Praise for Pipe Dreams "A biting, incisive look at corporate excesses... funny, opinion- ated and not shy in offering harsh moral judgement." The Dallas Morning News "[A ]delicious disembowling of the company.... Bryce has a rare ability to explain complex financial concepts clearly, combined with a breezy, colloquial style that makes his story a page turner." Salon.com "While most [missteps] have been reported in some fashion in the buckets of ink spilled on the story, Bryce still packs a punch by gathering all the damning details in one place ... Bryce is most compelling when he sketches the corrupt cast of charac- ters." BusinessWeek "There's nothing familiar about what Robert Bryce has accom- plished in this superb book ... Meticulously researched ... Bryce presents [financial] stuff with such admirable clarity that even the most numerically illiterate English major can grasp its gist." Austin Chronicle "It's a Barbarians at the Gate-type read." Cindy Adams, New York Post "Robert Bryce has done a brilliant job of explaining what Enron was all about and what made it fall apart. Better still, he pro- vides fascinating insights into the lives of the firm's executives who were calling the shots...a mesmerizing read." Tulsa World "Humorous ... entertaining and easy-to-follow.... Bryce's account sets the bar high for other Enron books to come." San-Jose Mercury News "No one succeeds in telling the story like Texas journalist Robert Bryce. His straightforward book ... is a must-read for the busi- ness set, and an enjoyable read for the rest of us." National Post (Canada) "Bryce, who understands the flamboyance built into Texas busi- ness culture, clarifies Enron's muddled and deceptive accounting practices, deconstructs the bone-headed and perpetually hyped ventures ... while lacing his account with the sexual foibles that played a tacit part in creating the company's anything-goes exec- utive culture ... There are sure to be many accounts of Enron's collapse, but Bryce's gossipy version will be hard to beat for sheer readability." Kirkus Reviews "Enron's downfall was inevitable, and with Bryce as chronicler, it makes for a terrific story.... [Bryce] has mined his sources well and also observes the important investigative rule of 'follow the money,' revealing a systemic corporate breakdown at Enron that was widespread, stretching from the office of the CEOs to the board of directors to various lower-level executives and beyond." Library Journal "Finally, an Enron book that actually explains what happened at Enron ... This isn't just the first book to make sense out of the debacle; it's a vivid cautionary tale about the consequences of the lurid excesses—personal and professional." Publishers Weekly "A comprehensive piece of investigative journalism." Booklist Pipe Dreams Robert Bryce PUBLICAFFAIRS NEW YORK Copyright © 2002, 2003 by Robert Bryce. Introduction copyright © 2002 by Milly Ivins. Published in the United States by PublicAffairs™, a member of the Perseus Books Group. All rights reserved. Printed in the United States of America. No part of this book may be reproduced in any manner whatsoever without writ- ten permission except in the case of brief quotations embodied in critical articles and reviews. For information, address PublicAffairs, 250 West 57th Street, Suite 1321, New York NY 10107. PublicAffairs books are available at special discounts for bulk purchases in the U.S. by corporations, institutions, and other organiza- tions. For more information, please contact the Special Markets Department at The Perseus Books Group, II Cambridge Center, Cambridge MA 02142, or call (617)252-5298. Book design by Mark McGarry, Texas Type & Book Works. Set in Sabon. Library of Congress Cataloging-in-Publication Data Bryce, Robert. Pipe dreams: greed, ego, jealousy, and the death of Enron/Robert Bryce. p. cm. Includes bibliographical references and index. ISBN 1-58648-201-7 (pbk.) 1. Enron Corp. —Corrupt practices. 2. Energy industries—Corrupt practices—United States. 