Conspiracy of Fools: A True Story

Conspiracy of Fools: A True Story

by Kurt Eichenwald

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Overview

From an award-winning New York Times reporter comes the full, mind-boggling true story of the lies, crimes, and ineptitude behind the Enron scandal that imperiled a presidency, destroyed a marketplace, and changed Washington and Wall Street forever.

It was the corporate collapse that appeared to come out of nowhere. In late 2001, the Enron Corporation—a darling of the financial world, a company whose executives were friends of presidents and the powerful—imploded virtually overnight, leaving vast wreckage in its wake and sparking a criminal investigation that would last for years.

Kurt Eichenwald transforms the unbelievable story of the Enron scandal into a rip-roaring narrative of epic proportions, taking readers behind every closed door—from the Oval Office to the executive suites, from the highest reaches of the Justice Department to the homes and bedrooms of the top officers. It is a tale of global reach—from Houston to Washington, from Bombay to London, from Munich to Sao Paolo—laying out the unbelievable scenes that twisted together to create this shocking true story.

Eichenwald reveals never-disclosed details of a story that features a cast including George W. Bush, Dick Cheney, Paul O’Neill, Harvey Pitt, Colin Powell, Gray Davis, Arnold Schwarzenegger, Alan Greenspan, Ken Lay, Andy Fastow, Jeff Skilling, Bill Clinton, Rupert Murdoch and Sumner Redstone. With its you-are-there glimpse into the secretive worlds of corporate power, Conspiracy of Fools is an all-true financial and political thriller of cinematic proportions.

Product Details

ISBN-13: 9780767911795
Publisher: Crown Publishing Group
Publication date: 12/27/2005
Edition description: ANN
Pages: 784
Sales rank: 244,901
Product dimensions: 6.10(w) x 9.30(h) x 1.60(d)

About the Author

Kurt Eichenwald wrote for the New York Times for more than twenty years before becoming a senior writer for Newsweek. A two-time winner of the George Polk Award for excellence in journalism and a finalist for the 2000 Pulitzer Prize, he has been selected repeatedly for the TJFR Business News Reporter as one of the nation’s most influential financial journalists. His book, The Informant was turned into a major motion picture. He lives in Dallas with his wife and three children.

Read an Excerpt

CHAPTER 1

The two men pushed through the glass-and-chrome doors of the Enron building and hurried down the polished granite steps outside. Across the street, a white fountain resembling a mammoth three-tiered wedding cake bubbled in the brilliant winter morning. The sounds of splashing receded as the men crossed Smith Street, a main artery for downtown Houston. Rounding a corner, the older man, David Woytek, glanced at his watch. Fifteen minutes to go. Fifteen minutes, he felt sure, till all hell broke loose.

Without a word, he picked up the pace, followed in step by John Beard, a colleague from Enron's internal-audit department. On that morning, February 2, 1987, the two were eager to meet with Ken Lay, to finally prove that two of his underlings had cheated his company. Beard carried the damning evidence—bank records showing millions of dollars siphoned from Enron into personal accounts, transactions so suspicious that the bank itself raised a red flag to Woytek. But, most delicious of all, the executives under investigation—Louis Borget and Thomas Mastroeni, two top officers in Enron's oil-trading unit in Valhalla, New York—would be at the meeting, defending themselves with what Woytek and Beard were certain would be a tangle of lies.

The proof was strong, but the auditors knew it would need to be. Borget was Enron's earnings Svengali, a man whose business reliably brought in tens of millions of dollars in badly needed annual profits. He and Mastroeni, his top finance executive, were rumored to consort with the rulers of Saudi Arabia and Kuwait, contacts everyone believed gave them strong knowledge about the inner workings of OPEC, the Arab petroleum cartel. Taking them down would mean losing their connections and dismantling their profit machine at a time when Enron was struggling.

But Woytek and Beard believed Lay would have no choice; their case was ironclad. Mastroeni had opened an Enron corporate account at Eastern Savings Bank, listing himself and Borget as the signers. But neither had bothered to tell Enron about the account, and it was not recorded in the company's books. Millions in corporate cash had been wired there, about half of which ended up in Mastroeni's personal accounts. The dealings had all the earmarks of some multimillion-dollar scam, with Enron as the mark.

Woytek and Beard turned onto Dallas Street, two blocks from their destination, Enron's other offices at the Houston Natural Gas building. The streets of downtown seemed almost abandoned that morning, with only a smattering of cars around, a reminder that the years-long oil bust was still wreaking its havoc on Houston.

The two auditors walked into the lobby, taking the elevator to the sixteenth floor. There, a receptionist directed them to the office of Mick Seidl, Enron's president. Lay had borrowed the office for the morning meeting while Seidl was on the road.

