Enron, Ep 1: Potemkin Village

My name is John M. Schweiler. For four decades, I was a Wall Street Journal reporter. In that time, I wrote a lot of stories. There's one that stuck with me more than any other. Enron. It's been 20 years now since Enron fell into bankruptcy. Its list of creditors was 54 single-space pages. So this was a massive bankruptcy filing. Within weeks, tens of billions of dollars, thousands of jobs gone. Retirement plans destroyed. This was my life savings, my nest egg. And that was just the beginning. Congressional committees rushed to investigate. The Justice Department launched an epic criminal probe. The CFO, chief accounting officer, Treasurer, and more than that dozen others pleaded guilty. And perhaps the highest profile corporate fraud trial in U.S. history, former CEO Jeff Skilling was convicted. He maintained his innocence, but he spent more than a decade in prison. Here's a measure of just how big a deal Enron was. On the FBI's list of his most famous cases, JFK's assassination, Watergate 9/11, it's the only corporate name. That would, in fact, go from being this highly respected company into being this massive symbol of corporate dishonesty. It happened so rapidly. My colleague Rebecca Smith and I broke the stories that Enron officials blamed, in part, for sparking the company's collapse. This podcast, based on hundreds of interviews, years of reporting, and reams of court documents, is about how it all happened, and why today, the Enron story, is as relevant as ever. In the 80s, Enron was a pretty standard oil and gas company. It had pipelines that moved energy around the country, but executives weren't satisfied. They told everyone they were going to revolutionize the energy industry. And they did. Starting in the mid-90s, Enron would be named America's most innovative company, year after year. Enron had a reputation, and executives would do just about anything to keep it. That's where I'd like to start the story, 1998. Enron headquarters, Houston. That year, Enron wanted a showcase of brand new sales room, and it set up for one of its new operations, Enron Energy Services. The goal was to cut off the middleman by selling energy directly to businesses. And of course, make a lot of money in the process. Enron had invited Wall Street analysts to downtown Houston to check it out. If they were impressed, the analysts might tell their clients to invest even more in Enron. There was just a little problem. The sales room wasn't ready. Enron still hadn't hired enough people to fill it. They could have delayed, or just told people they were ramping up. But instead, Enron executives decided to just go ahead, and make it look like it was falling right. I remember being told, everyone, bring some of your personal items, put it on the desk, make it look normal, and everyone just act like you really busy. That's Robert Bradley, a former Enron speech writer. He was one of the staffers asked to be an extra, a sort of body in the room. I thought it was strange, but I really didn't follow up or investigate it. On the day of the tour, Bradley headed to the sixth floor with a pen and notebook and got settled in the back. We had desks that looked out the window, so my back was turned. But I do remember turning around and looking and seeing the people coming. The people were stock analysts, the audience from Wall Street. Bradley says he and his colleagues were personally invested in impressing them. We all had a lot of stock, and so, you know, keeping the stock price up was really important. Enron had spared no expense on their new sales room. They even included flat screen TVs, cutting edge tech at the time. One employee would later describe the elaborate crews as a Potemkin village. You know, like that story about the Russian minister who tried to impress his queen by building fake villages all along her travel route. This was sort of like you invent your own reality by deceiving others and making it happen. Now it's hard to know if this whole charade had a direct impact on the stock price. Enron had already promised that this venture was coming, but the company's showboating had often been effective, and it would continue to be. Over the next couple of years, the stock would soar from $20 a share all the way to 90. You know, a lot of your sins can go unnoticed if everything's going well. And back then, everything was going. It seemed very well for Enron. Eventually, Enron hired more people and got that sales room fully up and running. At the time, Bradley says it seemed more like a half-truth than a lie. And that's a good example of, you know, the slippery slope when you start going along with this stuff, how you can become a pretty numb toward it all. It was only in retrospect that I realized that, yeah, I'd participated in this and there was something really wrong with it. When I look back at Enron, there are a lot of moments like these when reality didn't match executive's ambitions. But most of these moments weren't about a stage play in the sales room. They were about creating financial facades to mask problems brewing inside the company. In 2001, reality bit back. It's a stunning fall. Enron had grown into the seventh largest company in the country ahead of IBM and AT&T. Enron, once an energy giant, now amid government investigation, finds itself in chapter 11 bankruptcy court. It's hard to believe that a company with revenues of some $100 billion last year would be filing for bankruptcy this year. This is Bad Bets, a podcast from the Wall Street Journal that unravels big business dramas that have had a big impact on our world. Season one, the story of Enron's collapse. My colleague Rebecca