Andy Fastow To Keynote ACFE Conference

Andy Fastow, former CFO of Enron Corporation, is set to speak at this year’s ACFE Fraud Conference. On the speaker’s page, Mr Fastow is titled “Convicted Fraudster”, which sounds a little unkind, especially for someone who is, you know, volunteering to speak at your conference (Mr Fastow is not being paid for his appearance.) They could have simply titled him “Former Enron CFO” or some such. But nope, they gotta make their bones I guess.

Andy Fastow Speaks To Students Again

I love that Andy Fastow is speaking to students these days. He seems very committed to explaining Enron and that always makes me happy.

His most recent foray into speaking was at Dartmouth. He is an endlessly fascinating human being and I have nothing but respect for him speaking out like this, trying to shed light on his role at Enron.

Fastow is proof that the road to ignominy is most often not well marked. His talk was part of the Choices & Challenges series organized by the Center for Business and Society.

There was a time, about 13 years ago, when Andrew Fastow had achieved the pinnacle of success and fame that could be expected of a chief financial officer. At the tender age of 36, he had been appointed the CFO of Enron, the hundred-billion dollar energy company. Just two years later, CFO Magazine gave Fastow an award for capital structure management.

But as the world learned in 2001, the laws of physics don’t apply to fame. When Enron imploded, causing $40 billion in market value to disappear along with the pensions of thousands of people, Fastow fell much further than he had ever risen, becoming the most hated person in America. Even his eight-year old son knew the right term for him now. “Dad, you’re not famous,” he said, “you’re infamous.”

Fastow, who served more than five years in federal prison for securities fraud, recounted the arc of this journey with candor and conciliation to Tuck students on October 8, during an event moderated by Richard Shreve, adjunct professor of business ethics at Tuck. The talk was part of the Choices & Challenges series on business ethics organized by the Center for Business and Society.

Fastow’s story is a perfect case study for business school students on the blurry line between genius problem solving and fraud. The same much-lauded “off-balance-sheet” strategies that Fastow innovated to make Enron seem financially healthy were the ones that, upon closer review, landed him in jail. His main mistake, he said, was ignoring the principles behind the rules he creatively circumvented. “I used loopholes in the rules to get around the principles of the rules,” he explained. “But it’s not always easy to know when you’re doing that.”

Indeed, it was not as if Fastow acted alone. According to Fastow, every sketchy deal he made was approved by accountants, attorneys, and the Enron board—the usual gatekeepers who guard against illegal action. The salient lesson was that these gatekeepers can also act as enablers. All it takes is a change in attitude. Lawyers, instead of warning about fraudulent statements, can delight in crafting disclosures that are “technically legal but completely incomprehensible,” Fastow said. Auditors and consultants, instead of raising red flags, can help shape the numbers to comply with generally accepted accounting principles.

Another important lesson was that a series of minor indiscretions can slowly accrete into a major crime. Fastow went astray not with one shocking act of fraud, but by degrees. Time after time, he chose from a menu of justifications: he was helping shareholders, “it was just a timing problem,” everyone was doing it. “We had a lot of immaterial stuff that added up to being material,” he said. In retrospect, these justifications were just a manifestation of his lack of character, he admitted. Greed, ego, and hubris all played an underlying role. “I wanted to be a hero by solving the problem,” he said.

When the talk became more of a dialogue between Fastow, Shreve, and students, the most daunting question was how to prevent another Enron-scale disaster, in a business environment where firms still employ legions of people to dream up ways to get around laws. The best hope for reform, Shreve said, is to educate the next generation of business leaders, something that Tuck does with its Ethics and Social Responsibility requirement in the core program. All students are required to take at least one mini-course that explores the complex ethical and social challenges of business.

“You’re going to find yourself in a position where you’re incented to do things really close to the line,” Shreve told students. “That’s why there’s an ethics program at Tuck.”

Fastow, by most accounts a brilliant man, is proof that the road to ignominy is most often not well marked. “No one’s going to say, ‘Hey, I’ve got a Ponzi scheme I want you to sign on to,’” he remarked. “It’s going to be much more insidious.”

Leave Andy Fastow Alone

A few days ago, I saw an article on some website about Andy Fastow. I can no longer find it but the gist was that the reporter had tracked down Lea Fastow and Lea – who by all accounts is a sweet, lovely woman – was gracious enough to talk to the reporter instead of slamming the phone down. Lea said that she and her family were at a friend’s house on a “mini-vaction” and that they’re all just trying to relax.

It was by any measure a truly gracious response to the reporter’s questions. But the report was full of snickering sarcasm and left one with the feeling that a Christmas effigy was in order.

Incidentally, Sherron Watkins defended Andy Fastow in that article. She stated something to the effect that Jeff Skilling was the real bad guy. I can’t remember the exact words because every time she opens her mouth, she sounds like the Peanuts character’s teacher. Wahwhahahahaha.

I bristled at the reporter’s usage of Watkins in the report. Who cares what she thinks of Andy Fastow? And hasn’t she graced us with her opinions on everything from Jeff Skilling’s competence to the United States’ prosecution of corporate crime? Maybe it’s time to shut her pie hole and go away. Her expiration date was about ten years ago.

I am tired of hearing from Sherron Watkins at all about anything. But I am also frustrated by people jumping all over Andy Fastow without thinking – and I include the corpulent moron in this statement. Andy Fastow and Jeff Skilling were both persecuted mercilessly in the media. Both were accused of things they didn’t do. Andy has rejoined society and officially speaking, the DOJ has no problem with him so we shouldn’t either.

I fear that Andy Fastow is going to bear the brunt of the Enron collapse, and that isn’t quite fair. Even if he stole $100 million from the company, it would not have been enough to topple Enron. The liquidity crisis wasn’t caused because he took all the cash, as some people seem to think. He is not a choir boy, but it is far too easy to put all the blame onto him. It is too simple an answer. And even if he is guilty of everything you believe, the least you could do is leave his wife alone.

