Houston investigative reporter, is anything but unbiased. This is a beautifully jeering account, from a journalist’s perspective, of emotionally-stunted geeks who struck it rich and were still not pleased. Pipe Dreams focuses mostly on Ken Lay and Jeffery Skilling, while giving the necessary attention to Fastow and the ultimate giant killer. Also emphasized was the government and political relationships that existed between Enron and the Bush Family.

Power Failure: The Inside Story of the Collapse of Enron by Mimi Swartz and Sherron Watkins gives an insider’s view of what happened at Enron. Sherron Watkins was the Tomball, TX whistle-blower who first expressed concern to Ken Lay regarding Enron’s questionable accounting practices shortly after the resignation of Jeffery Skilling as CEO in 2001. Her memos were the beginning of the end. This book concentrates on Watkins and her relationship with Fastow and his lieutenants at Enron.

Now, add to this group the best written of the bunch, Kurt Eichenwald’s Conspiracy of Fools: A True Story. Eichenwald, an investigative reporter for the New York Times, previously wrote books on The Prudential Securities scandal (Serpent on the Rocks) and the Archer-Daniels-Midland price-fixing debacle (The Informant: A True Story). Conspiracy of Fools: A True Story is the result of intense interviews and research and is written in an engaging narrative voice that adds to the natural page-turning quality of the Enron story.

Unlike the previously mentioned books, Conspiracy of Fools: A True Story concentrates closely on Andrew Fastow and his special purpose entities that are credited to the final insolvency of Enron. Also well treated were the rolls of Michael Kopper, Treasurer Ben Glisen, and chief accounting officer Richard Causey. Sherron Watkins receives mention only as the memo writer and one hero, Vince Kaminsky, risk modeling analyst who was one of the loudest voices crying in the wilderness.

But is ultimately Fastow who receives the most attention. Great detail is provided regarding his side deals names South Hampton, Chewco, Jedi I and II, LJM1, LJM2, the Raptors, and Braveheart. As delicately as possible, Eichenwald presents how the accounting surrounding the four side deals know as the Raptors endangered Enron, as well as how the unwinding of these deals drove a stake into the heart of the company. Once the Raptors went bad, because of built-in stock price and trading level triggers, the remaining deals also unraveled. Between August 2000 and December 2001, Enron’s share price dove from $90 to less than $0.50.

Eichenwald concentrates on the disconnect between Ken Lay and his entire company, Fastow and his cohorts and detractors, and the corporate ignorance of cash flow in deference to deal making and revenues. The author concentrates on the Sophistry practiced by Lay when in communication with the Security and Exchange Commissions, Congress and three presidents. This book is so well written that it could easily be a suspense thriller in the guise of The Bourne Identity to those readers with a healthy business and accounting education. In fact it is only the esoterica that prevents this epic story from being a blockbuster. Like all of the mentioned books, the Enron circumstances following the Sherron Watkins’ memo naturally accelerate as Enron enters its death spiral and finally succumbs to Fastow’s vice.

I stop short of endorsing a single one of these books to the exclusion of the others. Enron was a phenomenon so big that its story could not be told in a single book. I would suggest that the reader first read either Pipe Dreams: Greed, Ego, and the Death of Enron or Power Failure: The Inside Story of the Collapse of Enron before tackling Conspiracy of Fools: A True Story, but surely read at least two of these books.

Since the publications of these books, the other shoe has dropped for the majority of the principals. So, what happened to the major movers and shakers in the Enron saga? Here is a list of those characters most prominent in these four books about Enron:

Ken Lay, chairman and CEO: Was found guilty on six counts of conspiracy and fraud on May 25, 2006, was to be sentenced, along with Jeffery Skilling, October 23, 2006. Lay died of an acute myocardial infarction while in Colorado, July 5, 2006. His conviction was vacated October 17, 2006, due to his death.

Jeffery Skilling, president (1997-2001), CEO (2001): On May 25, 2006, was found guilty on 19 counts of conspiracy, fraud, false statements and insider trading. Skilling was found not guilty on nine counts of insider trading. Skilling was sentenced on October 23, 2006 to 24 years and 4 months in Federal prison, which he began serving December 13, 2006 at the Federal Correctional Institution in Waseca, Minnesota.

Greg Whalley, president (2001): Considered “One of the Luckiest people in Houston” by for not being called to testify in the Lay-Skilling Trial. He was last working for Centaurus Energy, the Houston hedge fund founded by John Arnold, who worked under Mr. Whalley at Enron as a natural gas trader.

Andrew Fastow, CFO: On January 14, 2004, Fastow pled guilty to two counts of wire and securities fraud, agreeing to serve a ten-year prison sentence and an informant cooperating with federal authorities in the prosecutions of other former Enron executives in order to receive a reduced sentence. Fastow was sentenced to six years, followed by two years of probation and is currently serving his sentence at the Federal Detention Center in Oakdale, Louisiana.

Michael Kopper, head of special projects: Kopper was the first Enron executive to plead guilty to two counts of conspiracy. He reported to a Beaumont, Texas Federal Institution January 30, 2006 to begin serving a 37-month sentence.

Richard Causey, CAO: Richard Causey was indicted on January 22, 2004 for wire fraud and conspiracy charges. Causey originally pled not guilty, but on December 28, 2005, entered a guilty plea and agreed to testify against Kenneth Lay and Jeffrey Skilling in exchange for what ultimately proved to be a five and a half year prison term at the Federal Corrections Facility at Bastrop, TX.

Ben Glisan, Jr., treasurer: Ben Glisan pleaded guilty September 10, 2003 to one count of conspiracy to commit wire and securities fraud. He was sentenced to five years in prison. Glisan spent time in two federal prisons in Texas — one near Bastrop, the other in Beaumont. He was ultimately confined to his Houston home under house arrest, his sentence concluding in January 2007.

J. Clifford Baxter, executive vice president, Corporate Development: Allegedly shot himself in the head on January 25, 2002 in his black Mercedes-Benz in Sugar Land, Texas.

Lou Pai, CEO, Retail Energy: Made out like a bandit to the tune of $270 million six months prior to Enron’s meltdown…by the skin on his chinny-chin-chin. Pai now raises horses in Sugar Land, Texas.

Rebecca Mark, CEO, International Division & Azurix: Made out like a bandit in spite of her questionable judgment that led to Enron’s staggering losses in Dahbol, India and the aftermath of Azurix. She operates cattle ranches in Colorado and New Mexico.

This review was first published in

© Copyright, C. Michael Bailey, 2007