House of Cards

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

Last August, shortly after returning as chief executive officer of Enron Corp., Ken Lay sent an e-mail to employees asking them to "Lay It On The Line" and answer a few questions about the company. Within days, Lay received more than 4,000 responses from around the world, covering issues that ranged from Enron's share price to its employee evaluations to its image beyond the corporate walls.

The results were analyzed, and in early September, Lay responded by outlining a course of action that would, as he put it in an e-mail summary of the "Lay It On The Line" survey, "keep Enron one of the best places to work in the world."

At the heart of Lay's plan was information. In an effort to be more up-front about the company's operations, he wrote, top executives had already met with major shareholders to review "the strong prospects in each of our businesses." Stock market analysts, who for the first time in years were questioning Enron's complex balance sheet, would be educated on "how we make money."

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.
Some people questioned Enron's earnings, says Janice Holloway, but most employees didn't share those concerns.
Troy Fields
Some people questioned Enron's earnings, says Janice Holloway, but most employees didn't share those concerns.
Randy McClanahan, an attorney for former employees, hopes to prove Enron was a conspiracy to defraud.
Troy Fields
Randy McClanahan, an attorney for former employees, hopes to prove Enron was a conspiracy to defraud.

This new spirit of openness would be extended to employees. Lay invited them to attend "brown bag" sessions to discuss issues that affected Enron's share price. In mid-October, Lay and Greg Whalley, president of Enron Wholesale Services, would begin meeting with groups of employees in events that would be videotaped and distributed companywide. In the meantime, employees were encouraged to log on to the company's internal Web site and join a question-and-answer forum with the CEO.

"We recognize that as Enron's ambassadors in the marketplace the more you know about our strategy, performance and challenges, the more you can help disseminate accurate information about our company," Lay wrote in the summary.

It's now known that what Wall Street didn't understand about Enron late last summer had already doomed the company. On October 17, the seventh-largest company in the United States stunned shareholders by reducing the value of assets on its books by $1.01 billion to correct the accounting treatment of off-balance-sheet partnerships managed by Chief Financial Officer Andrew Fastow. Less than two months later, Enron laid off 4,500 employees and filed for bankruptcy protection.

After a three-month investigation, a special committee of Enron's board of directors reported that management had purposely misled shareholders by hiding huge debt and poorly performing assets in Fastow's partnerships. Committee chairman William C. Powers, who was hired by the board to conduct the investigation, told a congressional panel that between July 2000 and October 2001, 70 percent of Enron's reported earnings were fabricated.

"What we found was appalling," Powers testified.

To date, three former Enron employees have stepped forward to corroborate the findings in the Powers committee report. Sherron Watkins, an accountant whose now-famous letter to Lay in August warned the CEO that the company was about to "implode in a wave of accounting scandals," testified before a congressional committee earlier this year, opposite former CEO and President Jeff Skilling. Watkins went easy on Lay and suggested he was clueless about the import of the transactions. But she had little trouble convincing lawmakers that Skilling was lying when he said he knew nothing of Enron's dire financial condition when he resigned "for personal reasons" August 14.

Margaret Ceconi, a deal originator with Enron Energy Services, told Lay in an August 29 e-mail that the division had hidden more than $500 million in losses on long-term energy contracts. Ceconi tipped off the U.S. Securities and Exchange Commission for the first time last July, then followed up with a detailed complaint in October. She has not yet been called to testify, nor has she been questioned by investigators. Ben Glisan, Enron's former treasurer, reportedly is cooperating with the Department of Justice after being implicated by the Powers committee.

The congressional inquiries have, so far, focused on the actions of Lay, Fastow and Skilling; the company's auditor, Arthur Andersen LLP, which was indicted March 14 on federal charges of obstructing justice; and its general counsel, Vinson & Elkins, whose internal investigation of Enron's accounting practices has been derided as a whitewash. The unrestrained outrage of lawmakers has been fueled by the presence of a ready pool of victims--Enron retirees and former employees whose retirement plans were laden with now-worthless Enron stock.