Enron Execs In Handcuffs

This is the week of the collapse of Enron Corporation so there are a lot of pictures of Enron execs, most of them coming to and from the court house. One trend is to show them in handcuffs if at all possible. Earlier today, the Chron switched out a normal picture of Rex Shelby for this one:

I really hate this picture. It is frightening. Rex Shelby is looking down because he is about to head down some narrow steps, but it looks like he’s ashamed. He had nothing to be ashamed of. If you notice, the agents are also looking down as they approach the steps. Furthermore, I’ve heard from someone who would know that he was actually pleasantly surprised by the FBI agents who arrested him — I hear that they got along well. One of them tried to shield him from the cameras, but he had to step back as they approached the narrow steps — that is when one of the camera slugs, who were camping at the courthouse in those days, managed to grab a photo, I guess.

The purpose of the perp walk is to humiliate the accused and put an image in the minds of media consumers that he is guilty. He’s in handcuffs, so he must be guilty.

The worst one in my opinion is a tie between Ben Glisan and Andy Fastow. Both were wearing chains. But look at this picture of Andy Fastow:

Seriously? Chains? Why? The FBI had taken his belt and his necktie in this photo, then bound his hands. It is painful to look at. His face is so sweet in this picture too – he looks daunted by what has happened to him.

They put Ben Glisan in chains too, but interestingly when he was arrested, they allowed him to cover his hands with his jacket (notice he is without a tie and belt too):

It is disgusting. None of the Enron executives were violent. None protested when they were arrested. And they were treated like violent murderers. When I see images like this, I just think the media beast is being fed. Absolutely must show them in handcuffs or else the public might get the wrong idea, like that maybe they’re innocent. Can’t have that!

A Nigerian Barge Puzzle

I have long said that the Nigerian Barge case was the easiest of all the Enron cases to understand. There was no accounting. No sub of a sub of a sub you had to keep track of. It basically came down to the central question: did Andy Fastow guarantee to Merrill Lynch that Enron would buy back the barges? That’s it. The answer is no. However, I am curious what would happen if Merrill Lynch had attempted to enforce Andy Fastow’s so-called promise. That action simply wasn’t enforceable. Enron had the ability to take ML’s money and buy women and drugs and there wasn’t a damn thing ML could do about it because ML owned the barges. They accepted full responsibility. ML shouldered the risk that the boats would sink, or that Enron was corrupt and would collapse, or that terrorists would blow the barges up, or that a Soviet-era satellite would fall to earth, land on the barges, and sink them. Basically anything could have happened to those barges under ML’s watch and Enron could have, if it was so inclined, laughed and yelled “Suckers!” as it ran over the hill.

So if ML decided it wanted out of the investment, and the bankers called Andy and said, “We’re holding you to your promise, we want our money back,” what could they have done if Andy just laughed?

There was nothing they could have done. They were simply stuck with the barges because Andy’s so-called promise was not really a promise at all. There was nothing legally binding about any “secret side deal”. If Andy made that guaranty and ML accepted it, ML was then accepting not only the risk that the boats would explode, but that Andy Fastow would live up to his promise.

The ML bankers were bright, industrious people. Most of them had been in the business for many years; they didn’t just start working for ML that day. They knew how these deals were put together. I don’t think any of them would be foolish enough to accept an unenforceable promise. It’s Merrill Fucking Lynch. Not “Joe’s Bank of Dead Pig Junction, Arkansas.” They knew what they were doing. They were buying a couple of Nigerian barges.

Sexiest Man Alive

People Magazine has aggregated the collective conscious of tweens everywhere and pronounced Bradley Cooper the “Sexiest Man Alive.”

We here at Cara Ellison Corporation have said for years that the sexiest men alive are Enron defendants. So today, I pronounce Rex Shelby, Jeff Skilling, and of course, ANDY FASTOW the sexiest men alive.

How can I pick just one? They’re all so sexy in different ways. Rex Shelby looks British, therefore he’s sexy (which means the NatWest Three are also the sexiest men alive!) Jeff Skilling is sexy because he’s the wrongly accused hero and he’s gorgeous with those blazing blue eyes and sharp jaw.

And Andy Fastow is the sexiest man alive because he’s just so damn hot. So very very hot. The hottest of the hot. Sexxy hot. Almost sexier than Big! That’s how sexy he is.

And he should totally get in touch with me. Bring on the sexy!

Simplifying Andy Fastow

I found this in my search terms today:

I’ve actually seen this, or modulates of this, with increasing frequency, and I think it is because it is the most crude simplifying of what Andy Fastow did – it is how you would explain Andy Fastow to a three year old.

Andy Fastow did not “set up” “fake” “companies”.

Andy Fastow used legal, approved, and completely above-board special purpose entities. Funds, in other words. There was nothing illegal or fake about them.

I have the sinking suspicion that what I’m seeing with this line of thought is the final popular explanation of Enron. “Oh, Andy Fastow set up fake companies. That’s why it went bankrupt.”

That’s going to do a grave disservice to both Andy Fastow and Enron in general.

Today In Enron History

Wednesday, October 24, 2001.

The stock opened at $19.74 and would close at $16.41 at extremely heavy volume. The stock lost 17.4% of its value.

First thing in the morning, Andy Fastow and Whalley discussed the problems with the banks – or, more to the point, the problem the banks were having with Fastow. Andy said that he understood he was no longer effective in the role of CFO, and Whalley agreed. Andy then said he would talk to his team and McMahon and get back to him. Whalley politely said okay.

He showed Andy out and saw several others, including McMahon, waiting to speak to him. He asked them to head upstairs and he’d join them in a few minutes.

