American Scandal - Enron - A Sense of Urgency | 1

Episode Date: August 27, 2019

In the mid 1990s, Enron Corporation solidifies its position as the number one energy company in America. Investment manager Sherron Watkins lands a dream job there, but quickly learns that Enron's office culture and accounting practices make it a treacherous place to work. Need more American Scandal? With Wondery+, enjoy exclusive seasons, binge new seasons first, and listen completely ad-free. Start your free trial in the Wondery App, Apple Podcasts, Spotify or visit https://wondery.app.link/rUic7i1hMNb now.  See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Wondery Plus subscribers can binge new seasons of American Scandal early and ad-free right now. Join Wondery Plus in the Wondery app or on Apple Podcasts. On Tuesday, August 14, 2001, the restaurant on Smith Street in Houston is jam-packed with the lunch crowd. Sharon Watkins looks around. She recognizes most of the faces of her co-workers at Enron, and they seem oblivious. Watkins has seen the numbers, and she knows what they mean. The ship has hit the iceberg, it's sinking, and there aren't enough lifeboats. She pushes her plate

away, having lost her appetite. Her friend Kathy looks concerned. Sharon, what's up? You've barely touched your salad, and Andy's expecting us back in 15. We can't keep the boss waiting. Watkins trusts Kathy Lynn, a former Enron VP, now at the subsidiary LJM, and she's a friend. VP, now at the subsidiary LJM, and she's a friend. So Watkins lowers her voice and leans across the table. Yeah, about Andy. Since June, he's had me reviewing assets. You know, boring stuff, but he's trying to figure out how to get some cash flowing in within the next couple of years. But here's the problem. We have these assets, Avicii, Hanover, New Pound, all hedged with this financial entity called Raptor to shield losses, or at least the appearance of losses. Oh, no, Raptors, plural. We have several of them. So, yeah, I'm familiar with the Raptors.

Well, are you familiar with the fact that they lose hundreds of millions of dollars a year? Because I wasn't until I looked into it. Enron Energy Services sent two guys to my office. They stood at a whiteboard and broke it down. Turns out these Raptors lose money every day. So to keep them afloat, Enron is stuffing them with hundreds of millions of Enron stock. Look, Sharon, it's a complex transaction, yes. But no, no, if those Raptors go bankrupt, it could trigger huge losses for the LGM division.

I looked at last year's statements, and guess what? Enron actually lost a half billion dollars. But because those losses are hidden in the Raptors, no one knows. Not the stock analysts, not the investors. And Jesus, if this thing gets out, Sharon, it's okay. All right? First of all, the accountants, Arthur Anderson, they signed off. You've got to be kidding me. Yeah. And even if the Raptors do go bankrupt, Andy doesn't care.

He doesn't mean anything to LGM. He's structured the deal so he can pull all of his money out first. Sharon's head is spinning. Kathy, it matters to Enron. LGM and the Raptors might not have anything at risk, but Enron sure does. And whoever else invested in these things Andy created. If the Raptors go bankrupt, which they probably will, all the money will be gone. But Lynn just shrugs. Though Watkins is seated firmly in her chair, she feels like she's falling. She just told Lynn, her friend, that she's uncovered the worst accounting fraud she's ever seen. And Lynn just shrugged.

As Watkins looks around, everyone's on their phone, talking at once. All the people from Enron. And one by one, the color drains from their faces. Lynn reaches for her own phone. She recognizes the number and answers. Hello? Oh my God, what? I'm with Sharon now, yeah. We're on our way. Lynn hangs up and swallows hard. Walken leans forward. What is it?

What happened? Jeff? He just resigned. Walken stares back. Jeff Skilling, the CEO of Enron, one of the most famous corporate executives in history, is abruptly done with the company he helped build. He must know what Watkins knows. And at that moment, Watkins realizes there can be no more rationalizations, no more procrastination. Her company is corrupt and sinking fast. It's time for her to get out. It's time for her to get out. In the past decade, Boeing has been involved in a series of scandals and deadly crashes that have dented its once sterling reputation.

At the center of it all, the 737 MAX. The latest season of Business Wars explores how Boeing allowed things to turn deadly and what, if anything, can save the company's reputation. Make sure to listen to Business Wars wherever you get your podcasts. From Wondery, I'm Lindsey Graham, and this is American Scandal. In the 1990s and early 2000s, Enron was like no corporation on Earth. It called itself the world's leading energy company, and few dared to disagree. Enron specialized in delivering natural gas, electricity, paper, and communications technology. It posted earnings at a rate of 20% annually and generated profits of over $100 billion.

