Today In Enron History

October 25, 2001

The stock opened at $16.40. It would close at $16.35. Enron’s stock would never close higher than it opened again, not even on the day the Dynegy deal was announced, and the October 25 loss would be one of the smallest ones Enron would know from here on out.

Steve Bergstrom, president of Dynegy, was like most oil and gas execs in Houston: he knew everyone. One of his friends was Stan Horton, CEO of Enron Transportation Services, which was basically Enron’s pipelines. Horton called Bergstrom and asked him to meet for lunch, and added that he’d like Greg Walley and Mark Frevert who was CEO of Enron Wholesale, to join them.

Bergstrom had floated the idea of combining Enron’s European trading ops with Dynegy’s and since both Whalley and Frevert were coming from trading backgrounds, it looked to Bergstrom like maybe Enron was coming around to that idea in light of the crisis.

They met at the Plaza Club at One Shell Plaza. On the forty-ninth floor, it has an astonishing view of Houston (speaking from experience, especially at night). Whalley gave it to him straight: they wanted to discuss a merger. With the whole company. Not just European ops.

Bergstrom, taken aback, was certainly open the idea. He said he needed to talk to Ken Lay directly. Whalley said that was no problem. A few hours later, Ken Lay got in touch with CEO Chuck Watson. They made an appointment to meet on Saturday at Ken Lay’s home.

Meanwhile, Enron had announced its plan to draw down its $3 billion in bank lines. The WSJ was all over that. They called Mark Palmer and during that conversation casually mentioned Chewco — what was that? Palmer said he had no idea.

Rebecca Smith and John Emshwiller had found the name in an LJM private placement document. Since Enron was in the throes of a crisis, they knew that they could get their names out there if they found a new controversy so they were attempting to find an angle nobody else had found yet. Chewco, it turned out, was that angle.

The article reads in part:

While Enron disclosed its Fastow-related transactions in SEC filings, a computerized search of the SEC’s database of public filings produced no reference to this other employee-related entity known as Chewco.

Chewco was established in 1997 “with approximately $400 million in capital commitments” to buy an interest in Enron assets, according to one of the partnerships documents. The document didn’t further specify what assets were purchased, and it didn’t disclose the financial impact of the transactions for either Chewco or Enron. Chewco was being run by Michael Kopper, a managing director in Enron’s Global Equity Markets Group, according to the document.

Enron, which has maintained that its complex financial transactions with employee-related entities were legal and properly disclosed, didn’t have any comment regarding its dealings with Chewco.

Mr. Kopper, who Enron says left the company this year to focus on helping to run the Fastow-related partnerships, didn’t return phone calls. A person at his office in Houston Thursday said Mr. Kopper was traveling. In response to questions about Chewco, an Enron spokesman would say only that “Michael Kopper was never an executive officer of Enron.” Mr. Fastow repeatedly has declined interview requests. He severed his relationships with the partnerships in July.

This statement is an apparent reference to SEC disclosure regulations regarding related-party transactions. Under SEC rule S-K, a company has to report any transaction that exceeds $60,000 and involves “any director or executive officer.” By contrast, Mr. Fastow, as CFO, would have fallen into that category, but Mr. Kopper, as managing director of a business unit, presumably wouldn’t have.

However, reporting guidance issued by the Financial Accounting Standards Board seems to have a broader definition, one that might include Mr. Kopper. According to FAS Statement 57, a related-party transaction involves a “material” piece of business between the company and a member of management. The statement defines management as directors, top officers, vice presidents in charge of major business units and “other persons who perform similar policy-making functions. Persons without formal titles may also be members of management.”

All that stuff about Michael Kopper is a transparent effort to cause trouble. Classic muckraking.

Inside Enron, Mark Palmer was trying to get some answers about Chewco so he could talk to Smith and Emshwiller about it. He wasn’t able to get good answers so he called a meeting with McMahon, Greg Whalley and a few others. Ken Lay got pulled in and basically everyone tried to cobble together what they knew about Chewco. Jeff McMahon mentioned that an issue was Michael Kopper’s partner was chief investor in the fund.

Ken Lay was confused. “He has another partner in this?”

“Um.. No,” McMahon said. “His.. lover. Michael Kopper’s gay lover.”

Ken Lay finally lost his composure. “What the fuck is happening here!?” he yelled.