Whalley immediately went to Ken Lay’s office and informed him he was firing Andy Fastow and replacing him with Jeff McMahon. Lay hesitated. He still wanted to believe Andy was the old Andy Fastow – the brilliant star who had the world by the balls. He said he’d take it up with the board. Whalley felt that Lay didn’t quite understand the urgency of the matter. NO BANK WOULD DO BUSINESS WITH ENRON IF ANDY FASTOW WAS CFO! So he basically gave Lay an ultimatum: either Enron would have a new CFO or it would have a new COO.

Whalley left Ken’s office and hustled up to the meeting with Andy, McMahon and others. Without board approval, he fired Andy Fastow and replaced him with McMahon. Both were shocked. Not that it was done, but that it was done like that. Whalley understood the situation. He was an excellent COO, seeing what was in front of him, not what he wanted to see. And he was moving quickly to fix it as best he could. He was sort of a little like Jeff Skilling in this way. Whalley immediately moved on to the next order of business: pulling down the revolving credit lines, which McMahon suggested the day before. Fastow objected but nobody listened.

McMahon deputized Ray Bowen, then they assembled a team who would try to rescue Enron from financial meltdown. He said he’d meet Bowen in the new Enron tower on the fourth floor in thirty minutes. There was no time to waste.

Dazed from being fired, Andy Fastow made it to his office in time to field a phone call from Jeff Skilling. Skilling had no idea that he’d just been fired and was surprised by the news. He tried to say a few encouraging words to his old friend, but Andy quickly got off the phone with him. Andy dialed his attorney, David Gerger. He then got in touch with Michael Rubenstein, another attorney. Andy and Lea had a conference call with Rubenstein that lasted two hours.

Ken Lay was spending the day in a management meeting at the Four Seasons Hotel. He directors listened as Ken Lay expressed concerns that Andy Fastow might not be able to fulfill his role as CFO any longer. He was unaware that Whalley had already tossed him out and filled the position with McMahon. John Duncan mentioned that his call with Andy the previous day had revealed that Andy made much more money on the LJMs than they’d been led to believe. He admitted to $45 million. Ken Lay was shocked; he felt then that he had been deceived by Andy Fastow. He would have to be terminated. But there was a catch. Andy Fastow had an employment contract that stated the board needed special cause to fire him. So one of the board members made a motion that Andy Fastow would take a leave of absence and McMahon would replace him, effective immediately. It passed unanimously.

McMahon was trying to keep calm over in the new Enron building, but he could not believe his ears. The financial SWAT team he’d assembled needed answers – how much cash Enron had on hand, how much it owed, a maturities schedule for debt. And nobody could produce any of it.

Ken Lay kept thinking about Jeff’s offer to come back to Enron. He was desperate and needed something to stop the vortex of doom that was sucking them all down. And maybe Jeff was that thing. He asked Whalley to meet with him and he agreed. He’d go to Jeff’s house — there was no frecking way Jeff could show up at the building without causing a huge commotion.

Jeff was waiting for him. Before he even stopped his car in Jeff’s drive, Jeff was outside, walking toward him. “What the fuck is going on?” Jeff demanded.

“It’s bad,” Whalley said. “Really, really bad.”

Back inside, they discussed facts and figures. Whalley estimated they needed about $3.2 billion to keep the trading business alive.

Jeff was immediately animated. He wanted to jet to New York immediately – just let him change out of his shorts and shave, and he was ready. He believed that if he could meet with the bankers, tell them there wasn’t a problem, that the banks would get their money back, it would all be okay. This was freaking Enron! There was no problem Enron couldn’t handle. It was the darling of Houston.. a shining star on Wall Street.

Whalley returned to the office a true believer. He told Lay that they should bring Skilling back. They decided they’d talk to the management committee about it.

But it wasn’t happening. Back at Jeff’s house, the phone wasn’t ringing. Jeff wasn’t having it. He called Whalley back, demanding to know what was going on, and trying to impress upon him that they needed to be in New York that night. They needed to be taking bankers to dinner, proving themselves. Whalley, who had shown a penchant for speed with Andy Fastow, said there was simply nothing to do: they had to have a management meeting.
When the call finally came, it was not good news. Skilling could not return to Enron. The management team had suddenly turned a cold shoulder to their former CEO.

This was one of those “if only…” moments. If only Jeff had been permitted to return. If the market saw that he was truly invested in the company, that he loved it… if only. Maybe there would have been a slight slowing of the hemorrhaging, just enough to catch their breath. Just enough to calm the panicking markets.

But it wasn’t to be. Skilling was out and he was going to stay out.

Enron issued a press release in the mid-afternoon:

ENRON NAMES JEFF McMAHON CHIEF FINANCIAL OFFICER

FOR IMMEDIATE RELEASE: Wednesday, October 24, 2001

HOUSTON – Enron Corp. announced today that it has named Jeff McMahon chief financial officer. McMahon had been serving as chairman and CEO of Enron’s Industrial Markets group. From 1998 to 2000, McMahon was Enron’s treasurer.

“Jeff has unparalleled qualifications and a deep and thorough understanding of Enron,” said Kenneth L. Lay, Enron chairman and CEO. “He has the trust and confidence of our investors and financial institutions.”

Andrew Fastow, previously Enron’s CFO, will be on a leave of absence from the company. “In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as CFO,” Lay said.

McMahon, 40, joined Enron in 1994 and spent three years in the London office as chief financial officer for Enron’s European operations. Upon returning to the United States, McMahon was executive vice president of finance and treasurer for Enron Corp. In 2000, he was named president and chief operating officer of Enron Net Works, where he had responsibility for Enron’s e-commerce activities.

McMahon has a bachelor’s degree in business from the University of Richmond in Virginia. He is a Certified Public Accountant, SFA registered and is a member of the American Institute of Public Accountants and Association of Corporate Treasurers.