Smith and I will take you inside, show you the successes that made Enron a Wall Street darling and explore the deceptions that brought it down. The scandal rocked people's faith in big business. Because in the eyes of many, it didn't just expose what was wrong at Enron, it exposed unchecked power throughout corporate America. The story of success became so enticing that for a moment there, it didn't matter if it was fraud. This is episode one, Potemkin Village. I came to this story two decades ago, knowing very little about Enron and the world of American energy. I covered white collar crime for the journal. But I was paired with Rebecca Smith, the journal's reporter for utilities and power markets. Enron was part of repeat. The company was headquartered in Houston, the epicenter of the US energy industry. Houston was to energy what Wall Street was to finance and what Silicon Valley was to the tech industry. It was the center. There's a massive gas pipeline system. Of course there are oil and gas reserves in Texas. Many big companies were based there. Enron had a certain swagger and at the time, of course I was in California, I was never sure, is this just Texas? Is it the Texas swagger or is it the Enron swagger? Enron was the flashiest, crashiest player. Car Clicker was a training manager at Enron. He remembers pulling up on his first day of work to the Enron Tower. It was like he was working in Hollywood, not energy. There were like 25 Ferraris and Maserades and Bentley's lined up on bonus baby row. And I thought, who works here? This is crazy. And what I found out later was if you're a 26 year old Stanford MBA and you make a billion dollar deal, you get a million dollar bonus. Enron was about big bucks and big attitude, right down to their whole music. Yep, that's Tina Turner, simply the best. I mean, who does that? Enron's Ravado never seemed to miss a beat. Then something happened. The first real crack in the Enron facade. And it was a big one. It was August 2001. Enron's CEO Jeff Schilling resigned completely out of the blue. Jeff Schilling's resignation was just a stunning, shocking thing to have happened. I mean, this is a man who spent years working his way up to become CEO. And you know, he'd barely gotten the seat warm. Schilling had only been CEO for six months, but he'd been with Enron for more than a decade. He'd helped transform the once sleepy gas pipeline company into a global enterprise. He'd become a corporate celebrity in the process. You might compare him to Apple's Tim Cook or Tesla's Elon Musk. So when he resigned, he sent shockwaves through the industry. Schilling said it was for personal reasons, but CEOs usually don't just quit, especially after just landing the job. often signals something is up at the company. Now covering something like this with normally a fall into Rebecca, like I said, this was her beat. But she was moving into a new house that day and had no internet connection, so I was asked to fill in. I figured it would be one and done. I had no idea that I'd be spending the next few years on in-runs trail. That's next, after the break. When I was asked to write this story about Jeff's killing sudden resignation, my first move was pretty standard. I called Enron's PR head at the time, Mark Palmer. Jeff's departure as a milestone in the history of Enron was big, it was huge, but it was just kind of one of those things that didn't stand out as a, oh my gosh, this is really bad. Palmer downplayed it, nothing to see here, but I still wanted an interview with Scillin. Palmer quickly got the CEO on the phone. He was a great spokesperson for the company, so I had a lot of confidence in Jeff. Scillin stuck to his story at first, that he resigned for personal reasons, which he wouldn't go into. But as the interview progressed, he started to sound troubled, almost depressed. Then to my surprise, he went off script, and he said something that would help turn a two-day story into years of investigation. He told me, right there in the phone, that he was disappointed by the fall in the stock price. It fell by half during his six months of CEO, and if it hadn't fallen, he said he probably would have stayed. I remember when he said that, I thought, well, that doesn't sound like a personal reason, that sounds like, you know, a business concern. It just sure didn't seem like a great one to bring up in an interview with the Wall Street Journal. Scillin took line to be interviewed for this podcast. But as admission on the phone that day in 2001, certainly caught my attention. This wasn't a canned response. I thought, hey, I've got a scoop here. I wrote a quick story for the paper, but the interview, and Scillin's almost confessional tone about the stock price, just kept bouncing around in my head. Sure, lots of executives see their stock price in quarterly returns as a personal report card. In 2001, was it generally bad year for the stock market? It was right after the dot-com bubble that burst. A lot of CEOs weren't thrilled, but they weren't all quitting in mass. NRS stock had long been considered a good bet, one that was likely to outperform the broader market. The price could rebound. That's why Scillin bringing up the stock price dropped made the whole resignation feel more suspicious. It made me think there might be bigger problems inside of NRS that the captain might be abandoning a sinking ship. Earlier in 2001, NRS stock price had been $80 a share. By August, it was $40. Now, Scillin had suddenly quit. NRS was understandably eager to quiet any concerns, and the company had no better man for that job than former CEO Ken Lay. The Charmer in Chief. Rebecca had interviewed him several