Fortune hailed it as America's most innovative company six years in a row. Fortune hailed it as America's most innovative company six years in a row. Enron was the pride of Houston, Texas, the ultimate corporate success story, and for a decade, a radiant affirmation of the American dream. It was founded in 1985, when the Nebraska-based energy company InterNorth merged with Houston Natural Gas Corporation. In those days, Enron's mission was ambitious but straightforward. It aimed to be the premier natural gas pipeline in America. Its chairman and CEO, Kenneth Lay, considered himself one of the country's leading visionaries in energy, and his vision included deregulation.

Luckily, he had friends in the White House and well-heeled lobbyists on Capitol Hill. He wanted a free-market energy business, unconstrained by federal oversight. Once unshackled from regulation, he felt the profit potential was enormous. And then in the 1980s, deregulation became a reality, and Enron was off to the races, expanding beyond pipelines to other unregulated energy markets. And then in 1990, Lay made a pivotal hire. Jeff Skilling was brought in to run Enron's finance division. He was cunning, aggressive, and brilliant. Perhaps one of Skilling's most brilliant maneuvers was instituting an accounting system known as mark-to-market.

Under the mark-to-market system, Enron could declare profits from a deal on the very day it was signed, even if it had no idea what those profits would be. But the key to Enron's success was accounting fraud. In the 1990s, a feverish bull market stoked Wall Street expectations. Big companies pushed themselves to show annual returns of 15% or more. And Enron, unethical and exploitative, fueled by greed and little else, began slowly rotting from the inside out.

Wall Street didn't know about Enron's creative accounting practices. Analysts and stockholders were just impressed with the profits. And thanks to its numbers manipulation, Enron was on just about every analyst's buy list. But when Enron's earnings started to defy market forces, stock analysts and journalists became suspicious, eventually sounding the alarm. In 2001, Enron was revealed to be a fraud, but it was too late. When the company tanked,

it shattered the lives of thousands of employees whose retirement accounts just vanished. Enron left wreckage from California to Wall Street. The sheer breadth and complexity of Enron's crime stunned the world. In the aftermath of the company's bankruptcy, many asked how such a massive fraud could go undetected for so long. At the heart of the dark scam were Enron's corrupt leaders and brokers, but they had help from a vast network of collaborators, including outside legal and accounting companies that covered for them. At the time, the scale of the illegal manipulation of the American financial system was unprecedented. This is Episode 1, A scale of the illegal manipulation of the American financial system was unprecedented.

This is Episode 1, A Sense of Urgency. It's February 1994, and as she walks across the snow, Sharon Watkins smiles. She is officially an employee of Enron. She's only 34 years old and has been with the company a mere four months, but now she's here in Aspen, Colorado, America's most exclusive ski town. Watkins was sent here alongside several of her colleagues. Their boss, Jeff Skilling, the head of Enron's capital and trade division, sent them to represent the company at an important conference convened to help link those who run large public pension funds with big corporate

money movers like Enron. The conference was a success, and at the end of each day, there was plenty of time left over to head out into the snow or try one of the fancy local restaurants. Tonight, Watkins will do both. She approaches the meeting place and hears Andy's unmistakable laugh. Watkins likes Andy Fastow. He's a good guy, the one who hired her to manage investment portfolios. Fastow is one of the most energetic and innovative finance executives in the company, maybe even the country. Watkins reports directly to him and is confident she'll be able to move up steadily in his department.

She jogs up to the group. There's a couple of guys from Enron, Chris Bauer of Pacific Corporation Group in California, and a friendly middle-aged guy Watkins doesn't yet recognize. Bauer explains that the man is with Pine Creek Cookhouse, the restaurant they'll be eating at tonight. And then upon closer inspection, Watkins notices something. Everyone is standing in cross-country skis. She's only wearing lightweight winter clothes. Someone apparently forgot to tell her to gear up to hit the slopes. The man from Pine Creek starts handing out poles.