Sherron Watkins was thrilled by the changing of the guard in the upper echelons of Enron. With her nemesis out as CFO and her friend Jeff McMahon in the power position, she thought for sure she could leverage the situation. In fact, she was pretty sure Jeff McMahon needed her advice on lots of things – like whether to get rid of Glisan. Now there was no love lost between Glisan and McMahon, but Sherron Watkins was not in a position to be advocating for firings. In any case, as soon as the email announcing McMahon’s new position was sent, she drafted a letter to McMahon:

—–Original Message—–
From: Watkins, Sherron
Sent: Wednesday, October 24, 2001 4:12 PM
To: McMahon, Jeffrey
Subject: Your new CFO spot and the job I want

Jeff, Congratulations, you deserve the job and can do it superbly! You know you will need to replace Ben Gilson as Treasurer – possibly with Bill Brown.

My issue, and I feel very strongly about this, is that I want to be on the crisis management team to determine how we save our trading franchise. It can disappear over night and I believe there’s more bad news coming re: these raptor deals (ie, restatement). I have clearly proven myself to be the only person at Enron that had the character, at great risk to my own career, much less personal risk, to go to Ken Lay and let him know what was going on here. I resent all these late comers joining the band wagon – it’s damn easy to make a statement now, when Ken has made the hard decision to unwind these deals and write them off. Mainly I resent being stuffed into a holding tank, I should not be the pariah here! Despite your comment to me several weeks ago when I told you that’s how I felt and you replied “what did you expect?” I have been professional in this 100%, I went to Ken and Ken alone, in contrast to yesterday’s VP Jim S. who put Ken on the spot by asking unanswerable questions at the all employee meeting. I hope to meet with Ken Lay soon. But I’d like to talk to you about my role in the ‘inner circle’, because I firmly believe I deserve it and have proven so by my past evaluations of the negative impact of these structures and then by my actions in doing something about it. You can help me with your endorsement of me to Greg Whalley, Mark Frevert and Ken Lay. I hope I have it. Thanks and good luck in the new job,

Sherron

What a delusional psychopath.

But anyway, after she sent that crazy, self-serving email, she forwarded it to Cindy Olson with a message:

—–Original Message—–
From: Watkins, Sherron
Sent: Wednesday, October 24, 2001 4:14 PM
To: Olson, Cindy
Subject:FW: Your new CFO spot and the job I want

Cindy, I sent this to Jeff McMahon today. I wanted you to see it. You can forward it to Ken if you’d like – I am very interested in speaking with him as soon as that can be arranged. I very much appreciate your insightful and professional support of me in all of this from day one! Thanks, Sherron.

Need I point out that Enron was on fire and this woman was only concerned with her career. McMahon was tied up with the financial SWAT team all day, trying to figure out the real position of Enron. He didn’t have time to baby-step Sherron Watkins career up the ladder. I do love the fact that she thinks she belongs in the “inner circle.” Again, I repeat what one of her former bosses told me: she was one of 180 VPs, she was utterly undistinguished and she knew absolutely nothing about deals. He did say she was aggressive and ambitious though, and that comes through in these emails.

Jeff McMahon called Ken Lay that afternoon, not to discuss the social climbing Watkins but to apprise him of the situation Enron was really in. Thirty billion in debt, about $10 billion current. They had to visit with the banks and try to renegotiate the debt. McMahon then called Whalley and told him the same thing.

Another option, Whalley said, was a merger. A merger with someone with a stronger balance sheet would at least save the company – there was no shame in that. McMahon said he’d give it some thought.

That night, McMahon and some other guys met at a dim, dank Houston landmark bar called Kenneally’s that supposedly serves the best pizza in town. McMahon had been thinking about Whalley’s idea of a merger. He threw it out there to see what the guys thought.

They pondered who would be a good candidate for a merger. Exxon? Shell?

“Dynegy,” someone said.

Today In Enron History

Tuesday, October 23, 2001.

The stock opened at $23.25, its high for the day.

Ken Lay convened a conference call with analysts to try and keep them apprised of what was happening ( Call transcript here ). The room at the Enron building was packed; Ron Astin, a V&E attorney, was present, as were Richard Causey, Ben Glisan, Greg Whalley, Mark Palmer, Andy Fastow. Tension zinged through the room. The only thing Whalley could say was that an SEC investigation had begun but he could give no other details, which was the only thing that the world wanted to know. Causey was uncomfortable; Fastow was angry.

Most of the analysts were polite, until Richard Grubman took the line. Only a few months earlier, Jeff Skilling had called the Highfields Capital short seller an asshole ( transcript here). Grubman asked a question about Azurix, saying that the water company would require a billion dollars of support from Enron, and had Enron taken reserves against that liability?

Causey answered that Azurix was well-positioned to handle all of its obligations. Grubman persisted, stating that the value just wasn’t there.

Ken Lay stepped in. “Richard… I know you want to drive the stock price down. And you’ve done a good job of doing that, but let’s move on to the next question.”

Lay and Grubman tangled for a few more moments.

Listening from home, Jeff Skilling must have been smugly satisfied. That guy was a pill, and it was difficult for even consummately professional Lay to gracefully handle him.

David Duncan had been watching the stock price during the conversation. It was chugging downward with every second.

An analyst from Goldman Sachs finally got to the question everyone wanted answered – whether there was more to come in terms of LJM. Ken Lay said that he couldn’t say much about LJM because of the SEC investigation.

Skilling thought this was exactly the wrong answer. This was what people wanted to know – the one question that had the potential to turn around the stock price and people’s perception of Enron, and Lay refused to answer it.

That was when Skilling called Enron. Lay was still on the call, but Skilling asked his secretary to have him call back asap.

When the call ended, the general feeling in the room was that they’d just created another disaster. A huge, ugly, nasty disaster.

Shutting off the webcast in his office, David Duncan reiterated the document policy and told his team to get in compliance with it.

When he was finished with the analyst call, Ken Lay called Skilling. Skilling asked to be brought back to Enron. He believed it would send a good signal to the street and help tourniquet the blood loss the company was experiencing. Ken Lay said he’d think about it.

