Incredulity is a polite word to describe the reaction to former Enron CEO Jeff Skilling, who swore last week at a congressional hearing that his company's bookkeeping trickery had caught him by surprise. Rep. Ed Markey of Massachusetts got a laugh when he compared Skilling to Sergeant Schultz of "Hogan's Heroes" ("I hear noth-ing, I see noth-ing"). As it turns out, even Skilling's mother was skeptical. "When you are the CEO and you are on the board of directors, you are supposed to know what's going on with the rest of the company," Betty Skilling, 77, told NEWSWEEK in an interview before the hearing. "You can't get off the hook with me there... He's going to have to beat this the best way he can."
The usual way to beat the rap is to blame someone else. In legal circles, it is assumed that the top Enron executives will turn on each other like scorpions in a jar. Already, Skilling and his old boss, former Enron chairman Ken Lay, appear to be ganging up on Andy Fastow, the company's former chief financial officer who set up (and personally profited from) the off-the-books partnerships that led to the company's collapse. Though barred by their lawyers from talking to each other, Lay and Skilling occasionally check up on each other through a mutual friend. "Ken will sometimes ask, 'How's Jeff doing? Is he holding up? I worry about his health'," the friend recounted to NEWSWEEK. "I said, 'He's holding up fine. But he's really worried about you'." It's an old axiom of white-collar criminal-defense lawyers that their clients must "hang together--or hang separately." By the same token, prosecutors like to divide and conquer. If Fastow, who maintains his innocence, is convicted of a crime, no one will be surprised to see him cut a deal with the Feds for a more lenient sentence--in return for his testimony against his old colleagues Skilling and Lay.
The legal drama promises to be absorbing for months to come. But the human drama is one for the ages. There was the pathos of seeing these self-appointed visionaries of the new millennium--who apparently believed that they could rise above the old rules--hauled into that hoariest of rituals, the congressional inquisition. The Enron Three have become the symbols of late-20th-century corporate hubris. Whether they committed fraud (civil or criminal) will be determined by the courts. But just from the evidence that has emerged so far, the trio of Lay, Skilling and Fastow will be remembered for their ability to fool a lot of people, including some very smart ones, for a long time. They were clever about using greed and a kind of group-think grandiosity as tools of deception. The question now is whether they are still fooling themselves.
Skilling, who loved to use hip business jargon, often spoke of "optics." He wanted to create a new way of looking at the world, a lens that would allow the analysts and accountants to cast off their green eyeshades and see the rosy dawn of a New Economy. To enhance their vision, Enron's friends were provided with financial inducements. Enron spread around fees and emoluments to consultants, lawyers, investment bankers, politicians and journalists the way John D. Rockefeller handed out dimes to poor boys. (In an ironic twist, Enron has become so radioactive in the business world that the only big accounting firm it can find willing to audit its books may be the one it recently fired, the disgraced firm of Arthur Andersen.)
On the Enron stage, the lead actors were Lay and Skilling. But the behind-the-scenes set designer was Fastow. At the hearings two weeks ago, a congressman used a culinary metaphor, branding Fastow as "the Betty Crocker of cooked books." From snippets of the rise and fall of Enron's chief financial officer, a none-too-flattering portrait is taking shape. A middle-class kid from the New Jersey suburbs who used to haggle over grades with his high-school teachers, Fastow in later life took delight in small hustles. Trying to book a table at a trendy Los Angeles nightspot, he asked for a reservation in the name of L.A. Kings hockey star Wayne Gretzky. When the maitre d' called his bluff, Fastow demurred, "No, I said Duane Gretzky." Deciding that he wanted to buy a new Jeep when he moved from a banking job in Chicago to Enron in Houston, he called Jeep dealers in both cities, conferenced them on the line together and said, 'OK, you guys. Fight it out'." Says a colleague: "He thought that was the cat's meow." Though Fastow's rabbi calls him a "mensch" and he is hailed in Houston society as an art patron, he was perhaps more realistically described by a colleague from his early days at Chicago's Continental Bank: "He could be a little unscrupulous in a minor sort of way," said this colleague. "As a junior guy he would be willing to do just about anything to get a deal done. He thought very highly of himself. Take a person like that, where all those behaviors are encouraged [i.e., to Enron], and you've got a problem."