3. Business failures—United States. I. Title. HD9502.U54 E573 2002 333.79'°973—dc21 2002031615 10 987654321 This book is dedicated to the thousands of current and former Enron employees—hardworking, honest people—who lost so much through no fault of their own. This page intentionally left blank Contents Author's Note xI Introduction by Molly Ivins xv 1 The Job Fair i 2 John Henry Kirby and the Roots of Enron 13 3 Buy or Be Bought 24 4 The Merger 31 5 The Lays Move to River Oaks 34 6 The Valhalla Fiasco 37 7 "The Smartest Son of a Bitch I've Ever Met" 44 8 Banking on the Gas Bank 52 9 Mark-to-Market Account-a-Rama 60 10 Enron Goes International: Teesside 69 11 The Big Shot Buying Binge 76 12 "Kenny Boy" 85 13 The Dabhol Debacle 93 14 OPIC: Sweet Subsidies 104 15 A Kinder, Gentler Enron 111 16 The Reign of Skilling 120 17 "A Pit of Vipers" 126 18 Cash Flow Problems, Part i 132 19 Chewco: The 3-Percent Solution 137 20 Sexcapades 144 viii CONTENTS 21 The Family Lay 149 22 LJMi 155 23 Buying Off the Board 161 2.4 The Deal Diva 169 25 Enron's Waterworld 175 2.6 Hyping the Bandwidth Bubble 190 27 Andy Fastow Arrives... in River Oaks 199 28 Strippers and Stock Options 205 29 Casino Enron: Cash Flow Problems, Part 2 215 30 LJM2 223 31 The Big Five Versus the SEC 232 32 Derivatives Hocus-Pocus 240 33 Ken Rice: Missing in Action 245 34 Analysts Who Think 249 35 Air Enron 257 36 Skilling Says a Bad Word 267 37 George W. to the Rescue, Part i 270 38 Broadband Blues 275 39 Sleepless in Houston: Cash Flow Problems, Part 3 284 40 Sherron Watkins Saves Her Own Ass 293 41 George W. to the Rescue, Part 2 300 42 You Gotta Have Art 305 43 Revenge of the Raptors 309 44 "An Outstanding Job as CFO" 313 45 Fastow Goes Bye-Bye 318 46 Posh PJ's 321 47 Greenspan Gets the Enron Prize 323 48 One Restatement Too Many 328 49 The Downgrade 334 50 The Bankruptcy 339 51 "Salvation Armani" 343 52 Aftermath 363 The Enron Scorecard 3 73 Notes 377 Bibliography 391 Index 395 ENRON CAST OF CHARACTERS AND THEIR STOCK SALES' Name Position at Enron Shares Sold Gross Proceeds J. Clifford Baxter Vice-Chairman 6I9,898 $34,734,854 Robert Belfer Member of Board of Directors 1,065,137 $111,941,200 Norman Blake Member of Board of Directors 21,100 $1,705,318 Rick Buy Chief Risk Officer 140,234 $10,656,595 Rick Causey Chief Accounting Officer 208,940 $13,386,896 Ronnie Chan Member of Board of Directors 8,000 $337,200 James Derrick General Counsel 230,660 $12,563,928 John Duncan Member of Board of Directors 35,000 $2,009,700 Andy Fastow Chief Financial Officer 687,445 $33,675,004 Joe Foy Member of Board of Directors 38,160 $1,639,590 Mark Frevert Chief Executive Officer, Enron Europe 986,898 $54,831,220 Wendy Gramm Member of Board of Directors 10,328 $278,892 Kevin Hannon President, Enron Broadband Services Unknown Unknown Ken Harrison Member of Board of Directors 1,011,436 $75,416,636 Joe Hirko CEO, Enron Communications 473,837 $35,168,721 Stan Horton CEO, Enron Transportation 830,444 $47,371,361 Robert Jaedicke Member of Board of Directors 13,360 $841,438 Steve Kean Executive Vice President, Chief of Staff 64,932 $5,166,414 Mark Koenig Executive Vice President 12.9,153 $9,110,466 Ken Lay Chairman, Enron Corp. 4,002,259 $184,494,426 Charles LeMaistre Member of Board of Directors 17,344 $841,768 Rebecca Mark Chief Executive Officer, Azurix 1,895,631 $82,536,737 Michael McConnell Executive Vice President 32,960 $2,506,311 Jeff McMahon Treasurer 39,630 $2,739,226 Cindy Olson Executive Vice President 83,183 $6,505,870 Lou Pai CEO, Enron Energy Services 3,912,205 $270,276,065 Ken Rice CEO, Enron Broadband Services 1,234,009 $76,825,145 Jeffrey Skilling Chief Executive Officer, Enron Corp. 1,307,678 $70,687,199 Joe Sutton Vice-Chairman 688,996 $42,231,283 Greg Whalley Chief Operating Officer, Enron Corp. Unknown Unknown TOTALS 20,788,957 $1,190,479,472 *A11 listed sales occurred between October 19, 1998 and November 27, 2001. The number shown under gross proceeds indicates the number of shares times the price of Enron stock on the day the shares were sold. It does not reflect any costs the Enron officials incurred in exercising the sale of the stock. Therefore, the net proceeds to the listed individuals is likely less than the amount shown. SOURCES: Mark Newby, et al. vs. Enron Corp., et al., Securities and Exchange Commission filings, Con- gressional testimony, Enron Corp. press releases. THE ROLLER COASTER: ENRON STOCK PRICE 1998-2001 Stock price chart Author's Note This book was a joy. Challenging and heart-wrenching, too. My goal in writing this book was to explain why Enron failed. I did not attempt to tell every facet of the Enron story or to explain all of the legal and accounting issues that came into play. Nor did I attempt to explore the myriad details of how Enron might have profited from Cal- ifornia's convoluted electricity markets. Nor did I delve deeply into Enron's efforts to deregulate electricity markets. Instead, I sought to explain why the company got so bollixed up, while avoiding as much business jargon and accounting-related arcana as possible. My premise throughout this book is that Enron's failure wasn't due to faulty accounting or poor regulation, though both of those factors were—and are—very important.