The breathtaking losses--Enron's 401(k) plan was worth $850 million at one point--and the apparent fraud by top management have inspired more than a half dozen shareholder lawsuits, including a class action by the Severed Enron Employees Coalition, a group of about 600 people whose former positions ranged from secretaries to division vice presidents.

One of the coalition's founders, Diana Peters, an information technology specialist, planned to take advantage of Enron's early-retirement program in three years so she could care for her husband, who is suffering from a brain tumor. Unlike many, Peters had the presence of mind to move some of her 401(k) assets into mutual funds. What she didn't realize was that when Enron's share price fell to less than a dollar, leaving her 401(k) account with a negative balance, her mutual fund was tapped to make up for the shortfall. Left with no health benefits to cover her husband's treatment, Peters had to take the first job she was offered. She says it's a good one, but that's hardly consolation.

"I want money from Arthur Andersen," she says. "I want money from Vinson & Elkins. I want money from Jeff Skilling and Andy Fastow. I want money from the board of directors. And I want somebody to go to jail."

Support for Peters and other rank-and-file employees has been universal--almost. In early March, Michael Lewis, an author and columnist for Bloomberg News, suggested that employees should be among those held accountable for the Enron debacle. Calling them "expensive beggars," Lewis compared employees to the getaway driver for a failed bank heist who lays claim to his share of the take confiscated by police.

"[E]verything we know so far about Enron suggests many, many employees were, at the very least, willing accomplices to the schemes dreamed up by their bosses. And now they want their money back!" Lewis wrote in a column that appeared in, among other publications, The Washington Post. "The Enron case as it is currently playing out sends the following message to corporate employees: You aren't responsible for what you do...[So] long as you aren't one of the top bosses, you will enjoy the moral status of the victim."

Indeed, after reviewing the now-familiar partnerships, the Powers committee concluded that "literally hundreds of people...were involved in one way or the other in the transactions." Watkins told Lay that deceptive accounting was an open secret at Enron. "We're such a crooked company," she quoted one co-worker. During the company's internal investigation, Watkins told Vinson & Elkins attorneys that she was worried that as many as 300 employees with knowledge of the transactions would start talking to journalists, the SEC or both.

Watkins also pointed to the "Lay It On The Line" survey as a possible source of corroboration. She told the V&E lawyers that two employees involved in the survey said questions about accounting issues were not reflected in Lay's summary. Watkins suggested that a legal assistant could "plow through" the responses to find out how widespread the concerns were, although there is no evidence that either V&E or the Powers committee ever did that.

Nonetheless, according to the survey's results, many respondents were aware that something was indeed rotten in the state of Enron. Nearly one in three respondents told Lay they thought Enron had become less ethical during the previous 12 months. Almost 40 percent considered the company more arrogant and less trustworthy, while far less than half the respondents believed senior executives possessed "a clear view of where Enron is going and how to get there."

Lay skillfully dodged those concerns in his summary, instead noting that "Lay It On The Line" confirmed the "great things you feel about Enron." According to Lay, Enron's stock price, which had been cut in half since January 2001, was the No. 1 concern of the 4,000 respondents. He blamed the decline on several factors: the recession, the slower-than-expected pace of electricity deregulation, a marked decrease in natural gas prices and a "meltdown" in the high-speed Internet, or broadband, industry, which Lay estimated accounted for more than a third of the company's stock price at its peak a year earlier.

But by last summer, many employees were wondering how Enron stock ever got as high as $90 a share. "People were aware that the stock was overvalued, that the earnings being reported did not reflect reality," says Michael L. Miller, a former vice president with Enron Wholesale Services. "There was more uncertainty than people [outside the company] perhaps appreciate."

Why that hasn't translated into more people offering up evidence to prosecutors is a question some former employees have asked themselves. Michael J. Miller--not to be confused with the Enron Wholesale executive Michael L. Miller--says that as the investigations grind forward, he expects more former employees to contribute to the prosecution of those responsible, many by offering firsthand accounts of wrongdoing.