A little while later, Ken Lay headed to the Imperial Ballroom of the Hyatt for an all-employee meeting ( Transcript here). The employees were worried about the stock price; many were angry. Ken Lay was calm and affable, as always, and assured them that the stock was way undervalued.

The employees had been asked to provide questions anonymously to Mr. Lay. Most of them were concerns about the stock price and what the company’s strategy would be going forward. Then he picked up a question written on a card and said, “A lot of these I think I’m going to have to handle, like this one.” He read: “I would like to know if you are on crack.”

The crowd laughed.

“If so,” he continued, “that would explain a lot. If not, you may want to start because it is going to be a long time before we can trust you again.”

The crowd laughed again. Even under attack, Dr. Lay looked relaxed and appeared to be enjoying himself, though we know that could not possibly be happening.

“I think that’s not a very happy employee,” Lay said. “I’m sure a lot of you have some hatred.” He paused. “No, I’m not on crack.”

The decision of the board to ask Andy Fastow how much he had earned with the LJM structures had been made last week. Today John Duncan and Mickey LaMaistre would ask. Jim Derrick, the firm’s general counsel, had composed a script (script here) to make sure they asked the right questions.

LaMaistre, who was in Colorado at the time, looked down at the script and began to read it.

“Andy, because of the current controversy surrounding LJM1 and LJM2, we believe it would be helpful for the board to have a general understanding of the amount of your investment and your return on investment in the LJM entities.” He asked four specific questions, which allowed for no wiggle room.

Fastow answered that he made twenty-three million on LJM1 and twenty-two million on LJM2. The actual number would be about fifteen million dollars higher — over sixty million dollars all told.

In Global Finance, two very bad things were happening. The first was that Enron’s short term loans in the commercial paper market weren’t rolling over. The second was that Ben Glisan was attempting to get some credit from bankers, to no avail. No bank wanted to do business with Enron as long as Fastow was still CFO. Thus Ben Glisan was put in the uncomfortable position of having to tell his boss that he was the corporate equivalent of anthrax.

Pug Winokur, a board member, and president Greg Whalley were at that moment fighting over whether Andy Fastow would stay as CFO. The board – and Pug – adored Andy. Whalley believed Fastow was poison.

Fastow and Glisan convened the finance team – including Rick Causey – trying to find a way out of the morass of problems that had been dumped on their laps. Whalley suggested they call Jeff McMahon.

McMahon and Glisan were not on good terms. Just three days earlier McMahon had tried to fire Glisan. But the Boy Scout had survived. So when Glisan told him that the company was unable to roll commercial paper, McMahon could only roll his eyes. Obviously Glisan was too stupid to even know the words he was using.

“Ben, obviously you didn’t mean you couldn’t roll it,” McMahon said. Probably what had happened was that he couldn’t issue as much as the company would like, which was not a surprise in this market.

Then Andy’s voice came on the line. “No, Jeff. Ben is right. We were unable to find any buyers for our commercial paper.”

McMahon was stunned. And sickened. Through the astonishment of the situation, only one solution presented itself. It was time to draw down the revolving credit lines that backed the commercial paper.

Getting off the phone with Glisan, Causey and Fastow, McMahon then called Whalley. “We have a major liquidity crisis,” he said.

The stock closed at $19.79, a loss of 4 percent of its value.

Today In Enron History

Monday, October 22, 2001.

The stock opened at the high it would reach for the day: $24.

The SEC alerted the company that it had begun an investigation; it was not entirely unexpected since the Wall Street Journal had spent almost the entire previous week raising questions and accusing Enron of covering up the $1.6 billion loss. Questions had begun to swirl, and accusations. So when it finally happened, there was something almost inevitable about it. ( Press release here).

At 8am Ken Lay convened a meeting of Enron’s executives in the Dogwood room of the Hyatt Regency across the street from the Enron towers. Absent was Andy Fastow, who was currently meeting with Jordan Mintz in Fastow’s office. Ken Lay had asked him not to attend.

There was a lot to discuss: LJM, the write-downs, the SEC inquiry, the sinking stock. Ken Lay’s hope was that by having a very frank discussion, he might calm the company – and possibly come up with a short-term strategy that would halt the kamikaze death spiral that Enron was in.

Almost immediately, the meeting was bedlam, a scene out of the English parliament with executives yelling in the middle of the other’s questions and comments. Some believed the company should apologize and vow to do a better job of disclosure. Others yelled back that was nonsense, that taking a defensive posture was absolutely the wrong thing to do.

Ken Lay reiterated his support (and the Board’s) for Andy Fastow. In the end, nothing was really solved by this meeting, but at least it must have been crystal clear to Ken Lay that with so many executives calling for Fastow’s neck, he could not remain CFO for long. In fact, he had two more days in that role.

At 10:30 Andy Fastow called Mike Edsall, an attorney at Kirkland & Ellis, LJM’s outside counsel. They spoke for half an hour.

From 12:30 to 2pm, he met with Houston attorney David Gerger- who would become his attorney through-out the Enron trials. One can speculate what was going on here, but I’ll just assume he was eager to catch up with an old friend. (Gerger was a friend of Lea Fastow).

At 3pm, Ken Lay hosted a special Board of Directors meeting, which Ken Lay again asked Andy Fastow not to attend. Ben Glisan made a presentation, noting that demand for the company’s bonds was soft, but restating that Enron had plenty of liquidity. After a brief discussion with Rick Causey about an arcane accounting structure of Azurix, Ken Lay asked if any of the Board members if they knew how much money Andy had made from the LJM structures. Nobody knew. The time had come to just ask him. Two directors, John Duncan and Mickey LeMaistre were appointed to call Fastow and ask him.

At 3:30pm Houston time, Enron stock closed at $20.65, having lost 20.7% of its value since Friday.

At 4pm, Fastow had another phone conversation with Mike Edsall lasting for one hour.

At 5pm, Fastow attended a strategy meeting to prepare for the next day’s special investor conference call. In attendance were Ken Lay, Greg Whalley, Mark Koenig, Rick Causey, Steve Kean, and Ben Glisan.