They're going to ski to the restaurant. He makes a vague gesture over his shoulder and says it's just around the mountain. He adds that if anyone's really not up to skiing, he can send for a sleigh to take them instead. Fastow's look of disdain says everything. Enron guys don't do sleighs. And more than anything, Watkins wants to be an Enron guy. One by one, the group pushes off towards the mountain. Watkins is a little wobbly and immediately falls behind, but she grits her teeth and pushes her skis forward. Watkins calls to Fastow and Taylor

to slow down, but they speed up. Within moments, they're gone. She's been left behind. It's not long before Watkins watches the sun disappear behind the trees. She should have reached the restaurant by now. Dusk is becoming night and she's alone, starting to get very cold and growing more and more concerned. She sees no sign of her team or the restaurant. She's lost in the dark, has gone too far to turn back. But she reminds herself that it will be okay. It has to be. Andy will realize she's gone too long and set off back down the trail to get her. And finally, lights appear in the distance. Lights, a building, and a sign that says Pine Creek Cookhouse. She opens the door,

scans the room, takes a moment to process what she sees. She kicks the door shut behind her, pulls off her gloves, angrily flings them to the floor. Fastow notices her for the first time. He's in his regular clothes, his ski gear in a heap at his feet, casually chatting with Mitch Taylor. They appear to be on their second or third glass of wine. Dinner is over. Fastow gives Watkins a look like, what's your problem? He didn't even notice she was missing.

He didn't care. None of them did. Watkins just shakes her head and asks if anyone realized that she hadn't made it until just now. Fastow tells her that next time, she'll just have to do a better job of keeping up. Watkins finds a table. This has all been just another lesson in how things are done when you're part of Enron. Enraged and embarrassed, she grabs her menu and resolves to never allow herself to get left behind again. Ken Lay's executive suite at Enron headquarters has a splendid view. He would never admit this to anyone, of course, but he enjoys towering over the city of Houston. He earned his spot at the top of this high-rise. After all, no one but him imagined a future in which the American energy industry was deregulated,

then dominated by a single company, with 20% growth so consistent you can set your watch by it. Lay believes a person in a position of power like this should maintain an air of politeness and humility at all times. Still, in private moments, he allows himself to admit the truth. The people who call him a visionary, they're right. If industry is a ship, then he's at the helm, and they're still far from port. Enron is about to turn 10 years old. Leigh is only 52, and they're just getting started on this voyage. Before he packs up and heads home, there's a small bit of business to attend to. The door opens, and Nancy enters, followed by James Alexander. Nancy is smiling.

Alexander is not. Lay rises from his desk to shake his hand. Nancy exits swiftly and closes the door behind her. The two men sit down. Alexander launches into it. He's under attack. Enron spun off one of its entities, Global Power, not too long ago. under attack. Enron spun off one of its entities, Global Power, not too long ago.

Though Enron owns 52% of Global Power's stock, Global Power is still considered independent. It's a publicly traded company in its own right, and Alexander, its president, must answer to the many non-Enron shareholders. But Rich Kinder, Enron's chief operating officer, is pressuring Global Power to buy up poorly performing power plants from Enron at prices far above market value. When Alexander pushed back, he was accused by Kinder and others at Enron of disloyalty. He's being asked why he refuses to be a team player. He's being told that Enron is Global Power's parent company, so Global Power needs to do what's best for Enron, not the other way around. Lay, his chin resting on his fist, nods sympathetically.

He asks Alexander if there's any more. Yes, in fact, there is. Alexander has heard rumors that some executives at Enron are suspected of boosting the price of power projects to increase their own compensation. Some are even employing questionable accounting practices. Alexander continues, but Lay rapidly loses interest. Alexander is clearly a man floundering, blaming others for his own shortcomings.

When he's done speaking, Lay thanks him for sharing his concerns, and Lay promises he'll speak to Kinder. Alexander beams with relief. The two men shake hands once more, and Alexander sees himself out. Lay suspects this is the last time he'll ever see Alexander, as he's already made his decision. Alexander can go. He's unworthy of global power, and once he's out, Lay will find those at global power who are truly loyal to Enron and transfer

them to Enron Capital and Trade Management, a sort of investment bank, better known as ECT, because ECT is run by a visionary like Lay himself, the talented, intelligent, irreplaceable Jeff Skilling. Jeff Skilling is pleased to see the microphone already set up. He strides onto the trading floor, the centerpiece of Enron headquarters, the place where the real money is made. His men are hard at work buying and selling natural gas contracts. They race between hundreds of monitors, closing deals, setting prices.