times. Ken Lay was always a very affable, congenial, polite person to talk with. As you know, he grew up on a farm in Missouri. He could make you feel you'd had a visit instead of an interview. Lay had been NRS CEO for over a decade before Scillin, and was perhaps the company's most famous figure. He got close, personal relationships with both presidents of Bush. George W sometimes even referred to him as Kenny Boy. Lay stepped back into the CEO role after Scillin resigned. He knew the shareholders couldn't be happy about the falling stock price, and many of his employees had their life savings wrapped up in company stock. So, a couple of days after Scillin's resignation, Lay held a company-wide meeting at the Hyatt Regencies in Perial Ballroom in downtown Houston. Good morning. Under the spotlight, he spoke directly to employees. Many of you concerned about the value of your stock options. I'm concerned about the value of my stock options. In a seeming effort to boost morale, he offered them a little something pulled from his back pocket. More stock options. It won't make you rich, but it might make you feel better. I think we've got a lot of great stuff going on. We are now about three times the size of the next largest competitor. But there's more than me see eye here. Listen closely. We certainly think we're close to if not at the bottom of this cycle, and we want you to enjoy the ride back up. Do you hear that? The prediction, the stock would climb? Well, that type of positive spin would eventually get Ken Lay in big trouble with federal criminal authorities. I should note here that Lay would plead not guilty to charges of misleading investors, but he was ultimately convicted in 2006. That conviction was vacated because of his death shortly after the trial. His optimism in that meeting in 2001 would soon collide with a reality where back and die were on the hunt to uncover. After the break, an Enron Insider reaches out. Publicly traded companies in the US are supposed to disclose what's really going on in their organizations. The good and the bad, so investors know. Companies write quarterly reports and submit them to the Securities and Exchange Commission, the SEC. One of the strengths of American capitalism is the existence of generally agreed upon standards for what will be included in these public documents, and they can be a treasure trove for reporters. The day after skilling quit in August 2001, I had pulled up Enron's most recent SEC filing before I did my interview with him, just to see if anything jumped out. It was 37 pages, single spaced, and pretty dense. I was on deadline, so I scanned some important sections, including one titled Related Party Transactions. These are outside business deals involving directors or top officers. It's what I've always thought of as a company's potential dirty laundry list. And there, I found something most unusual, something that ended up being a big deal. Deep in the document was a reference to outside partnerships that were doing vast amounts of business with Enron, worth hundreds of millions of dollars. These were not something that Enron had ever talked about in any setting I'd ever been in, so it seemed to come out of the blue. Rebecca also hadn't heard about these partnerships from stock analysts who followed Enron. Now the descriptions of the transactions in the SEC filings were so convoluted, they were practically gibberish. But one thing was clear, and it stunned me. The partnerships had been run and partly owned by a senior executive of Enron. It didn't take me long to think, conflict of interest. It raised the possibility that a senior executive of Enron might be making money for himself and his partners at the expense of his employer and its shareholders. It seemed to me at the very least an outrageous arrangement. Rebecca agreed. It's as simple as saying you can't serve two masters. If you're in an arrangement in which you're on both sides of a transaction, you're going to have to pick which side to favor. They're never going to be equally treated. At first, I suspect that the unnamed executive running the partnerships might be former CEO Jeff Skilling. After all, that person had just quit the partnerships according to the SEC filing and Skilling had just quit the company. I heardly call Palmer again. He was essentially the only source I had at Enron. Palmer said the partnerships were fully disclosed and completely above board. It had been all approved that the accountants, the lawyers, the board, everybody had approved it, so it was fine. Palmer said the partnerships simply provided outside capital that helped the company. It was the company line. Ken Lay told us the same thing in a subsequent interview. During that call, Palmer told me the executive who had headed those partnerships wasn't Skilling. His Enron's chief financial officer, Andy Fastow, who was still working at Enron. It was the first time I'd ever heard Fastow's name. It would hardly be the last. Now to be clear, Mark Palmer was never accused of wrongdoing by authorities. But he suspected something was up with these partnerships. Many months later, he confided to me that he sensed people inside Enron were concerned. Maybe I should have asked a hell of a lot more questions. Yeah, clearly. Rebecca and I also needed to ask a hell of a lot more questions. It felt like we weren't getting the truth, hitting walls. We hit something, we bounce off, we go on another direction, we come back, we bounce against it again. We're a room, but we just keep moving. We look back at some of the prior SEC filings, and we saw these partnerships have been up and running for a while, and it dealt with a lot