The pressure Jeff McMahon was under during this time must have been otherworldly. He was working nonstop to keep the company afloat. Drawing down the bank lines was slated for that day, and the New York bankers weren’t happy about it. No bank had thought that Enron would draw down over $3 billion in one giant gulp. They didn’t want to send it. McMahon was a bulldog. “Send it,” he said.

“But … but.”

“Send it.”

Meanwhile, Andy Fastow, newly fired, spent the day on the phone with attorneys. From 11am to 1:30pm he was on a conference call with Michael Rubenstien, David Gerger, and Lea. Then from 1:30 to 3:00 he was on the phone with Gerger alone. Then at 5:30 he spoke to Gerger again for thirty minutes.

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.

Larry Ciscon Describes EIN

This is an email from Larry Ciscon to Rex Shelby and Mark Palmer. It describes the EIN in phases and is a very high-level, easy-to-understand summary.

What If EBS Had Survived?

What If EBS had not been pulled down by the Enron bankruptcy?

There would have been a big clash between the bandwidth traders who thought that was the future and the apps over the Net group who believed that was the future — Kevin Hannon, the consummate trader, and Scott Yeager, the prime evangelist for apps over the Net, would be at each other’s throat. Rex Shelby would attend the meetings, suggest EBS spin the apps over the Net into a separate business unit (which he really did). When the traders refused, Rex would leave EBS (cordially and on good terms), contract to use the EIN to launch an apps over the Net business, and become disgustingly successful.

(Note: The Modulus people actually developed a presentation to ECI in 1998 [before the acquisition] titled “Changing the Rules of the Industry: It’s the Applications, Stupid!”. So my “what if” scenario for Rex is really not so far-fetched.)

John Bloomer would have gotten fired and then prosecuted for stealing EBS technology (which he actually tried to do). Bill Collins would have gotten fired and ended up in an asylum when EBS turned out so successful. Joe Hirko would have become the CFO when Johnathan Schwartz of Sun was offered the CEO job. Larry Ciscon would be offered the CTO job, but would leave to create an Android-like operating system for Rexoogle.

Rexoogle being the name of Rex Shelby’s venture.

David Berberian and Mark Palmer would launch Rexoogle smartphones long before the iPhone. Ellis Giles would work with Ciscon to create the first fully functional tablets, called the RexTab.

Rexoogle headquarters would be located outside Fredericksburg, TX along a large flowing creek. The office space would be a strange combination of the sublime and the bizarre. The employees have a lot of say in what goes on, so the interior is quite eclectic. The carpet in the huge open, meandering lobby (which has lots of places to sit and drink coffee) is a shade of blue so beautiful that people are starting to spend too much time there without consciously knowing why.

Larry has a huge photo of his souped-up Mini Cooper on his door. The car contains the slogan, “Rexdroid Operating System — Lean, Mean, and Blazing Fast!”

During the annual May Day party on the Rexoogle grounds, Rex is showing a visiting reporter the site of a famous Texas Ranger/Comanche battle on the banks of the creek. In his enthusiasm for the topic, Rex slips on an exposed tree root and tumbles head-first into the creek. He pulls himself out, with a big smile on his face. Unfortunately, the reporter snaps a photo which then makes it into newspapers all over the country with “clever” headlines such as:

“Is Rex Shelby Too Wet Behind the Ears to Lead Rexoogle To Industry Domination?”
“Is Rexoogle Swimming Against the Current with their ‘Apps over the Net’ Concept?”
“Can Rex Shelby Keep His Head Above Water as the Competition Lines Up Against Rexoogle?”

And, of course, the gossip blogs:

“Beautiful Reporter Pushes Software Playboy into the Creek!”
“Terrorist Reporter Tries to Drown Texas Entrepreneur!”

Dear Mark Palmer

Dear Mark Palmer,

All your friends love you, so I do too. You have a wonderful reputation for creating kick ass PowerPoints, among other things. Which is why, when I found this I became quite amused. You worked for a Fortune 500 company, not a lemonade stand, and you were using Comic Sans? Really? I have no idea if that’s fucking adorable or lunacy. I’m leaning toward lunacy.

It looks like a serial killer’s document. A brilliant, crazy serial killer. I hope, since 1999, you’ve reconsidered your stance on that font.

I’ve forgiven you, and I hope we can put this unpleasantness behind us.

PS. Every computer in the world can read Arial. When it doubt, use arial.
PPS. I ultimately blame Rex Shelby for this. He knows why.

