House of Cards

Enron's collapse may have been engineered from the top, but low-level employees played parts, too

When the committee representing the "employee class" is finally seated, the Severed Enron Employees Coalition hopes to have at least one member, if not several, appointed to it. The coalition's goal--to secure $150 million in additional severance allegedly owed to laid-off workers--is chump change compared with the hundreds of billions in secured claims staked by the "investor class" of banks and institutional shareholders. But it won't come easy. For one thing, both the secured creditors and Stephen Cooper, who was hired by the Enron board to restructure the company, have opposed additional severance beyond the $5,600 per employee that's already been paid out. Meanwhile, Cooper says he'll need another $50 million to keep his current workforce from fleeing to other companies.

"If Cooper can figure out a way not to pay employees, that just means more for the company if it survives," says Randy McClanahan, an attorney from one of four firms hired on a contingency basis by the severed-employees coalition. "And the investor class is against the employees, because that would mean more for them if Enron is liquidated. It is not in either of their interests for the employees to succeed."

McClanahan plans to counter the opposition by expanding the coalition's lawsuit to a claim for damages under the federal Racketeer Influenced and Corrupt Organizations Act. McClanahan will have to first convince the bankruptcy court that Enron was a criminal enterprise and that the investor class conspired with the company's management to deceive shareholders and employees.

Margaret Ceconi suspects Enron was bankrupt for two years before its December collapse.
Deron Neblett
Margaret Ceconi suspects Enron was bankrupt for two years before its December collapse.
Diana Peters had to take the first job offered to her after Enron's collapse. "I want somebody to go to jail," she says.
Troy Fields
Diana Peters had to take the first job offered to her after Enron's collapse. "I want somebody to go to jail," she says.

That strategy may have received a boost with the recent indictment of Arthur Andersen, as well as revelations that Fastow allegedly pressured banks and pension funds to invest in the off-balance-sheet partnerships in exchange for other Enron business. Watkins and Chief Operating Officer Jeff McMahon told V&E attorneys and the Powers committee that favored lenders were known within the company as "Friends of Enron."

"That was actually a pretty widely used term--FOE," confirms a former vice president with Enron Global Markets, who pronounced it "pho," like the Vietnamese noodle soup. "And for a while it worked. For a while everyone was happy."

Before Enron collapsed, its transformation from a stuck-in-the-mud pipeline company to New Economy "market-maker" was much celebrated, as was its principal architect, Jeff Skilling. Even today, many employees, while no longer worshiping at Skilling's altar, still marvel at his extraordinary intellect.

Lay particularly admired Skilling. In January, some weeks before he declined to testify before Congress, Lay was interviewed by attorneys representing the Powers committee. According to the notes of that session, Lay trusted Skilling, never felt manipulated by him and considered him a man of integrity and good judgment. He pointed out that Skilling had graduated from Harvard.

Skilling joined Enron in 1990 to run its embryonic natural gas trading business, Enfolio GasBank. The GasBank guaranteed its customers delivery of a certain amount of natural gas, at a certain time, for a predetermined price. At the end of each quarter, each contract was "marked to market"--that is, its value was recorded depending on the price of gas that day. Enron then booked each contract as earnings or loss.

In 1993, Enron partnered with the California Public Employees Retirement System, or CALPERS, to invest in independent producers of natural gas, crude oil and electricity. When CALPERS cashed out in 1997, Fastow engineered the infamous Chewco partnership. Chewco's financial statement should have been consolidated on Enron's balance sheet, but Skilling and Fastow apparently convinced the board that the partnership was an independent company, like CALPERS.

The "error" was discovered in November, and when the arithmetic was complete, Chewco accounted for a large part of the $1.01 billion write-down in asset value that preceded Enron's bankruptcy. The details of the Chewco transaction are extraordinarily complex. Less complicated is why Enron did the deal in the first place: It couldn't find a partner to invest in its assets. Michael L. Miller remembers when, a few years back, Enron tried to package its South American and Caribbean energy assets and sell them as a way of generating capital. For no apparent reason, the marketing effort was called Project California; one package was dubbed SoCal, the other NoCal.

"The SoCal package went out to 10 to 12 potential buyers," Miller recalls. "Meetings were held, but they couldn't get anyone to submit even a preliminary bid. My boss pulled the NoCal book before it even went out to market. That was proof in the pudding that there wasn't a huge level of demand out there for the assets we had."

Janice Holloway, who used to work for what was once known as Enron International, remembers that the group's assets were "always on the block. But from what I could tell, they never sold more than a few." Holloway also recalls the prescient comments made by a co-worker as he left the company a few years ago. "He said to me, 'I don't know how they can keep this business going. I don't know how they are booking profits.'"

Holloway, who asserts she had a relatively low-level position working with the group's attorneys, says she responded by going downstairs to get a cup of coffee. "Yeah, I did wonder a little bit about it at the time," she says now. "But it wasn't something that people were talking about, like around the water cooler or anything. I wasn't a manager or a director. I didn't see any need to question. I really wasn't privy enough."

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