"That's the way they are going to weed out a lot of the facts, by corroborating evidence, having people step forward who are credible and in a position to know what was going on in the machine," says Miller, whose tenure at Enron dates to before it emerged from the conglomeration of Houston Natural Gas and Internorth in 1985. "I don't know how five people could have pulled this off."


Testimony and evidence from a broad range of former employees may also keep them in the hunt for whatever is left once Enron's bankruptcy runs its course. While the rank-and-file employees of failed companies are rarely given much consideration--or at least no more than other unsecured creditors, such as vendors--the high-profile plight of Enron's workers won them an unlikely victory on Valentine's Day.

Acknowledging the more than 20,000 participants in Enron's employee benefits plan, a trustee with the Department of Justice appointed a separate committee to represent former workers. Federal law allows for such special committees, says Nancy Rapoport, dean of the University of Houston Law School and a bankruptcy expert, but she knows of only one other case when such a panel was approved. "I think it was done for perception reasons in order to reduce tensions," says Rapoport, noting that Enron paid more than $50 million in "retention" bonuses on the eve of its Chapter 11 filing. "I think it was a wise decision, but it has a price: [An employee committee] increases expenses, which inevitably will come out of whatever assets are left for the unsecured creditors."

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.

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."

Enron began employing off-balance-sheet partnerships, which are widely used by U.S. corporations, in the early 1990s to hedge its investments in emerging markets. Often they proved to be good business decisions. Miller recalls that in August 2000, Enron Wholesale Services did a deal with one of several partnerships Enron named after a creature from Jurassic Park called a raptor. The year before, Enron had put $5 million in Active Power, an alternative energy company in Austin. The day the company went public, Enron's investment was worth $60 million. Miller's group hedged the gain by transferring the shares to Raptor during the 180-day "lockdown period," when they can't be sold on the market.

"It was a good deal," Miller recalls. "We were able to sell the shares and make a cash profit of $25 million on a $5 million investment."

That explains why Miller, who was instrumental in organizing the Severed Enron Employees Coalition and eventually wrote the group's charter, says the depiction of the horrendous Raptor losses in the Powers committee report "surprised me a little."

As detailed by the committee report, the Raptor partnerships were spun off from Enron's dealings with perhaps the best-known of its off-balance-sheet schemes, LJM--so named for the initials of Fastow's wife and two children. Raptors I through IV had the greatest impact on Enron's financial statements, the committee report said, allowing the company to conceal $1 billion in losses on poorly performing assets it couldn't dump. The Raptors' fatal flaw was that they were capitalized not with outside equity but with Enron stock.

For example, LJM1 and its related Raptors received Enron stock to hedge investments in an Internet service provider, Rhythms NetConnections, and the expansion of a fiber-optic cable network. As long as the tech companies did well, the phony hedge was harmless. As long as Enron's share price held its own, the hedge served a useful purpose. While the details are infinitely more complex, the upshot is that both Enron's tech investments and its share price tanked. The company's management complicated matters by restructuring the deals in early 2001 without seeking approval from the board of directors. Nonetheless, the tech companies continued to decline in value, as did Enron's stock.

Meanwhile, after folding Enron International in 1998, Skilling effectively shut down Enron Global Markets group last summer, telling employees that the company wanted to dump its traditional asset base in favor of its trading operations. A former executive with the Global Markets group says that, as far as he could tell, Enron Global Markets was making money for the company, booking almost $80 million in earnings in 2000.

Still, he remembers one incident that makes him wonder how much of that profit was real. Just before Christmas that year, his boss called and said he "needed" another $20 million in the fourth quarter. Because the group marked the value of its assets to market, the executive went back and examined the group's holdings for a plant or a small energy concern that might have been undervalued. When he reported the bad news, his boss told him to look again.