These men are the alphas of ECT and Enron in general. They've taken to calling themselves Skillingites, and Skilling's got no problem with that. Gentlemen, I'm here to tell you that you've done it again. ECT trading is up 15% from last quarter. I may be chairman and CEO of ECT, but I want to tell you I know I wouldn't be where I am without you. Together, we've made Enron the biggest startup in the last 20 years, next to Microsoft. But f*** Microsoft.

Skilling chuckles, but now he's arrived at his real reason for stopping by today. But I have to confess, I've been sent by HR. Yeah, I know. But let's just get this out of the way, right? There have been some complaints. Skilling turns to his left and tries not to laugh. It's there in the corner, right where HR said it was. A large cork board with headshots

of various women at Enron. He can tell the photos have been tacked, then re-tacked again and again. Skilling points to the photos. So please, someone, what the hell is this? That's a very highly sophisticated ranking system. We call it the hottie board. Okay, boys, but the hottie board's got to come down. Seriously, do me a favor. Clean up a couple things around here. Get HR off my back, okay? All right, the lecture over. Get back to making me money. Skilling steps away from the mic and heads for the elevators His Skillingites are going to help him achieve the only thing in this life Skilling really wants The CEO chair when Ken Lay retires

It's December 1995 and Sharon Watkins sits behind her desk and stretches She's about to walk out to tell the young accounting associate that he can head home when he staggers through the doorway, cradling a stack of documents as if it's a severed limb. He's in shock. Watkins asks what happened. The associate oversees the interest rate books on the ECT trading desk. He hedges the interest rate risk so that ECT's trading position

stays well balanced between losses and gains. Usually, the cash flow doesn't vary from day to day. But today is different. Today, there's $70 million missing from his rate book. Watkins isn't ready to panic. She picks up the phone and calls the head of accounting, telling her about the missing $70 million. The accountant tells Watkins not to worry, sounding like an affable customer service rep. Enron is doing just a little fine-tuning and correcting of its books.

The company made more money during the fiscal year than it actually needed, so it decided to move $70 million into next year's earnings book for now. In early 1996, the money will simply flow back into the young accountant's records. Watkins thanks the head of accounting for the explanation and hangs up. Somewhat bewildered, she explains to the young man what she was just told. He's relieved, but Watkins is disturbed. What the head of accounting just explained to her

is earnings manipulation. Not really illegal, but frowned upon and hidden from investors. But Enron didn't get to be where it is by being like the rest of the business world. Watkins has to remind herself of this from time to time, though lately she's been doing it more. It's the summer of 1996,

and Jeff Skilling is ready to put his fist through the wall. He has a huge problem he can't figure out how to fix. He's the smartest guy in the company, so if he can't figure this out, they might be screwed. The second smartest guy in the company, his second-in-command, Andy Fastow, is also at a loss. Skillings calls Fastow, Watkins, and other account experts to a conference room for an all-hands meeting. The issue is this. The ECT traders bet wrong on the price of gas, and now Enron is $190 million short of its

earning targets. That's a problem because Enron never misses its earning targets. Skilling stares directly into the eyes of each person in the room. Make no mistake, they're in the same boat he's in. They traded their way into this mess. The question is whether they can trade their way out of it. The group agrees, though, that that's not an option. So it's time to get innovative. One executive whose name Skilling can't even remember looks timidly to his left and right. Skilling tells the man to speak up if he has an idea. The executive proposes ECT try fair value accounting. Skilling's intrigued. What's that? Basically, the executive explains, Enron re-evaluates some of its key assets. Then the company claims these assets will bring in huge

money in the months and years to come. Fair value could more than make up for the current losses. Skilling loves it. It's a similar principle to mark-to-market. Perfectly reasonable, perfectly legal. Wall Street stays happy, and more importantly for Skilling, Ken Lay stays happy. Skilling looks around and sees a lot of smiles and nods. Sharon Watkins looks unimpressed, but who cares? Andy looks to be fully on board, and that's good enough for Skilling. But they're not done yet. Fair value can only work if Enron's accounting firm, Arthur Anderson, approves. Skilling orders Watkins to call them immediately and ask for permission to deploy the new fair value strategy. The ball

is now in the accountant's court. If they approve a fair value, Enron is saved. If they don't, it's doomed. I'm Jake Warren, and in our first season of Finding, I set out on a very personal quest to find the woman who saved my mum's life. You can listen to Finding Natasha right now exclusively on Wondery+. In season two, I found myself caught up in a new journey to help someone I've never even met. But a couple of years ago, I came across a social media post by a person named Loti. It