In 1999 Fastow was honored by CFO Magazine for his pioneering work on "unique financing techniques." Actually, the tools that Fastow used to move debts off the balance sheet are not all that exceptional. Revered industry giants like GE have used similar techniques. But Fastow worked on a grand scale--Enron had thousands of off-the-book operations--and he let his own self-interest creep in. With Enron's approval, he made himself a partner in several of these deals, reaping at least $30 million. In retrospect, the conflict of interest seems so obvious that congressional investigators were having a hard time understanding why the Enron board let him get away with it.
Last week former Enron CEO Skilling groped to explain how he could have been oblivious to his protege's self-dealing. Minutes of the October 2000 meeting of the Enron board's finance committee, made available to NEWSWEEK, show procedures for Skilling and other top Enron executives to keep a careful watch on Fastow's partnerships to avoid conflicts. Yet last week Skilling testified that he couldn't remember what happened at the meeting. Shown evidence that he was present, Skilling said there had been a power outage in the hotel and that he had left the darkened room. Skilling's signature is notably missing from a stack of approval forms drawn up for Fastow's partnerships. An Enron lawyer said he tried three times to get a meeting with Skilling to sign the forms but each time the CEO was unavailable. "Based on the documents, it looks to us like Skilling wanted to keep his fingerprints off the partnerships," said Ken Johnson, the House Commerce Committee spokesman.
Why didn't someone inside Enron blow the whistle sooner? Naysayers and second-guessers are frowned on in most corporate cultures. At Enron raising a red flag was a ticket to exile. As long as two years ago, the then Enron treasurer Jeffrey McMahon questioned Skilling about the propriety of Fastow's partnerships. As McMahon related to investigators, he protested that he couldn't very well represent Enron's interest when he was forced to negotiate with his own boss over the terms of a partnership agreement. "Untenable position," McMahon jotted down in his notes of the meeting. Skilling last week testified that he could recall only McMahon's complaining about his own compensation. In any event, McMahon was "promoted" to a different job in London (in another twist, he is now the COO of what's left of the company).
In August 2001, Skilling himself shocked his colleagues by stepping down as CEO. This was the Harvard M.B.A. who had once boasted, "I've never not been successful at business or work--ever," and whose license plate read WLEC, for World's Largest Energy Company. Actually, a close friend says Skilling was ambivalent when he took over the CEO job from Ken Lay earlier that year. "He said, 'You know, I just hate it. I am so visible. It's so hard. I'm tired. I never see my kids. I can't seem to turn the stock around'." Skilling--who had been divorced and was engaged to a woman he had installed as secretary to the Enron board at $600,000 a year--resigned, he publicly said, "for personal reasons." His mother, Betty, was suspicious: "I don't think he knew he was in such high water, but I think he must have had some idea because he resigned... I love him," Mrs. Skilling added, "but I'm considered an ogre in this house because I think something was going on there." (Skilling's father, Tom Skilling, said, "I've never known him to do a dishonest thing in his life.") Mrs. Skilling blamed her son's divorce, as well as a hardening and coarsening of his character, on the demands of his job. "That's what these high-flying jobs do to you," she told NEWSWEEK. "They distort your personality."
Skilling was widely regarded at Enron as a bully and boor. "If someone slowed him up in the parking garage he would shoot him the bird," said a former Enron worker. A former Enron executive told NEWSWEEK: "Over the years, Jeff changed. He became more of a creature of his own creation. His hubris came to outweigh some of the more attractive parts of his personality. He became more intolerant, more opinionated, more bombastic. Jeff was always right, and that got worse. He had a little bit of a God syndrome." In the end," says this former executive, "he created a culture that finally ate him up. Jeff hated dealing in the everyday grind of management in which he had to deal with the monster egos that he himself let get out of control."
Lay, on the other hand, seemed to benignly float on the surface of the Enron shark tank. A federal official lobbied by both men said, "Skilling had ants in his pants. But Lay was all down-home Southern charm, very smooth in his relationships. A nice, nice guy." Just a few days after Skilling quit in August, a midlevel Enron official, Sherron Watkins, sent a memo to Lay warning that the company's accounting was putting its finances in great jeopardy. Lay ordered an investigation but continued to believe nothing was wrong. A month later, he was speaking to 300 top government regulators and industry titans at a conference in Arlington, Va., still preaching the gospel of deregulation. There was not a hint, said one listener, of underlying trouble.
