A tale of Enron's strategies that led to its fall

Riddled with secrets, officers struggled to keep the company together


HOUSTON - Investigators picking through the wreckage of Enron Corp., seeking to understand what caused its collapse in December, have explored its Byzantine partnerships and financial strategies.

From these details, a clearer picture has begun to emerge about what happened inside the thick walls of Enron during its past 11 months. It is two completely different tales - the public image, polished by its senior officers, of an innovative powerhouse on the verge of reshaping the world, and the hidden truth of a company riddled with secrets, whose executives were struggling to hold it together.

On Jan. 20, 2001, Kenneth L. Lay, Enron's longtime chairman and chief executive, watched the motorcade of President George W. Bush move past the reviewing stand, near where he had just taken the oath of office.

Lay was in the exclusive "Pioneers" box on the route amid an elite group of about 200 men and women who had each raised $100,000 for Bush's campaign.

The company's stock price was hovering around $80 a share - not its high, but not far from it. And on Feb. 5, scores of special bonus checks were cut for Enron executives, who would collect tens of millions of dollars because of the company's strong reported profits.

The mood that day was far less jubilant in the nearby offices of Arthur Andersen, Enron's outside accounting firm. There, David B. Duncan and Thomas H. Bauer - two of the firm's lead accountants on the Enron account - met with six colleagues. Six more Andersen executives were patched in by speakerphone.

The Andersen accountants debated a critical point: What should they do about two partnerships - called LJM1 and LJM2 - that had been set up 18 months earlier by Enron's chief financial officer, Andrew S. Fastow?

Since mid-1999, Enron had engaged in a score of transactions with the Fastow partnerships.

On its face, this arrangement partly reflected a common financing technique. And Enron's board, which had approved Fastow's dual role in 1999, had ordered that top management - Richard A. Causey, the chief accounting officer; Richard B. Buy, the chief risk officer; and Jeffrey K. Skilling, the company's second in command - carefully monitor these deals.

Later, the board's special investigators concluded that these partnerships, and others they spawned, had been twisted at Enron into a tool for making the company seem far more profitable than it really was.

If those allegations are true, there is no sign from the notes of the Feb. 5 meeting at Andersen's Houston office that anyone there knew it. Still, the accountants seemed uncomfortable with the LJM arrangement, and they drew up a "to do" list.

But one week later, on Feb. 12, Enron board's audit and compliance committee held a meeting, and both Duncan and Bauer from Andersen attended. Subsequent testimony by board members suggests that the accountants raised nothing from their list.

That same day, though, Enron's board approved a big decision: Skilling would be taking over as chief executive. Lay would remain as chairman.

Red flags

What made Enron's stock price so important was the fact that some of the company's most important deals with the partnerships run by Fastow - deals that had allowed Enron to keep hundreds of millions of dollars of potential losses off its books - were financed with Enron stock. Those transactions could fall apart if the stock price fell too far.

After 18 years as a tax attorney, Jordan Mintz moved to work in October 2000 as a lawyer with Fastow's finance division.

What he saw troubled him. Fastow was negotiating deals on behalf of partnerships across the table from his subordinates, who were representing Enron. Approval sheets for those deals had not been signed by Skilling, the chief operating officer. The situation seemed fraught with peril.

Eventually, on May 22, Mintz wrote a confidential memo to the Enron chief executive saying he wanted to bring over the unsigned paperwork for Enron's deals with Fastow's partnerships during the previous year so that Skilling could sign them.

Skilling never responded, according to Mintz's testimony.

But the stock prices fell, and the Fastow partnerships came under increasing pressure, pressure that would send Enron into a death spiral.

On Aug. 14, stunning the market, Skilling announced he was resigning after just six months as chief executive, noting undisclosed personal reasons.

Disturbing questions

"Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay?" a one-page unsigned letter to Lay read. After Skilling's resignation, Lay had returned as chief executive and had met employees, encouraging them to write about their concerns anonymously.

But this letter was not some mundane complaint. The writer described in detail problems with Enron's partnerships, problems that the letter claimed would cause huge financial upheavals at the company in as little as a year.

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