At 6pm, the meeting broke up and most of the executives left for the annual fundraiser at the Holocaust Museum, which was also an occasion to honor Jim Reilly of Salomon Smith Barney. Andy Fastow, having been offered a chance to speak about his contribution to the museum, took a special moment to acknowledge Ken and Linda Lay, saying that the couple were Lea and his own personal role models and paragons of community service. Though I do not know this, I think it is reasonable to assume that Andy knew at this point that the walls were closing in. He’d been locked out of two critical meetings that day. He was on the phone with lawyers. He wasn’t stupid. Putting those three factors together, it not difficult to arrive at the conclusion that he definitely knew something was very wrong. I believe his rather slobbery display over the Lays that evening was an attempt to charm and woo Ken back into his corner. Ken had always adored Andy — I think Andy was trying to remind him of that.

That night, about the time everyone was driving home from the gala, an automated email went out to all Enron employees reminding them that the Enron Savings Plan was moving to a new administrator, and that October 26 would be the last day they could touch their funds until November 20.

Transforming Enron Corporation: The Value of Active Management

I made a marvelous discovery today! I found this article in the Journal of Applied Corporate Finance by VP of Research Vince Kaminski. There are some great quotes by Jeff Skilling, Ken Lay and others. But this one, by Andy Fastow, made me sigh with nostalgia:

“If you ask an outsider what industry Enron is in they will say energy. If you ask an insider, they will tell you we’re in the risk management business. We provide certainty of delivery and certainty of price.”

This is Andy Fastow speaking of the direct bloodline to Enron’s Gas Bank, possibly the company’s first large-scale project that sought to provide – as he says – certainty of delivery and price.

Oh, Andy. You’re making me emotional this morning.

Today In Enron History

October 18 was a frenetic day for everyone at Enron. Ken Lay and a few others were on the east coast speaking with investors. Back in Houston, Mark Palmer at Corporate was getting the crap beat out of him by reporters at the Wall Street Journal.

Both Rebecca Smith and John Emnshwiller had been contacted by Jim Chanos. He called Emshwiller first to inform him that he had “missed” the $1.2 billion equity write-down that was mentioned in Enron’s conference call. Then he called Rebecca Smith and told her not only about the write-down (which as a journalist she should have gotten herself) but supplied her with the third quarterly report for LJM2 investors – and implied there was something unsavory about it. Thus, Rebecca Smith called Mark Palmer and yelled at him for “trying to cover up” the $1.2 billion – which Ken Lay announced on the phone to journalists and analysts that morning. She then dug into the LJM issues.

Meanwhile, Jim Derrick, general counsel for Enron, got a call from the SEC. They were opening a “preliminary inquiry” into the company’s dealings.

A few hours after hanging up with Rebecca Smith, Palmer picked up the phone and heard her screechy little voice yapping at him again. She was curious about funds from Raptors going to Andy Fastow and Michael Kopper. She also said that somebody (probably Sherron Watkins) said that Jeff McMahon heard bankers complaining that they were being forced to do deals with LJM to get a seat at the Enron table.

By this time, James Derrick had called V&E lawyers. The V&E lawyers called McMahon and asked if it was true about Andy corralling bankers by forcing them into LJM deals. McMahon said it was not true.

With all the stuff happening in Houston, Ken Lay cut short his trip and headed back to the Lone Star State.

Andy Fastow’s CFO Magazine Moment

Dang it, I should have posted this on October 1. This is the infamous CFO magazine article, published in 1999, that featured our [misunderstood? brilliant? criminal? hapless? nicholas-cage-caliber-cray-cray?] financier. Enjoy!

ANDREW S. FASTOW – ENRON CORP.
Category: CAPITAL STRUCTURE MANAGEMENT How Enron financed its amazing transformation from pipelines to piping hot.
Russ Banham – CFO Magazine
October 1, 1999

When Andrew S. Fastow, the 37-year-old CFO of Enron Corp., boasts that “our story is one of a kind,” he’s not kidding. In just 14 years, Enron has grown from a heavily regulated domestic natural-gas pipeline business to a fully integrated global energy company with thriving activities in natural gas, electricity, infrastructure development, marketing and trading, energy financing, and risk management. And much of that growth has been fueled by unique financing techniques pioneered by Fastow.

“When I came here in 1990, Enron was a company with a $3.5 billion market capitalization,” says Fastow. “Today, we’re around $35 billion, and that’s without issuing a whole lot of equity. We’ve increased shareholder value, grown the balance sheet, maintained a stable outlook from the rating agencies, and achieved a low cost of capital.”

In fact, when energy stock analysts look for paradigm companies to vaunt, they point resolutely in the direction of Houston-based Enron, with $31 billion in revenues last year. And when they seek to explain how Enron has remade itself so completely, they point to “remarkably innovative financing.” Says Ted A. Izatt, senior vice president at Lehman Brothers Inc. in New York: “Thanks to Andy Fastow, Enron has been able to develop all these different businesses, which require huge amounts of capital, without diluting the stock price or deteriorating its credit quality– both of which actually have gone up. He has invented a groundbreaking strategy.”

Fastow’s expert balancing act, in fact, has earned him this year’s CFO Excellence Award for Capital Structure Management. “We needed someone to rethink the entire financing structure at Enron from soup to nuts,” says Jeffrey K. Skilling, Enron president and chief operating officer. “We didn’t want someone stuck in the past, since the industry of yesterday is no longer. Andy has the intelligence and the youthful exuberance to think in new ways. He deserves every accolade tossed his way.”

Looming Legacy
Enron’s challenge in entering multiple deregulating energy markets has been to secure the necessary capital without sacrificing its credit rating. And that challenge was particularly apparent in 1997 when the company’s debt load, as a result of enormous growth, was higher than was consistent with its BBB+ credit rating. “Retaining a high investment grade rating was critical to the success of our energy franchises,” Skilling says. “If we were downgraded, we could lose critical market share in North America.”