By the end of October, however, with Enron stock plummeting, Lay was looking for an infusion of cash and credibility. The solution, he believed, was to merge with Enron's competitor in the energy-trading business, Dynegy. Lay managed to convince Dynegy's chairman, Chuck Watson, that Enron was merely suffering from "a short-term liquidity problem." But after the two companies appeared to have struck a deal, Enron restated its third-quarter earnings--and suddenly discovered that it had a $690 million debt obligation coming due. After some tense day-and-night negotiations in New York, the deal collapsed. Lay learned that Dynegy was backing out as his private jet was taxiing on the runway to return to Houston. Enron sued Dynegy for intentionally driving its stock price down in search of a cheaper deal--with the result that Enron was forced to declare bankruptcy in December. But a Dynegy source says that Enron never shed its corporate arrogance during the negotiations. "Enron looked at Dynegy the way Yale looks at Nebraska," said this source.
Back at Houston, Enron employees were in shock and despair as they saw the stock dive and their retirement savings vanish. One technician on the Enron trading floor recalls a colleague sitting in her row, shouting out the stock price every 30 minutes or so for the whole floor to hear. One former employee recalls that during the last week of November, no one was trading with Enron. He would arrive on the trading floor at 10 a.m. shortly before the beer was delivered. The traders would drink beer from about noon to 4 p.m., when they would leave for the day. Along with the bitterness came a certain nostalgia for the high-flying days. "You had a swagger in this town when you worked for Enron. You got things," recalls a former systems administrator.
Right to the end, Lay tried to put on a good face to his employees and the public. In the weeks before Enron declared bankruptcy, Lay sent out companywide e-mails and voice messages aimed at keeping calm and allowing Lay to give his spin on events. Former employees now wonder at the unreality of it all. When Dynegy backed out of the merger agreement, Lay's voice message said that Enron would find another solution and added, in an offhand way that gave no hint of the desperate, round-the-clock negotiations, that the merger "wasn't the best deal for Enron shareholders anyway." Within a few days, Enron shares were worth pennies.
The strain was showing on the other top men who had built Enron's house of cards. Fastow was reported by friends to be depressed and troubled by anti-Semitic murmurings. An acquaintance recalls seeing Skilling at a high-society bash in November for the opening of Hotel Derek, a swanky new boutique hotel in Houston. The invitees were suppose to come in "posh PJ apparel," according to the Houston Chronicle, which noted that Skilling showed up in a long flannel robe over slacks and sandals. The acquaintance says that Skilling looked awful: "It was weird. He looked unkempt and was unshaven." When a couple approached and introduced themselves by their full names, Skilling replied only with his first name, Jeff. "It was as if he didn't want anyone to know his last name," said the acquaintance. Skilling was deeply upset when former vice chairman Cliff Baxter, distraught over the Enron scandal, killed himself in January. The day Baxter died, Skilling drove over to Baxter's house to be with his widow and children. According to a friend, he went against the advice of his lawyers, who warned that he might get ambushed by a press stakeout.
And yet Skilling was defiant in his congressional testimony last week, insisting that he had always believed that Enron was on the side of right. Lay is still agitating to get his story across. His friends say that he has been dissatisfied with the PR skills of his Washington lawyer, Earl Silbert, a careful old hand who does not like to try cases in the press (Silbert referred NEWSWEEK's phone call to a PR person for Lay). Lay canceled congressional testimony scheduled for last week because, he said, the atmosphere had grown "too prosecutorial." He has now been subpoenaed and will be forced to appear before at least two committees this week. Will he invoke his Fifth Amendment right to remain silent? A source close to Lay said that his decision to cancel his testimony last week was a reluctant bow to the lawyers. In a brief telephone conversation last week, Lay sounded uncharacteristically upset, said this source. "He said, 'They are trying to trip me up. They want to put me in jail.' He said, 'Every fiber of my body wants to talk and tell my side of this.' He must have said it 10 times," said this friend. Lay is apparently still searching for what his former colleague Skilling described as the right "optic," the perfect lens through which to view his version of events. For Lay, as well as for Skilling and Fastow, the best looking glass would be a mirror.