Enron PowerPoints Criticized By CNN

For the love of taco sauce. Now they’re making crap up about Enron PowerPoints:

Of course, we can’t be naive: a persuasive presentation isn’t necessarily a good presentation. In 2001, Enron Corp. executives Ken Lay, Jeff Skilling and Richard Causey presented PowerPoint slides at an employee meeting that winningly depicted the company’s robust health and the bright future of its projected earnings. By the end of that year the company was worthless. Eventually, the U.S. Department of Justice charged those executives with 10 counts of a variety of crimes — based on their presentations.

Pardon? Which presentation would this be? Can I have a date that it was presented? Or what was depicted, exactly? And what “10 counts of a variety of crimes”? I CALL BULLSHIT.

Meanwhile, the Enron scandal may have been preventable by the right presentation. In 1999, a presentation by the Arthur Andersen accounting firm feebly warned the Enron Board of Director’s audit committee of the company’s sketchy accounting. Had that presentation sounded a bold warning, the audit committee might have been able to save the company. For that matter, it might have saved Andersen, which did not recover from its role in Enron’s dealings.

No, Arthur Andersen did not recover from a voracious, vicious, mendacious, and illegal attack on the company which was later unanimously exonerated by the Supreme Court of the United States. Oh, and again, these make-believe PPTs may be great little details to prove that PowerPoint sucks, but I think the author of this essay is just making stuff up out of wholecloth.

And incidentally Enron did awesome PPTs. I’ve published several and have many more, which I will flash up over the weekend as time allows. But this is crap crap crap!

Mark Palmer in Broadband was a freaking PowerPoint wizard and Ryan S. in Tax was pretty awesome, and there are a few other great PPTs floating around, and great people made them.

And that is a stone cold fact.

UPDATE
I have emailed the author of that article and asked for details about the presentations she’s criticized. I will, of course, post any details she provides. This is the full content of my email:

Ms. Duarte,

I am a blogger for the Enron Blog (caraellison.wordpress.com) and I saw on your CNN essay that you cited two Enron-related presentations. In the first you said:

Of course, we can’t be naive: a persuasive presentation isn’t necessarily a good presentation. In 2001, Enron Corp. executives Ken Lay, Jeff Skilling and Richard Causey presented PowerPoint slides at an employee meeting that winningly depicted the company’s robust health and the bright future of its projected earnings. By the end of that year the company was worthless. Eventually, the U.S. Department of Justice charged those executives with 10 counts of a variety of crimes — based on their presentations.

Could you please tell me which presentation this is? Do you have it in your possession? If so, might I see it? I’m unfamiliar with the presentation you’re referring to and would like to clarify this point.

Also, which ten counts among the three executives were related to that presentation?

And lastly, you said:

Arthur Andersen accounting firm feebly warned the Enron Board of Director’s audit committee of the company’s sketchy accounting. Had that presentation sounded a bold warning, the audit committee might have been able to save the company. For that matter, it might have saved Andersen, which did not recover from its role in Enron’s dealings.

Again, would it be possible for you to share this presentation? Could you give me a date that this presentation was given and who was present?

I appreciate your assistance.

Thank you very much.

Cara Ellison

Today In Enron History

The day before, Bethany McLean had interviewed Jeff Skilling for an article she was writing for Fortune Magazine. In the interview, Bethany began to get into some issues that Skilling was not – at that exact moment- prepared to talk about. “I have six minutes,” he said, “before I have to be in another meeting.” But he volunteered to send accountants and other finance executives to New York to help Bethany understand how Enron made its money. Bethany replied that she was going to run the story with or without his help and Jeff replied that he believed it was unethical to run the story without allowing Enron a chance to answer the questions McLean was raising. Bethany accused Skilling of then saying that Fortune only wanted to “throw rocks at the company.”

On February 15, 2001, Mark Palmer, head of publicity for Enron, and CFO Andrew Fastow flew to New York. In Smartest Guys In The Room Bethany complains that they were in a small, dark conference room – though they were in her office, and ostensibly she could have found a more suitable place for the meeting. She says that at the end of the two-hour meeting, as others were packing up to go, Andy Fastow said to her, “I don’t care what you say about the company. Just don’t make me look bad.”

Since Bethany McLean is the only source for the quote, it’s difficult to take seriously.  Like the “throwing rocks” comment, these remarks don’t sound like the people they are attributed to.

Oddly, Bethany McLean has never revealed what was said about the company in that meeting, and if Mark Palmer and Andy Fastow were any help in clarifying her confusion over Enron.  Like most of Bethany’s career, the substance just manages to get… left behind.