"We had already marked everything that we could based on our accounting policies, which basically stated that you couldn't mark it up to a higher level unless a third party was willing to come in and pay that much," he says. "We did have two companies that were in the early stages of another financing round, and they had term sheets that suggested a higher price could be had at some point. We had no deals yet, but I said, 'I suppose if we took a very aggressive stance, we could say that based on these term sheets, [the financing] is going to happen.' I effectively took $20 million of accounting profits out of 2001 and brought it back into 2000.

"That was the kind of thing that was happening all the time," he continues. "The attitude was: 'The most realistic assessment of the future was whatever made my bonus bigger at year-end. I'm not going to be here in five years anyway when it all comes crashing down, so who cares?'"

The former executive says that however misleading the transaction appeared, it was approved by Arthur Andersen and Enron's chief accounting officer, Richard Causey. Rick Buy, head of Enron's Risk Assessment Group, which signs off on the final valuation of assets for marked-to-market accounting purposes, found nothing objectionable about it either, he recalls.

"It was effectively being forced on us that it was top down, that the accountants were telling us, 'This is the way we want to account for this deal; this is what we're going to do here,'" he says. "It all seemed very strange in certain cases. But, my God, we had all these controls in place and everyone has signed off on it, it must be OK."

It wasn't OK, though, and neither were many similar transactions between Enron and its off-balance-sheet partnerships. According to the Powers committee, while Enron's board of directors relied on Causey and Buy to protect the company's interests, neither "had the necessary time, or spent the necessary time" to scrutinize the transactions closely.

Then again, Buy in particular had a mandate to ignore reality when necessary. Consider this clause from Enron's risk assessment manual: "Reported earnings follow the rules and principles of accounting. The results do not always create measures consistent with underlying economics. However, corporate management's performance is generally measured by accounting income, not underlying economics. Risk management strategies are therefore directed at accounting rather than economic performance."


In his interview with the Powers committee, Lay said he began to prepare Skilling for the CEO position some months before the transfer of power in February 2001. Lay said Skilling "appropriately slowed the flow of information" to his former boss, who remained chairman of the Enron board of directors. Meanwhile, Lay told interviewers, he began focusing on other areas of Enron's business, problems in California in particular.

For Lay and Enron, California was like the entryway to the Garden of Eden, the first substantially deregulated power market in the country. And thanks in large part to Lay's political stroke and largesse--Enron's officers, directors and employees gave millions in campaign contributions individually and through a political action committee--it certainly wouldn't be the last. Pennsylvania, New Jersey and Delaware had banded together to create a deregulated market on the East Coast, and two dozen other states, including Texas, were moving toward giving consumers a choice between private energy companies and public utilities.

Enron Online made a mint selling megawatt-hours on the spot market in California, where rates at one point were several hundred times the norm and a series of rolling blackouts darkened areas of the state. Earnings for Enron Wholesale Services increased from $12 billion in the first quarter of 2000 to $48.4 billion during the same three-month period a year later. According to several lawsuits filed last year, however, those profits were the result of price manipulation by Enron and other energy companies, including Reliant and Dynegy.

Enron could never hope to sustain those profits in any event, especially after the Federal Energy Regulatory Commission imposed price caps in California. There was also increased competition from other energy companies whose trading operations were starting to cut into Enron Online's market share. Where Enron had really hoped to distinguish itself in California and elsewhere was in retail power-management contracts.

Enron Energy Services was supposed to be Enron's most promising business unit, the crown jewel of the corporation in the eyes of some. In reality, it was a bust right from the start. The idea was that because of deregulation, the CEOs and CFOs of businesses that consume a lot of energy, such as manufacturing plants, shopping malls and apartment complexes, would look for the best deal on electricity and natural gas. But could they find it? That's where Enron came in. EES would handle everything--purchasing, delivery, metering and billing--and guarantee significant savings to boot. This was an extremely appealing offer, says Margaret Ceconi, who negotiated such deals at EES.

Compared with off-balance-sheet financing, Ceconi's experiences at Enron--which she has shared with the SEC and expects to someday share with the Department of Justice and Congress--have the dual virtues of simplicity and clarity of intent. And they speak volumes about the company Ken Lay so awkwardly called "one of the best places to work in the world."

