The Best American Crime Writing (35 page)

The saddest outcome is that Clint Towns died en route for treatment in New Mexico and that his wife, Wanda, who is no longer the madam at Angel’s Ladies, is devastated. There’s some more grief for you. Mack blames the Nye County sheriff’s office for Clint’s precipitous end, since he’d been detained for six hours without his oxygen tank. The other shocker, I guess, is that Mack put Angel’s Ranch on the market. He hasn’t found the right buyer yet, so if you happen to be looking for a thirdhand brothel, there’s a tip. The land is rich, perfect for growing tomatoes and watermelons, and there’s a natural-fed spring out back by the Fantasy Bungalow, perfect for a midnight skinny-dip
.

I
t was at first inconceivable to Jan Avery that her position at the Enron Corporation could make her a valuable witness in the largest bankruptcy case in American history. On the morning of January 25, when former Enron vice-chairman Cliff Baxter was found dead in his Mercedes with a suicide note and a bullet wound in his head, Avery was home sifting through proxy statements and SEC filings she had kept in storage. Like Baxter, she had been interviewed by lawyers and investigators who were convinced that her testimony could illuminate what had led to Enron’s collapse. Shortly before his death, Baxter told colleagues that he had become a pivotal figure in the scandal, and that he stood between Ken Lay and Jeff Skilling (former CEOs of Enron) going to jail. Avery was apprehensive as well. For eight years she had consulted on the myriad complex structures that fueled the Enron delusion. “The pattern began very early,” she said, “much earlier than anyone has reported. It started in the gray area of what was acceptable in accounting principles and, in my opinion, later turned into a clear case of fraud.”

The mystery of Enron presented itself to Avery in 1993, during her earliest days in the company’s tax department. Trained as an accountant—what Enron called a “middle person”—she placed confidentiality at a premium. Avery had a special expertise in oil-and-gas tax procedures, used to compute state and federal taxes. From her days as a young woman going to night school, she had
been taken by the simple beauty of accounting, balancing credits and debits. She had even run her own marketing company, jockeying to buy and move gas on the newly deregulated pipelines that crisscrossed Texas and New Mexico. In an Enron that would soon fill up with young MBAs in polo shirts and khakis, Avery was an anomaly. She dressed in blazers and suits and always kept flowers in her office. Her paternal grandmother had been born on a plantation in Alabama, and good breeding showed on Avery’s face, but the family had lost everything, so a determination was there as well. In the wild, optimistic days of Enron’s romance with the opening energy markets, Jan Avery was a perfect hire. The Soviet Union had fallen, and the idea of privatizing electricity, natural gas, and other commodities was sweeping the world. Like FedEx, Enron seemed poised to be in the vanguard of the newest frontier of American business.

Avery’s first assignment, in 1993, seemed routine. She was to compute a schedule of amended state tax returns for Enron Oil, a former subsidiary of the company. Enron Oil had shown a loss on its books, her boss told her, and Avery was supposed to calculate the carryback on the company records. She had worked at such major accounting firms as Arthur Young, Arthur Andersen, and Touche Ross, so she knew what to expect: a thick file with a schedule of tax depreciations. It was standard stuff—years of book-value depletion for oil and gas, company officers’ life insurance, liabilities of all kinds. She waited for the file to be delivered, but it didn’t appear. “Where is the file?” she asked her colleagues, and they gave vague answers, as if they hadn’t understood what she was talking about. Days passed, and still no file arrived. Finally, she says, she was given a thin manila folder containing three sheets, on one of which was a number: $142 million. This was no routine loss; it was a staggering amount for a young company. Avery assumed it was a mistake; she
scoured the storage room next to her cubicle and continued to ask her coworkers, “Where are the books for Enron Oil? How am I supposed to justify a $142 million loss for state-tax purposes?” No one could answer her.

“It made no sense to me,” she said. “You do not have an entire file of financials disappear.” Enron Oil had gone out of business; there had to be officers you could track down. Since she had no data, she refused to sign off on the $142 million figure. “I questioned it and questioned it. I went to the financial office. Finally I wrote a research report, trying to come up with some kind of basis, but it was impossible to do the research without the facts,” she said.