One option was to post significant collateral to continue doing deals, anathema to both Skilling and CEO Kenneth L. Lay. So instead Fastow, who at the time was the company’s senior vice president of finance, reorganized finance into an internal capital-raising machine. “We transformed finance into a merchant organization, one engaged in the intermediation of both commodity and capital risk positions,” he recalls, adding “Essentially, we would buy and sell risk positions.”

Such a transformation, however, required a team of finance personnel with the skill sets to develop capital structuring and structured finance deals. Consequently, Fastow tripled the staffing devoted to the company’s financing activities to more than 100, culling a diverse group of financial experts from commercial banking, investment banking, corporate finance, and the rating agencies. Their mandate: sell capital risk so it becomes a competitive advantage.

The upside potential of such an endeavor–for both the company and the team–were huge. The natural-gas and electricity industry, in all practical respects, is the largest and fastest- growing industry in the world today, in terms of both capital investment and revenue. But to launch an energy trading operation required a reservoir of capital just to get started. And therein lay the rub: Conventional financing techniques would jeopardize its BBB+ rating from Standard & Poor’s and other agencies, raising the cost of capital.

“We couldn’t just issue equity and dilute shareholders in the near term,” he says. “On the other hand, we couldn’t jeopardize our rating by issuing debt, which would raise the cost of capital and hinder our energy trading operations.” Plus, he says, “there was a one- to-three-year lag time” before Enron would receive any cash flow from its investments.

“Here we were, this big company by any standard,” he says, “with $31 billion of assets on the balance sheet and $50 million off the balance sheet, yet we were anemic relative to the opportunities.”

Walking the Tightrope
To solve the dilemma, Fastow first decided to capture the attention of the rating agencies, sending a message that Enron placed a high importance on its credit rating. The way he would do that, he planned, was to issue equity. Two months after he was named CFO in March 1998, Fastow delivered the strategy to Enron’s senior management. At first, they were disinclined. “Historically, we had been a company that traded on an earnings-per-share multiple,” Skilling notes. “Frankly, we were reluctant to dilute the share price. But Andy convinced us–and, ultimately, the market– that issuing equity would be accretive to shareholders if a comprehensive road show was organized.”

Subsequently, Enron issued 17.2 million shares to raise more than $800 million in equity, its first significant public offering of common stock in five years, with no share-price dilution. The rating agencies responded enthusiastically. “Andy has made it clear that maintaining the credit quality of the company is job one,” says Ron Barone, a director at New York­based Standard & Poor’s. “He’s been able to get the company to focus on cash flow to maintain credit quality, as opposed to managing the balance sheet, which Enron does well anyway. Cash is king, and Andy knows that.”

The second part of the action plan was the sale of assets. Under Fastow’s direction, each business unit was required to identify strategic assets that would remain in the portfolio. Others determined to be nonstrategic were put on the block. In 1998, Enron reduced its portfolio by a third, selling more than $1 billion of assets–a mix of power plants, pipelines, and subordinated- debt investments–with no negative earnings impact. “For every dollar I sold down, I reinvested it easily in a manner to generate higher returns, which then increased the return on equity and earnings,” Fastow says.

He then turned his attention to new forms of capital raising, creating an asset- securitization program in mid-1998. The first target was CoGen Technologies, a $1.1 billion acquisition. “This was a unique idea,” Skilling says. “Andy saw that the off-take contracts provided enough headroom to pay for the entire acquisition via a securitization of the contracts. This enabled the company to achieve an incredibly low cost of capital, while allowing 100 percent debt financing with no negative credit impact.”

Other innovative financing deals followed. Fastow financed two acquisitions–the $1.3 billion purchase of Elektro, Brazil’s sixth- largest electricity distributor, and the $2.2 billion purchase of Wessex Water Plc, a U.K.- based water company–through a contingent equity issue that was used as collateral for a nonrecourse debt issue. Shareholders were informed that the acquisition financing for Wessex would be replaced with permanent financing on terms that would maintain the company’s capital structure. “Under Andy’s direction, we issued mandatory convertible preferred shares into a trust,” Skilling explains. “Those trust assets were then used as collateral for a $1.5 billion 144A debt offering.”

Enron then committed to issue an initial public offering on the water company, or the trust would sell securities within three years. As a result, the company received equity treatment from the rating agencies, while raising capital at debt pricing in one of the largest 144A transactions ever executed. Astonishingly to all but Fastow, the company achieved debtlike financing on an equity issue that was nondilutive. And an IPO was filed within six months of the Wessex acquisition.

Numbers Tell the Story
Despite the traditional rules of financing, Fastow reduced the balance-sheet debt, maintained the credit rating, and reduced the cost of capital while simultaneously growing the balance sheet. In just the last two years, Enron has nearly doubled its total assets from $16 billion to $30 billion–without shareholder dilution and without a drop in the company’s credit rating. “He has successfully financed billions of dollars in a manner that has held credit quality,” says S&P’s Barone. “And that is not an easy thing to do. It is a testament to Andy’s focus on cash flow and his ability to think outside the box.”

Highlights of Andy Fastow’s Testimony

One of the last issues raised in Fastow’s testimony was a series of calls from Skilling in October 2001, after Skilling had resigned, asking Fastow “why Enron wasn’t telling its story,” when The Wall Street Journal was writing about LJM. Skilling said that “all the transactions were proper and fully disclosed,” and that “shareholders should give us medals for doing all these deals,” Fastow testified. On redirect by prosecutor John Hueston, Fastow said he didn’t believe Skilling was urging him to go public about their alleged secret deals, but rather “The way I heard it was, ‘Toe the party line’ ” about LJM, he said.

* * *

Ken Lay’s lawyer Mike Ramsey asked Fastow on cross-examination,”In connection with stealing from Enron, you were just looking Mr. Lay in the face and telling him a lie?” Fastow replied: “Yes, I was not loyal to him or Enron when I committed those crimes.”

