On December 6, 1999 the Lagos (Nigeria) government signed a deal with Enron to provide power to Lagos State. The deal was worth $500 million dollars, and would be developed in two phases.
The first phase would provide 90 megawatts of power by Enron through three diesel units mounted on barges and anchored off Lagos. The second phase would involve building a new 548 megawatt gas turbine to be serviced by a 290-km offshore natural gas pipeline from the Niger Delta.
The project was important to Nigeria because it was plagued with persistent power crises and blackouts. But soon after the phase one barges were in place, controversy erupted. Like all of Enron’s international projects, which Jeff Skilling despised, this one was immediately mired in political shenanigans. The World Bank declared the deal “unduly favorable” to Enron. The World Bank believed Enron was charging too high a price for fuel and didn’t accept full responsibility for the risks of building the plant.
Back in Houston, Enron had decided to sell its interest. This would not have been queer at all because Jeff Skilling did not like international assets and he was actively campaigning to sell them. His infamous rows with Rebecca Mark were not so much a power struggle but a fundamental disagreement about basic business principles: Skilling’s opinion of international projects remained dour while Mark pushed for an ever-widening Enron footprint across the globe.
A phone call between Andy Fastow and the Merrill Lynch bankers on December 1999 is uncontested. Also uncontested is that an agreement was reached between Enron and Merrill Lynch, in which Merrill would buy Enron’s interest in the barges for twelve million dollars. At trial, the prosecution alleged that one of the bankers, Daniel Bayly, received oral assurances from Enron CFO Andy Fastow that Merrill would get its money back with interest in six months, from either Enron or another buyer.
If such assurances were uttered, the transaction was not a true sale because Merrill never assumed the risk of ownership.
At trial, the prosecution was strangely incurious about the actual conversation. At the Nigerian Barge trial, they didn’t call anyone who was actually on the phone call to testify. They did, however, call several people to testify on the subject who were not party to the phone call, such as Michael Kopper and Ben Glisan. At Jeff Skilling and Dr. Lay’s trial, Fastow was asked to read their testimony. He did so, and then testified thusly:
Q. Now, after having read through those pages, does that refresh your recollection at all about the events that transpired in December of ’99 concerning LJM having been approached and what it did in response to that approach about these barges?
A. No, sir. They’re largely contradictory to my recollection of events.
Astonishing. His two primary co-conspirators in other Enron transactions suddenly became unreliable?
Jeff Skilling was asked about the transaction during his direct testimony:
Q. One such transaction was the sale by Enron to Merrill Lynch. “When Enron was unable to find a true buyer for the3 barges by December, 1999, conspirators parked the barges with Merrill Lynch so that Enron could record $12 million,” et cetera. Now, focusing on that — well, let’s go to the next paragraph. I think it references you here. Okay. “As Skilling knew, Merrill entered into the Nigerian barge transaction based on a promise in a secret oral10 side deal that Merrill would receive a return of its investment11 plus profit within six months. As Skilling knew, the oral side deal was concealed from Enron’s auditors and the public.” Did you know any of that?
Q Did you — did you know of any secret oral side deal involving the Nigerian barge?
A I was — to be quite honest, I don’t know that I knew the Nigerian barge deal was even under — this is tiny. This is not something, typically, that would even make it to my level in the organization. So, I — no, I — I remember the Nigerian barge project. I don’t recall being involved in this transaction at year-end.
Q Mr. Fastow has identified one conversation with you on the subject.
Q And what he said — and I’ll paraphrase it. We can look at the testimony if we need to. Basically, he said that he had a meeting with you in which you asked him to buy the Nigerian barges or an interest in it, and you promised and you gave him a bear hug like the bear hug, he said, you gave him on Cuiaba. Do you recall that testimony?
A Yes, I recall that testimony.
Q Mr. Fastow then went on to say that he rejected your bear hug at that time because he wanted — he did not want to do the deal.
This always seemed like a gotcha moment to me. Fastow, who would buy any old piece of crap because Skilling allegedly assured him that he’d never lose money, suddenly gets cold feet on this $12 million deal? Fastow’s sudden attack of conscience strains credulity.
The Nigerian Barge deal, particularly regarding the miniscule funds it earned, illuminates a greater point about Jeff Skilling and Ken Lay’s innocence regarding all the charges against them.
If Skilling was so desperate to book a $12 million deal, and he knew the shenanigans that Fastow was involved in, then why didn’t Skilling set up another entity with Fastow to buy the barges outright, a la Chewco? In other words, why involved sophisticated bankers in the deal, especially since there was a pool of friends and family who were in on these “schemes”? Why borrow trouble?
And furthermore, if Enron was a weak company, drowning in unserviceable debt, then why did Skilling – who by all accounts was a good guy – immediately resort to fraud? Why not start with cutting costs at the company? Enron was a rich company, and management had no problem splashing down the best of everything for its employees: private jets, new art for the buildings, a new building, the finest ergonomic chairs, designed by Hermann Miller, extremely generous benefits packages, the finest technology… There was a lot of fat to cut if they needed to save money.
Instead, some of the brightest minds in the oil and gas industry slaved in those glittery skyscrapers trying to figure out how to scam $12 million?
The Nigerian Barge deal was an ordinary Enron deal that was later repurposed to signal widespread fraud within the company. Prosecutors worked hard to make the transaction appear less than honest, but the facts laid bare show that it was completely honest and in line with corporate objectives.