EES had about 2,000 employees, a couple of hundred of whom, like Ceconi, worked directly on generating clients, negotiating contracts and ensuring the service was delivered. The pitch was that, based on Enron's expert assessment of supply and price trends, a company could expect its energy costs to go up over the long run.

Enron would assume that risk by buying power for whatever the market charged, while guaranteeing delivery to its customers at a predetermined price for 10 years. Sound good? There's more: Enron would reduce the price it charged by, say, 50 percent for the first few years and adjust the annual bill accordingly in the later years of the contract.

It's called "tilting the curve," and Ceconi was able to illustrate the peculiar logic behind it with a few strokes of a ballpoint pen. Seated at a conference table in her attorney's office, Ceconi sketched a standard two-line graph, added a few numbers, then drew a line, left to right, that stays constant for three years, then suddenly bellies down before rising again in about year seven. The finished drawing was an approximation of Enron's internal pricing curve, which purportedly represented what Enron calculated the price of energy would be over the next 10 years.

"This was something you would die for," Ceconi said when she finished. "Other companies couldn't figure out how Enron made money at this, because when they tried to do it, they couldn't figure out how to make money at it."

Truth was, Enron couldn't figure it out either. But it hid that fact by using a pricing curve that, contrary to what EES was telling CEOs around the country, projected that prices would drop dramatically. This allowed EES to show, on paper anyway, that its long-term power contracts were going to be enormously profitable. Moreover, using marked-to-market accounting, EES's accountants booked the projected 10-year value of the contract as earnings the day the deal was closed. The problem was that it hardly reflected the reality of EES's financial situation.

By tilting the curve to give customers an early discount on their energy costs, EES wasn't taking in enough to cover what the local utility companies were charging for gas and electricity. Meanwhile, EES was spending much more than it projected setting up the infrastructure for the retail contracts. For example, it was estimated that changing out an electric meter for one that Enron could track in Houston, whether the building was in Duluth or Chicago, would cost $1,000. It turned out the standard rate was $10,000 to $15,000. Some of Enron's biggest retail clients, such as Simon Properties and JCPenney, to cite just two, required hundreds of new meters for buildings all over the country.

Ceconi, an accountant and former banker, says it took her four months to figure out that EES was booking profits that it could substantiate only theoretically. When she pointed that out to her bosses and co-workers, they told her she simply didn't understand the business. "They said, 'No, this is energy accounting,'" Ceconi recalls. "But they knew these could not possibly be considered real earnings. Did they think they were so smart they could predict the future's curve? To a certain degree, yes, but I heard time and time again, 'Don't worry about it. That's somebody else's problem down the road.'"

Eventually, it became Dave Delainey's problem. Delainey was named EES's chief executive a year ago. The first thing he did was put a stop to the inflated marked-to-market valuations of EES's contracts. The new valuations, Ceconi says, showed that EES was losing millions of dollars meeting the energy needs of more than 31,000 buildings across the country. By May, EES had quit looking for new business. It had also changed the employee compensation formula, which originally paid a commission based on the full projected value of a contract. Ceconi saw her single commission--deals took more than a year to close--reduced from $300,000 to $25,000.

Ceconi acknowledges that she was lured away from her corporate job to become a salesperson by the promise of giant paydays. Even though the original commission formula was no longer workable, and rightly so, Ceconi apparently was one of the few who understood that. Most of the staff was furious, especially the seven who had made more than $1 million in 2000.

"Everybody knew this was going on, but nobody knew it was wrong because it was 'innovative and creative,'" Ceconi says. "Because most of the people had spent their whole careers at Enron, and they had no basis for comparison. Those of us from the outside said, 'This isn't the way you do things.' They didn't know this was something you couldn't do."