They arrived in the doorway of the large, wood-paneled office. Borget and Mastroeni were already inside, deep in discussion with John Harding and Steve Sulentic, the home office's nominal supervisors of the oil unit. When the auditors walked in, the conversation stopped.

"Hey," Harding said. "Good to see you."

There were handshakes all around. Borget picked up a thick stack of documents and slid them across the table.

"This is a memo with everything you need to know about these transactions," he said. "All the relevant banking records and other material are attached."

"Thanks," Woytek replied. "We'll look through it."

Beard picked up the documents and left Seidl's office, following Woytek to an unoccupied secretary's desk. He set the documents down, leaning over as he read them. "CONFIDENTIAL," the first page blared. "Memo for the File."

Step by step, the memo described how the transactions came about. In one paragraph it mentioned some attached bank statements. Beard thumbed through the pages and found the records. He studied them for an instant.

Wait a minute.

He scanned the records again, fearful he had made some mistake. No, there was no doubt. He glanced over at Woytek.

"Dave, come here," he said. "Take a look at these."

Woytek strolled over and skimmed through the statements. They were from Eastern Savings Bank, in the name of the oil-trading division. Nothing seemed surprising; the discovery of that account had set off the investigation. With an almost imperceptible shrug, Woytek looked at Beard, waiting to hear what he was missing.

"These are the same statements we already have from the bank," Beard said. "But this copy has been altered."

"You've gotta be kidding me. Show me our copy."

Beard fished through his briefcase, pulling out an almost-identical set of the statements. Woytek laid the pages side by side with the records from Borget.

Unbelievable. The statements were from the same account on the same date, but the numbers were different. The original records showed hundreds of thousands of dollars sloshing in and out. In this new copy, those transactions had simply disappeared. Woytek held Borget's records up to the light. No lines. No shadows. No telltale signs anywhere of an alteration. Somebody had put a lot of effort into this.

Woytek chuckled. These traders were planning to defend themselves to Lay—using dummied-up records? This meeting was going to be even more interesting than he had thought.

"Well," he said, looking up, "that settles it. Those two are gonna be fired today."

As the two auditors spoke, they saw Lay and Rich Kinder, Enron's general counsel, walking toward Seidl's office. Woytek and Beard gathered up their papers and stood to greet them. Everyone immediately followed Lay into the office and took a seat around the conference table.

After some chitchat, Lay opened things up. "Well, we know why we're here. So, Lou, why don't you go ahead?"

Borget handed out copies of the memo with the attached bank records. "As everyone's aware," he began, "questions have been raised about some of the trading operation's financial transactions. We want to go through them so that you know why these were done. I think everyone will be very satisfied with what they hear."

Borget and Mastroeni took turns laying out the story. Because of their huge profits in 1986, they explained, company managers had asked them to find a way to shift income into 1987, the current year; that way, Enron would have a jump on hitting its profit projections.

"Now, we were told to get that done using whatever legitimate business practice we could," Borget said, moving his hands as he spoke. "So we set up a system that's used by lots of other trading companies."

The idea was to conduct twinned trades that canceled each other out, known as a "book-out" or a "net-out." So, Mastroeni explained, they tracked down three trading companies—Isla Petroleum, Southwest Oil & Commodities, and Petropol Energy—that wanted to boost their 1986 earnings. Then, that December, Mastroeni and Borget entered into trades that gave profits to the competitors and losses to Enron. The plan was to reverse the trades in 1987, with Enron gaining the profits and the three others getting the losses. All the parties would walk away even and with exactly the results they wanted. The Eastern Savings account had been opened as a precaution, Mastroeni explained, to hold the money until the trades were completed. But since it was in the company's name, Mastroeni said, he had transferred the money to personal accounts, ready to be returned to Enron once the 1987 trades were conducted.

"How many other transactions have you guys done off the books?" Woytek asked.

"This is it," Mastroeni replied.

As the traders' words tumbled out, Woytek breathed deeply. This is the stupidest thing I've ever heard.

Sulentic broke in, looking Lay in the eye. "This was all just a misunderstanding, Ken. Lou and Tom really believed they were acting in Enron's interest. I say we accept that mistakes were made, do what needs to be done to correct them, and move on to a profitable 1987."

Lay nodded grimly, seeming lost in thought. "This is obviously not the type of thing we want to have happen," he said finally. "I understand what you were trying to do, but this is not the way to accomplish that."

Everything would be undone, Lay ordered. The transactions must be reversed and the off-books bank account shut down. And there would be other consequences. New controls, new oversight. This would not happen again.

Lay sat back. "Does anybody else have anything?"

"Well," Woytek said, "I have a couple of problems."

There was a short discussion about taxes and when the income would be reported. Heads nodded all around; they agreed Enron would report all of its 1986 profits in that year and pay the taxes. Woytek glanced at the traders. By raising such a tangential issue first, he seemed to have lowered their guard. They looked relaxed, confident.

Time to move in for the kill.

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