Soon after that Avery’s boss walked into her office and said, “Here is your answer. We had a little problem.” He paused and said, “Rogue traders.” That was the first Avery heard of a bizarre case that had disappeared without much notice. For a moment she thought he was joking. She wondered if certain files were kept in his office so that Enron could claim that they were protected under attorney-client privilege and could not be subpoenaed. Finally he let Avery see the Enron Oil file, but it yielded no data to clarify what had really gone on. “This was the clear beginning for me, when I realized that they were trying to hide all the losses,” she later said.

Jan Avery had arrived early in the Enron Corporation’s drama of willful blindness, during an attempt to perfume a disaster Kenneth Lay, Enron’s architect, had inherited in 1985 when he merged his company, Houston Natural Gas, with InterNorth, an Omaha-based concern. In December 1993, Arthur Andersen would become the in-house auditors. Enron Oil was an overture to thousands of off-the-books partnerships which would subsequently dizzy readers trying to figure out what the Enron debacle was really about. It was a harbinger of the future Enron pattern of hiding losses, no matter what. Avery’s initial confusion over accounting discrepancies and
missing documents only presaged the bafflement of the battalion of bankruptcy lawyers who would be assigned to unravel the morass, of the thousands of Enron employees who would find that their 401(k) plans were nearly worthless, and of all the congressmen—71 in the Senate and 187 in the House—who had received campaign contributions from Enron. The taint of the energy giant would soon permeate the White House and the president’s men as George W. Bush and Dick Cheney, close friends and associates of Ken and Linda Lay for years, stonewalled requests from the General Accounting Office for documents, issued new terrorist warnings, and gave lengthy interviews to
The Washington Post
in which Bush talked about being choked with emotion in the days after September 11. To many these actions appeared to be a full-out legal defense and public relations campaign, a smoke screen to keep the political leaders’ web of Enron connections from scrutiny. They overwhelmed the footage on the nightly news shows of former Enron employees in T-shirts dragging ficus trees from their offices down the steps of the two gleaming corporate skyscrapers on Houston’s Smith Street.

Avery had been hired to work on tax collages, researching case law and the tax code and briefing executives on Enron’s interests in deals. “We take an aggressive position on losses,” she was told, but that policy sounded benign. The enigma of the Enron Oil loss confounded her because it seemed to be constructed to cover up a criminal fiasco. In October 1985 the heads of a trading operation—soon to be renamed Enron Oil—based in Valhalla, New York, had set up a scam: Using two sets of financial books, they ran hundreds of millions of dollars of phony trades through four sham Cayman Island partnerships. Masterminded by Louis Borget and Thomas Mastroeni, the president and vice president, the trades glided into the Enron Corporation’s machinery, and in the swirl of the start-up the bogus trading operation continued smoothly for two years. One former executive remembered the day Enron got an urgent phone
call from the Treasury Department questioning the enormousness of one Enron Oil trade.

In fact, the future Ken Lay business model started with Enron Oil, a flourishing petroleum-marketing operation with twenty-eight employees and offices in New York, London, and Singapore. Enron Oil seemed to be the one bright spot in the sea of debt incurred in the Houston Natural Gas and InterNorth merger. On the books, it looked like a success story, earning $50 million over the two and a half years before its collapse. Months before federal prosecutors targeted the crime, an in-house Enron auditor began to keep a meticulous and lengthy file on the episode. Later, there was talk in the company that the auditor was so frustrated that he took fifty cartons of evidence and spirited them away in his attic.

Borget and Mastroeni pleaded guilty to conspiracy to defraud and to filing false tax returns, and Borget went to prison. The minor scandal hardly registered a blip in the financial press. Ken Lay told
The New York Times
that the loss was “an expensive embarrassment.” The Enron board quickly voted to disband Enron Oil, and the loss almost tanked the new company. Enron had to liquidate assets, including a portion of a new power business, to cover it.

There remained, however, a larger question: How much of a loss had the company actually sustained? Enron gave the
Times
a figure of $85 million. Avery’s file with no backup data said $142 million. No explanation for the loss ever appeared in subsequent annual reports, according to London’s
Financial Times
. Avery became obsessed with trying to solve that first accounting puzzle. “It was clear to me, even then, that the management wanted as few people as possible to have any access to the records. It was the beginning of management’s attempt to hide records from the SEC and the shareholders.”