Then again, taking liberties with the balance sheet had become the Enron way. In addition to the other changes at EES, Enron folded the unit's risk assessment desk, which certified the contract values, into Enron Wholesale Services, where they were raking in the profits on the California spot market. That allowed Enron to shift about $500 million in losses off EES's June 2001 financial statement onto the books of a more profitable unit, where they would be absorbed undetected.

Around midmorning on August 4, 2001, Jeff Skilling paid a visit to an EES "floor meeting." About 100 people attended, Ceconi recalls, and there was no shortage of questions about the unit's future.

"One guy says, 'Hey, Jeff,'" Ceconi recalls. "'You said the stock price is being penalized by analysts and that we should keep on buying, yet you're selling shares every week.' And Skilling says, 'Well, all executives have to register their stock sales, and I have a plan, and I don't know when it's going to sell, and I'm building a house and my accountant says I need to do some estate planning, and 80 percent of my worth is in Enron stock. But we still think it's a good buy and you guys should be buying.'"

Apparently, Delainey's predecessor as EES's chief, Lou Pai, was doing some estate planning as well. Pai began selling his Enron shares in January 1999 and didn't stop until June 2001. But by the time anyone knew EES was a failure, Pai had made $353 million--three times the next-highest cash-out: $101.3 million by Ken Lay.

Ceconi says that everyone at the floor meeting knew the earnings reported on EES's June financial statement were bogus. Yet she remembers that Skilling touted EES as Enron's "next star," predicting that the unit would be generating $500 million in income in a year or two.

"I'm thinking, 'What drug is he on?'" Ceconi recalls. "I said, 'Hey, Jeff, what's your strategy for getting us there? I mean, do you know something we don't know? Because we have no product to sell.' He said, 'Oh, you guys are the creative ones. You'll come up with it.' He was totally blowing smoke. We all got laid off later that day."


Less than two weeks after gutting Enron Energy Services, Skilling resigned as CEO, after just six months on the job. A day after Lay announced that Skilling wanted to spend more time with his family, Skilling himself acknowledged in an interview that he had taken personally the steep decline in Enron's share price under his watch.

At the request of the board of directors, Lay once again took charge of the company. He told the Powers committee in January that at a management retreat about a month after his return, he solicited comments about Enron's problems. That led to a one-hour discussion of off-balance-sheet transactions, which most of the two dozen attendees admitted they had used on occasion. According to notes of his interview, Lay said the consensus was that "so long as the vehicles were valid, they made a lot of sense."

Lay acknowledged that he had been consulted on the formation of most of the partnerships run by Fastow, but claimed not to have known they were being used to conceal huge debts and losses until October, when the company reported a quarterly loss of more than $500 million. By then, Lay had been working hard to rally the company's employees, starting with the "Lay It On The Line" survey. There is a somewhat surprising ambivalence among former Enron employees interviewed for this story about Lay's culpability in the company's collapse, although everyone believes he failed to respond quickly enough to Sherron Watkins' detailed warning of the accounting high jinks. For that reason--and because he was, after all, CEO and chairman of the board--nearly everyone agrees he bears ultimate responsibility.

Diana Peters is convinced Lay was "a patsy" who was "duped" by Skilling and Fastow. She believes Lay was sincere when he asked employees to "Lay It On The Line," and she senses nothing sinister in his exhortation in a September 26 online chat to "[t]alk up the stock and talk positively about Enron to your family and friends."

"I think he really thought he could make things better, smooth things out and move it forward," Peters says. "I don't think he had any intention of deliberately screwing anybody, excuse my French."

John Allario, creator and Webmaster of Laydoff.com, one of a handful of electronic gathering places for disenfranchised workers and an outlet for their frustrations, was initially encouraged by Lay's efforts at leadership, but eventually changed his mind. "At the time, I thought it was a very proactive thing for Lay to be doing," he says. "He had just taken over, and this was one of his efforts to get his hands around what the company was thinking. In hindsight, it seems like a well-planned PR campaign to give me that exact feeling of comfort, that Ken was at the helm and looking out for me."

