Jeffrey Skilling and Andrew Fastow embodied the two sides of Enron Corp.–publicly brash innovation and quiet but questionable financing to back the bravado.
Ingenious but largely unknown even inside the Houston energy giant’s sleek skyscraper, Fastow set up the secretive partnerships that afforded him a new lifestyle, with toys like an Italian sports car, but helped land the company in bankruptcy court.
Outspoken and heedlessly blunt, Skilling was anything but low-profile. He once told a floor full of employees that they instinctively would feel when Enron achieved its destiny as the world’s largest company.
“It’s like pornography,” he said. “You’ll know it when you see it.”
Together, they were the architect and engineer of a spectacular corporate success story–one that quickly turned into the biggest scandal in U.S. business history.
A consummate strategist who came from the elite halls of the McKinsey & Co. consulting firm, Skilling plotted Enron’s rise from a Texas natural-gas pipeline company to a global energy trading giant. But Fastow, who had honed his financial skills at Continental Bank in Chicago, was crucial in turning those ideas into action.
They created wealth and scandal, elation and disaster. The combination of their talents and personalities powered Enron’s spectacular growth and its equally stupendous fall. Now neither man is talking publicly as investigators from numerous government agencies and committees pore over their handiwork and the handshake they received from their auditors at Chicago-based Andersen (this sentence as published has been corrected in this text).
But the real story of how they used Enron to acquire oceanside vacation homes, millions in stock profits and wooded acreage in Vermont started years ago in the offices of an old Texas gas company.
To burned investors and employees alike, the two men are now the poster boys for Enron’s demise. Before leaving in August, Skilling created a hypercompetitive culture that stressed ever-higher revenues and forced upon managers what were, in effect, firing quotas. Fastow created and controlled the off-the-books partnerships, named for his wife and children, that helped sink the company.
Both men profited handsomely from their time at Enron.
Skilling, 48, sold $66.92 million in Enron stock from the fall of 1998 until the company’s collapse in early December, including 500,000 shares just a month before Enron revealed its internal troubles on Oct. 16, according to court filings.
In addition to the more than $30 million in stock he sold during the same period, Fastow, 40, earned an undisclosed $30 million from his controversial partnerships in just two years.
The deals created by Fastow–and ultimately blessed by the company’s board and its auditing firm, Andersen–are now the subject of investigations by a Justice Department task force, congressional panels and the Securities and Exchange Commission.
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High-octane partnership
For a long time, Skilling’s plans for Enron were considered visionary.
Founded in 1985 after the merger of two natural-gas companies, Enron reinvented itself as an energy trading concern in the 1990s. The company used its extraordinary political clout in Washington to loosen federal oversight of those transactions.
As those revenues surged, Skilling led Enron deeper into trading, creating markets on everything from housing starts to advertising time.
Skilling’s concept was to reduce the company’s reliance on physical assets, such as its pipeline system, for generating profits. Instead, it would make money as a middleman, trading energy and other commodities like the cattle and grain futures that built Chicago’s exchanges. While Enron has collapsed, a host of other companies who followed the concept still flourish.
The new direction at Enron brought new concerns: The company needed to shed assets and the debts they carried to become the nimble trading giant Skilling envisioned.
When Skilling needed someone to engineer the complicated financing that would bolster the company, he turned to Fastow.
Born in Washington, D.C., Fastow learned the financing skills he brought to Enron while working at Chicago’s Continental Bank in the 1980s, according to a Fastow spokesman and several former Continental colleagues.
He was among about 2 dozen Continental employees chosen in 1988 to work on a trailblazing finance deal that would become a common tool for banks throughout the 1990s. Fastow’s team put together the first private sale of notes backed by risky leveraged-buyout loans.
“He wasn’t the lead financial engineering guy, but Andy was learning fast and did quite a good job,” said one former top bank official involved. “He was energetic, he was smart, and he understood what was going on.”
The financing tool soon swept the industry because it provides an obvious advantage for a bank: It moves assets off the bank’s balance sheet while creating revenue.
Fastow’s Continental credentials from those and other deals caught Skilling’s attention and led him to court Fastow, said Gordon Andrew, a Fastow spokesman.