* * *

Skilling’s attorney Daniel Petrocelli questioned Fastow about the authenticity of the “global galactic” memo. “Is there some possibility, sir, that later on, having perhaps lost or tossed out the original, you went back and recreated or reconstructed the list?,” Petrocelli asked. “No, sir,” Fastow replied.

* * *

Petrocelli also asked Fastow whether he was “100% certain” that the initials on the global galactic list were indeed those of former top Enron accountant Richard Causey. “I recall being there when Mr. Causey initialed them, seeing him do that,” Fastow said.

* * *

Fastow testified about a list known as “global galactic,” that documented profits promised to partnerships run by Fastow when they did deals with Enron. “We had side agreements. That’s how we did business. This was a list of side agreements after the agreements had been entered into,” Fastow said. “Because the list was getting long, this was my way of keeping track of it, and [assuring] Mr. Causey, he was keeping track of it the same way.”

* * *

Fastow testified that Causey not only approved global galactic but assured him Skilling was on board. But Petrocelli pointed out that Skilling didn’t initial the document. “If you really wanted to be sure Mr. Skilling was on board, you could have taken the 60 seconds to walk from your office to his office, show him these pieces of paper and have him initial them,” Petrocelli said. “I suppose so,” Fastow replied, adding, “It never dawned on me that it would be necessary to do so.”

* * *

Petrocelli asked Fastow about the infamous Nigerian barge deal involving LJM2 and four former Merrill Lynch employees who served prison sentences over their involvement in the deal. “I believe I would not have acquired the barges without that bear hug” from Skilling, Fastow said. “I did that largely based on my understanding that LJM2 would have a similar guarantee from Mr. Skilling that it would be taken out in the future if necessary without a loss and its rate of return.”

* * *

Fastow testified that former chairman Ken Lay was at a meeting in August 2001 in which he heard about a “hole in earnings” at Enron, just days before he gave a BusinessWeek interview claiming Enron was in its “best shape” ever. Fastow said of the Lay interview, “I think most of the statements in there are false.”

* * *

In a heated cross-examination by Skilling lawyer Daniel Petrocelli, Fastow admitted, “I believe I was extremely greedy, and that I lost my moral compass, and I’ve done terrible things that I very much regret.”

* * *

Petrocelli, at one point, told Fastow that his answers sounded well-rehearsed, to which Fastow replied: “With all due respect, your questions sound very rehearsed to me.” Petrocelli shot back, “We’re talking about the fact that your wife, because of your conduct, spent one year doing hard time. And you think that’s funny?” Fastow answered, “No, sir, it is not funny at all.”

* * *

Lay opted to characterize a loss on an investment in the third quarter of 2001 as “nonrecurring,” even though a gain on the same holding was earlier characterized as “recurring,” Fastow testified, adding, “I thought that was an incorrect accounting treatment.”

* * *

By October 2001, Enron’s suppliers refused to trade with the company and Fastow testified that he feared the company would collapse and that he and an aide went to Lay to warn him. “I said I thought this was a death spiral, a serious risk of bankruptcy. I said the majority of trades being done were to unwind positions.”

* * *

“Within the culture of corruption Enron had, a culture that rewarded financial reporting rather than rewarding economic value, I believed I was being a hero. I was not. It was not a good thing. That’s why I’m here today.”

* * *

LJM1, was designed to help the company “solve a problem,” Fastow testified. “We were doing this to inflate our earnings, and I don’t think we wanted to show people what we were doing.”

* * *

Fastow quoted Skilling as saying, “Get me as much of that juice as you can,” after Fastow informed him that more money would need to be raised to continue making deals like LJM1.

* * *

Fastow testified that partnerships like the LJMs were willing to do deals that Enron “just couldn’t do with others” because they were too risky or didn’t make economic sense.

* * *

Fastow testified about pressure from Skilling to have one of the LJMs buy a minority stake in a Brazilian power plant owned by Enron because Enron’s South American unit was struggling to meet its earnings target. “I told him it was a piece of s–t, and no one would buy it,” Fastow said, adding that he relented, in part, because Skilling assured him he wouldn’t lose money on the deal. Fastow testified that there were many more “bear-hug” guarantees like this from Skilling in mid-2000.

* * *

Fastow testified that the LJMs were legal and did many legal deals, but “certain things I did as general partner of LJM were illegal.”

* * *

Skilling was concerned, Fastow testified, that off-balance-sheet deals like the LJMs would “attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses.”

* * *

Fastow tearfully admitted that he “misled” his wife about some of the money the couple earned from Enron-related deals. “She would not, in my opinion, have signed a fraudulent tax return,” Fastow said. Lea Fastow served one year in federal prison for filing a false tax return.

* * *

Fastow said he instructed Michael Kopper to send $10,000 checks to each of his sons. The checks were portrayed as gifts to the boys, but really they were proceeds from a business deal. “I shouldn’t have. It was the wrong thing to do.”

Judge Hoyt: Crazy & Racist

Judge Kenneth Hoyt, who oversaw the case against Andy Fastow, is a googler’s dream. Even more than Judge Gilmore, who consistently rates at the very bottom of judges in the US, Judge Hoyt is amazing for his entertainment value. For instance, Hoyt, who is African-American, has refused to accept evidence about the rate of lupus among blacks “because white people wrote it.” He has denied that race is a factor in sickle cell anemia – a condition that affects only black people.

He also claims physical differences among races were the product of their environments. “Why do you think Chinese people are short? Because there is so much damn wind over there they need to be short,” he was quoted as saying a few years ago. “Why are they so tall in Africa? Because they need to be tall. It’s environmental.

“I mean, you don’t jump up and get a banana off a tree if you’re only 4 feet. If you’re 7 feet tall and you’re standing in China, then you’re going to get blown away by that Siberian wind, aren’t you?”

Our judicial system at work, ladies and gents.