Lay acknowledged in his Powers committee interview that cashing in more than $100 million in stock options might have suggested to Wall Street that he was ripping the parachute from the back of Enron shareholders and bailing out. Lay's attorney, Earl J. Silbert, has defended the stock sales, saying Lay needed capital to repay millions of dollars in loans he had received from the company. But according to notes from his interview, Lay never mentioned the loans to the Powers committee. Instead, Lay explained that he "wanted to liquidate some of his stock to diversify because he had approximately 75 percent of his assets in Enron stock plans."

Ceconi doubts that explanation. She figures that, based on what she saw, Enron had been technically bankrupt for almost two years, and the top brass knew it. Meanwhile, she says, Lay "was encouraging people to invest in the company and selling his own stock. He was like Jeff Skilling...he did choose to turn the switch on in the first place to start selling shares every week."

It's safe to say that, in contrast to the mixed emotions about Lay, the contempt for Skilling and Fastow is shared by all former employees. They orchestrated a solution to the company's problems that wasn't a solution at all, says Michael L. Miller of the Severed Enron Employees Coalition. Miller is angry that Skilling only increased the pressure on a struggling company by trying to justify a higher share price through "deceit." The only honest solution, he says, would have been to admit Enron was overvalued and adjust the balance sheet accordingly.

Still, Miller isn't willing to tar everyone involved in the deception with the same brush. While he believes people such as treasurer Richard Causey and risk manager Rick Buy ignored their duties to shareholders, they may have weighed their options and decided it would all work out in the end.

"These guys became incredibly wealthy riding that train with Skilling," Miller says. "At the same time, I believe they viewed all this off-balance-sheet theatrics as a stopgap until we could get our [assets] sold and generate the 5 or 6 billion in cash that Skilling had been promising Wall Street for a couple years. I don't think they viewed them as a permanent part of the organization's structure, but as something that was necessary to get things off the balance sheet for this year-end, and by next year-end, we'll unwind them. And next year never came."

However it happened and whoever's to blame, the coalition's members seem eager to move on to the more pressing issue of securing $150 million in additional severance. According to the class-action suit, the coalition's claim is based on Enron's failure to give 60 days' notice before termination, per company policy. Many employees also want bonuses owed to them for their work last year; Miller says his would be "in the six figures." As for their lost retirement savings, few coalition members hold out any hope that even a fraction of that will be recovered.

"At its peak, people probably had a lot of money in their 401(k)s, but that was based on a business model that was fraudulent," Miller reasons. "How much money would people be allowed to claim they lost?"

There is some worry among coalition members that their case will be weakened somehow as former employees move on, either to focus on new jobs or to avoid being consumed by anger and disappointment. After a lot of early interest, the employee class represented by the coalition has leveled off at about 600 people.

Still, interest could pick up if Houston's energy economy doesn't. No one knows how many of the 4,500 employees laid off are back to work somewhere else; about half the coalition members interviewed have found new jobs. A pattern of discrimination has emerged in the refusal of some firms to even interview former Enron employees, says Michael J. Miller, who put in 20 years working for the company and its predecessor.

"If you were an employer and you had a choice of equally qualified candidates, and one was from Enron and one was from Duke, which would you choose?" Miller asks.

That's a stunning turn of fate for Enron employees, who were once considered the best in their field, not just in Houston, but in energy centers around the world. Even now, many employees think it's only a matter of time before people are downloading entire libraries of movies onto their hard drives and the demand for broadband will catch up to the supply. On the other hand, the company credited with opening up the country's energy markets to private companies has done the most, through its abuse of the privilege, to damage the cause. Some states are rethinking their new laws, while others have postponed enacting theirs until the federal government concludes an investigation into alleged price manipulation in California.

In the end, the lack of an honorable legacy may prove quite motivating for former employees.

"We're all very interested in seeing that justice is done," says Michael L. Miller. "And justice means not only that what is due the people who worked at Enron is returned to them, but also that there is some accountability here. Who is to blame? And that those people pay the consequences."

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