He was hired at Enron in 1990. Then, at only 36 and after eight years at the company, he was promoted to chief financial officer after serving as senior vice president for finance. “I knew who he was, but he was rarely, if ever, at any of the quarterly analyst meetings to talk about any of the results,” said John Olson, a Houston analyst who tracked Enron and had strong contacts inside the company.
To turn Enron into an asset-light trading firm, Fastow set up a series of complex partnerships that he controlled, including two formed in 1999: LJM Cayman LP and LJM2 Co-Investment LP. “LJM” represented the initials of his wife, Lea, and their two children.
Through a variety of complicated transactions, assets and debts the company wanted off its books were transferred to the ledgers of those partnerships and others, records show.
This is an acceptable financial practice, but the partnerships must be truly independent. Enron now acknowledges the LJM partnerships never were–and that the company ultimately was responsible for their debts.
Along the way, Fastow received “in excess of $30 million relating to his LJM management and investment activities,” the company revealed for the first time in an SEC filing late last year.
In October, Enron announced third-quarter losses of $618 million, largely because of the previously hidden details of the LJM partnerships, and reduced shareholder equity by $1.2 billion.
In quick order, Fastow was fired, more than 4,000 employees were laid off and Enron filed for the largest bankruptcy in U.S. history. The company’s once-mighty share price plummeted as pensioners and big investors alike cried foul. Enron stock became so worthless that it was stripped off the New York Stock Exchange last week.
Records released last week show company insiders were raising serious questions about Fastow’s deals–and Skilling’s knowledge of them–before Enron collapsed.
In a detailed but anonymous letter sent in August to Enron CEO Kenneth Lay, Sherron Watkins, who worked briefly for Fastow last summer, said she feared the company would implode in scandal.
“I have heard one manager-level employee from the principal investments group say, `I know it would be devastating to all of us, but I wish we would get caught. We’re such a crooked company,'” Watkins wrote of the partnerships.
She also suggested that Skilling was protecting Fastow and the partnership deals.
Watkins said the company’s treasurer, Jeffrey McMahon, was “highly vexed over the inherent conflicts” of Fastow’s LJM deals and gave Skilling five corrective steps “that should be taken if he [McMahon] was to remain as treasurer.”
Three days later, Watkins’ memo said, Skilling offered McMahon the top job at an Enron affiliate “and never addressed the five steps with him.” In addition, she said, “Employees quote [Fastow] as saying that he has a handshake deal with Skilling that LJM will never lose money.”
Fastow is now under civil investigation for securities fraud and has been contacted by criminal investigators, according to court filings made by the SEC in Washington. Skilling is cooperating with federal and congressional investigators, according to his spokeswoman (this sentence has been added to this text). McMahon, now in Fastow’s old job, did not return calls. Both Skilling and Fastow declined to be interviewed last week, as did Watkins.
Harvesting abundant rewards
Like many Enron executives, Fastow and Skilling reaped wild financial rewards from the company’s success.
Skilling and his older brother, Tom Skilling, the WGN and baiduhai meteorologist, grew up “as middle-class suburban folks,” Tom Skilling said in an interview.
An MBA from Harvard Business School and a stint at McKinsey, the New York-based consulting firm, put Jeffrey Skilling on a business fast track. Lay brought him to Enron as a consultant in 1985, before Skilling became an executive at the company in 1990.
Skilling’s nearly $67 million in stock sales came both as the share price peaked and as it dove, records show.
But investigators seem particularly interested in the $30 million Fastow made off the ventures named for his family, according to court records.
“Very little information regarding the participants and terms of these limited partnerships were disclosed by the company, either in required commission filings or otherwise,” an SEC lawyer wrote in a recent court filing on the investigation.
He also said “a federal criminal authority” contacted Fastow’s lawyer to arrange an interview about the CFO’s “activities relating to Enron” shortly after the once-secret partnership payments were disclosed.
Fastow’s new Enron wealth was reflected in an increasingly lavish lifestyle, separate records show.
In August 1998, about five months after ascending to CFO, Fastow paid $289,000 for 68 wooded acres with a cabin near Norwich, Vt. The mortgage was paid off in March 2000.