Studying SEC documents, Avery discovered that in an 8-K filing
for 1987 the loss showed up as $85 million. This number appeared to her to have been computed using a standard that would become applicable only the following year. “This was a huge discrepancy,” she later said. I asked Avery to explain what the numbers meant. She faxed several pages photocopied from 8-K’s and Enron financials, and wrote, “It appears that management convinced Arthur Andersen to sign off on showing the loss and provides the first hint of Enron’s ability to persuade Andersen to see things in Enron’s best light.”

Jan Avery and I met in early January for the first of many conversations. Like most people I interviewed during weeks of traveling back and forth between New York and Houston, she radiated anxiety about being seen with a reporter. A divorcée with a daughter who is a college freshman, Avery was concerned that she would be recognized in River Oaks by friends in the oil and gas business. In her years at Enron, she had participated in a heady world of ego and manipulation, dealing with an array of Cayman Island partnerships charted on whiteboards in conference rooms, jimmying utilities contracts during the California brownouts, bundling energy for Safeway stores, and creating a nationwide energy program for Citigroup. She supervised teams building power plants in Nicaragua and spent nine months in Europe, traveling often to the United Arab Emirates, where she was closing the $3 billion creation of the Dolphin pipeline.

For days I remained at the St. Regis Hotel in Houston as frightened Enron managers, lawyers, deal originators, and vice presidents—most of them women—came through the lobby, past the holiday gingerbread house that seemed frozen in the air-conditioning. It was the women of Enron, I soon discovered, who had detected the web of intrigue, predicted the fall, written futile letters to board members, tipped financial analysts, and tried to avert the final collapse.

Cynthia Harkness, an Enron lawyer, still at the company, described the moment when chief financial officer Andrew Fastow introduced her to a concept of monetization in which future revenue is booked immediately. The lawyer was baffled by the nerve behind Fastow’s logic. She told him, “Andy, it seems to me that if you do a ten-year deal, and suck all the earnings out in one year, you will then have to keep the profit coming through years 4, 5,6, and all the way to 10, by doing more of these deals …. How are you going to do that if the market changes? Book more deals?” It looked to Hark-ness like a pyramid scheme, but she knew that the accounting department had signed off on it. She recalled Fastow looking at her and saying, “Yes, you have to keep doing more of these deals each year.”

It was Harkness’s first week in Enron’s global finance group, and she had yet to parse the world within the world that was Enron. Harkness had come to Houston from a large French investment bank, and she asked her new colleagues about partnerships called LJM, which were controlled by Fastow. (The name came from the initials for Fastow’s wife and children.) “Isn’t there a conflict here?” she asked. “Their answer always was This has been approved by the board.’ They said, ‘It’s dicey, but it has been carefully scrubbed. They have put in extra hoops and procedures to make sure they’re all right.’”

The language of the culture was borrowed from ornithology, with partnerships called Osprey, Raptor, and Condor as created vehicles to hide debts and losses. A special fiefdom was arranged for Fastow, with names taken from George Lucas films: JEDI, Chewco. It was a sign of status to have earned a life-size furry Chewbacca head as a token of having worked on the Chewco deal. “At first we believed there was nothing wrong with this,” Shirley Hudler, the manager of the JEDI I partnership, said as friends of Fastow’s walked away with huge profits.

Hudler, like Harkness, worked with Fastow and understood the mechanism of the partnership deals. “They would say, ‘Okay, we need to get these assets off the books. We can either put it in Osprey or, if Osprey is full right now, we can sell it to LJM, which can hold it. And
then
we can move it.’” Years before that, the future whistle-blower Sherron Watkins would sit in meetings and say openly, “This is a circle jerk.” Hudler said, “There was so much pressure on us to make earnings, and the Arthur Andersen staff we worked with would never challenge these structures. We could always bully them into getting what we wanted. We made them push the envelope. If they had questions, they would call Chicago—their headquarters. I don’t think they were doing their job.” (Arthur Andersen lays the entire blame for Enron’s difficulties on Enron’s board and management.)

Enron, many of the women said, was a hotbed of hormones, a testosterone culture. A vice president openly displayed a “hottie board,” on which he ranked the sexual allure of Enron women. There was occasional violence. One trader, learning that his annual bonus was a mere $500,000, was said to have thrown his plasma screen across the trading floor. Another, fearing he would be a victim of an upcoming performance review, slammed his boss up against a wall, accusing him of lying about the trader’s performance. “Forget you saw that,” the man’s boss told the woman who later described the event. “He’s having a bad day.”