of money during that time. Our annual filing in 2000 said that these enterprises were conducting more than a billion dollars worth of business within Enron. Well, that's a massive number. But there was absolutely nothing in it. to tell you what these relationships were. And on top of that, we noticed Enron had some of its own stock tied up in these deals, 12 million shares of it. And we knew the stock had dipped, potentially crippling those deals, potentially crippling Enron. Did these partnership deals have anything to do with skilling being so upset about the fallen stock price? I didn't yet know how it all fit in. So we did what journalists do. We made it public. In late August, two weeks after skilling resigned, we wrote about the partnerships in an article. It was a small mention, just a few paragraphs near the bottom. We quoted directly from the SEC filing. It says Enron has entered into agreements with entities formed in 2000, which included the obligation to deliver 12 million shares of Enron common stock in March 2005 and entered into derivatives. It was basically gibberish, but that's pretty much all we had at that point. And it absolutely defies the entire purpose of financial disclosure. There's no information being conveyed through this. We didn't understand the information in the SEC filing, but hoped that someone would come forward and help us. I was so happy that we were able to do that because to me, and I've done this many times as a reporter, I think of these as a letter in the bottle. You put the letter in the bottle, you toss it into the ocean. You have no idea where it's going or if anyone's ever going to read it or pick up on it. Well, this time, someone did. A person had a lot of knowledge about these partnerships, an Enron insider. The source didn't want us to use his name. He feared Enron could harm his career, so we called him our mutual friend. His identity is a secret we've kept for 20 years. Was I the first person to talk to the Wall Street Journal? Yes, I was. I felt like, finally, somebody is getting this story out in public. He called Rebecca at the Journal. My first impression of him was that he sounded like someone who was very knowledgeable. He was clearly intelligent. He sounded like he had a well-balanced view of the company, so he sounded trustworthy. I said, what do you know? And she said, we know very little, but we were hoping, are hoping, somebody comes forward and tells us more about it. Do you know anything about it? And I said, well, I was probably the architect of the idea. What information would you like to have? Because I've got quite a bit on it. I told her my name and I asked her to keep me anonymous. He said he had internal documents. It's one of the most beautiful phrases any reporter can ever hear. So at that point, I thought, wow, this guy could be really important in helping unlock what's been happening at NRON. Our mutual friend knew a lot about these outside partnerships. He'd even worked on them. He sent Rebecca a trove material. It cracked our case open. It told us that there were rampant conflicts of interest that had not been dealt with. It told us that your average shareholder would have no idea what the true financial condition of the company was. And we would soon learn that NRON had been taking extraordinary steps to hide losses. That federal prosecutors later said should have been reported to the public, losses of hundreds of millions of dollars. It was the first indication that we were really onto a big story. It was our key to unlocking one of the biggest corporate scandals in American history. We had a cash problem. We spent all the cash. It is my belief that NRON's failure was due to a classic run on the bank. I didn't drive us into the iceberg. I'm just trying to warn the captain of the ship. A lot of the watchdogs did not bark. On this season of bad bets, we'll take you through the many layers of mistakes and misdeeds at NRON. The accounting tricks that hit hundreds of millions of dollars in losses. The trial. The demanded answers from the men once at the helm of American energy. And we'll hear from the whistleblower, who kicked it all off. NRON is dead. But 20 years later, the forces that gave rise to the scandal, well, they're still very much alive. And on the minds of folks such as Lynn Turner, former chief accountant at the SEC. We could see that we're setting ourselves up for another round of corporate scandals, which history tells us does occur every 25 to 30 years. Next time on Bad Bets. This episode of Bad Bets was hosted by me, John M. Schweller. The original reporting on which this season is based was done by Rebecca Smith and me. Bad Bets is production of the Wall Street Journal. This season was produced in collaboration with Neon Humb Media. From the Wall Street Journal, Cateri Yokem is the executive producer of this podcast. Dan Rosen is the co-executive producer of WSJ Studios. Danny Galloway is the global head of video and audio at the Wall Street Journal. From Neon Humb Media, Moona Danish and Haley Fager reported, wrote, and produced this season. Nathela Kato is the associate producer, story-edding by Annie Gilbertson and Vikram Patel. Sammy Allison is a production manager, sound design and engineering by Scott Somerville. And the executive producers from Neon Humb are Sharon Morris and Jonathan Hirsch. This episode was fact-checked by Laura Bullard. The theme song and many of the tracks you hear in this series were composed by Hans Dailsew. The other music in this season of Bad Bets is from Epidemic Sound and Blue Dot Sessions. Subscribe and listen wherever you get your podcasts. I'm John M. Schweller. Thanks for listening.