After buying the Vermont acreage, the Enron CFO got a 1999 Porsche 911 convertible, records show. The base price of the German-made import: about $80,000 (this sentence as published has been corrected in this text). His wife got a 2000 Mercedes Benz wagon registered in her own name.
Fastow also readied his family to move up from its ivy-covered brick home with five bedrooms and four fireplaces in the upper-middle-class Houston neighborhood of South Hampton. With the mortgage paid in 1996, the Fastows kept the property, valued at about $700,000, while buying into the mansion-laden neighborhood of River Oaks, records show.
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On Feb. 23, 2000, the Fastows purchased property valued at $1.32 million in River Oaks. No mortgage was recorded in their names for the parcel, according to records at the Harris County, Texas, clerk’s office. The estimated value of the new construction was $1.53 million, according to the city of Houston’s engineering department.
River Oaks is the same part of town where Skilling built a sprawling Spanish-style mansion valued at $2.47 million that he moved into in March 2001, nearly four years after getting divorced from his wife. Before the divorce, the couple and their three children lived in a far more modest, 3,400-square-foot home in the South Hampton neighborhood.
About a year after buying their River Oaks property, the Fastows bought a seaside vacation home, valued at about $252,000, on nearby Galveston Island, records show.
Crippling internal competition
Skilling’s efforts to re-engineer the company may have pushed Enron into complicated deals, but the culture he created inside the firm could not have been more straightforward.
“Make your quarterly numbers or else. That was the quickest way to find the door–not make your quarterly numbers,” said Mike Boutcher, who worked in the company’s New Business Ventures unit.
“You had to keep up with Wall Street and make your numbers–and hook or by crook, you did it,” Boutcher said. “You should have seen that place two or three days before the end of a quarter. It was nuts, and I think some of these financial vehicles were used to create the numbers.”
At the same time, according to current and former Enron workers, Skilling implemented a job review process that undermined morale for many employees. Under his system, supervisors were required to give failing reviews to about 10 percent of all employees under them, regardless of how well the individuals had performed. At the same time, only workers who helped generate the most revenue got the best raises and bonuses.
Combined with Enron’s practice of allowing people to complain anonymously about co-workers, the system prompted some to submit negative reviews against people they were competing against for rankings.
“Skilling took away the team environment through this review process; it was everyone for themself,” Boutcher said. “So you brought in as few people as possible to make the deal work, so that you wouldn’t have to split the profits of it with as many people”–reducing your chances for a big bonus.
Skilling’s performance review system also created Enron’s contribution to the list of corporate euphemisms for being fired: “redeployment.” Those who did not make their revenue numbers or otherwise failed to make the cut in their division were put on a “redeployment” list.
According to former Enron managers, such employees were told they had 45 days to find another job within the company when in reality they were marked for elimination.
After one of Skilling’s favorite projects, a division that traded in Internet bandwidth, failed for want of customers, information technology manager Marc Lerro sought to bring several people back to his unit.
“I went to HR. The first question they asked was, `Is this person on redeployment?’ And they said, `You absolutely are not allowed to talk to anyone on that list,'” Lerro recalled.
“We thought it was very unethical to give these people the hope that they could find another job within Enron and spend those 45 days doing so, when in reality they didn’t know they were being blackballed.”
Some former employees, however, defend the brash Skilling style that marked that system.
“The only thing he was trying to do was instill people with the sense that we can do better,” said John Berger, 28, who traded electricity for Enron before leaving last summer to attend business school at Harvard. “It was competitive. But, frankly, that’s how you get to the top.”
Now, of course, Enron has hit bottom. As if to underscore its humiliation, word filtered out of headquarters last week about how vendors had refused orders from the company for even the most basic items.
Consequently, the remaining employees at the company that pioneered trading in electricity were trading something else from floor to floor by week’s end: toilet paper.
Like office supplies at Enron, Fastow and Skilling also are hard to find these days.
Though he later obliged, Fastow enraged the SEC when he failed to appear after being subpoenaed to testify last month following more than a month of subpoenas and talks, records show.
As for Skilling, he has Houston police guarding his house.
“He can’t leave his home. He is so embarrassed about this,” Tom Skilling said. “The only thing he has told us is that he didn’t do anything wrong, he didn’t do anything illegal. … He is not a crook.”