read in part, three years ago today that I attempted to jump off this bridge, but this wasn't my time to go. A gentleman named Andy saved my life. I still haven't found him. This is a story that I came across purely by chance, but it instantly moved me and it's taken me to a place where I've had to consider some deeper issues around mental health. This is season two of Finding, and this time, if all goes to plan, we'll be finding Andy. You can listen to Finding Andy and Finding Natasha exclusively and ad-free on Wondery Plus. Join Wondery Plus in the Wondery app, Apple Podcasts, or Spotify. On January 5th, 2024, an Alaska Airlines door plug tore away mid-flight, leaving a gaping hole in the side of a plane that carried 171 passengers. This heart-stopping incident was just the latest in a string of crises surrounding

the aviation manufacturing giant, Boeing. In the past decade, Boeing has been involved in a series of damning scandals and deadly crashes that have chipped away at its once sterling reputation. At the center of it all, the 737 MAX, the latest season of business wars, explores how Boeing, once the gold standard of aviation engineering, descended into a nightmare of safety concerns and public mistrust. The decisions, denials, and devastating consequences bringing the Titan to its knees,

and what, if anything, can save the company's reputation. Now, follow Business Wars on the Wondery app or wherever you get your podcasts. You can binge Business Wars, The Unraveling of Boeing, early and ad-free right now on Wondery Plus. A week has passed since the all-hands-on-deck meeting with Jeff Skilling. Sharon Watkins still can't believe that it actually worked. Arthur Anderson said fair value is fair game.

And just like that, $190 million in losses was erased. An indisputable triumph for Enron. Everybody wins. Watkins' phone rings. It's Fastow's secretary. She sounds concerned when she tells Watkins that Fastow wants to see her. As Watkins walks down the hallway to Fastow's office, she has a sickening feeling, like being called to the principal's office. Though she can't fathom what she did wrong. Andy looks up when she enters. He's frowning. Sit down, Sharon.

She can tell right away he's angry. Sharon, it's been brought to my attention that you f***ed up. I'm sorry, I don't understand. You don't? You don't remember the other day when the guys from Arthur Anderson were here and you said, quote, you guys are really going to let us get away with this fair value stuff? When are you going to grow some balls? You don't remember that? Watkins actually gulps. What she says next comes out fast. Andy, I didn't mean anything by it.

I was just butchering their chops. You know, it was a joke. Everyone knew it was a joke. It was, it was just, just shut the fuck up. He holds his hands up for her to stop. Fastow shakes his head and looks down and massages his temples. It's as if the sound of her voice alone gives him a headache. Watkins is floored.

Fastow's never spoken to her this way. Listen, you manage investments, right? Well, it's not your place to question or make fun of new accounting practices. I don't give a shit whether you're joking or not. Just stick to what you know or keep your mouth closed. Clear? Um, clear, yeah. Yeah, I'm sorry.

Don't let it happen again. And without another word, he turns back to his computer and starts typing. As she heads back to her office, Watkins feels shaken. She's convinced she's made a serious career misstep. She'll have to figure out some way to make up for it. Ken Lay's private jet is in the hangar gleaming, just the way he likes it.

He's headed to Washington for some policy discussions. The plane's stairs are lowered, waiting for him. Jeff Skilling stands outside the plane, looking irritated. He's not scheduled to go on this trip, so seeing Skilling, Lay wonders what could possibly be wrong. Skilling doesn't hesitate to tell him. He tells Lay he knows Rich Kinder is resigning, leaving the COO position open. Well, that's correct, Lay explains.

Kinder wanted Lay's job and grew tired of waiting for Lay to retire. What Lay doesn't say, though, is that he was all too happy to see Kinder leave after he learned Kinder was sleeping with Nancy McNeil, Lay's assistant turned Enron VP. That's unacceptable. Nancy's absolute loyalty to Lay was now compromised. Kinder had been a hero once. He gave the whole company what everyone referred to as a sense of urgency. With his simple phrase, Kinder defined Enron's high-stakes, succeed-at-all-cost culture. Lay trusted him above anyone else. But that was the past.

Now, Kinder has to go. Skilling gets down to brass tacks. He tells Lay that he's made a lot of money for Enron, and his time has come. Either Lay agrees to promote him to COO immediately, or Skilling leaves the company. Lay looks at his watch. He's less than ten minutes from wheels up, and he can't afford to drag this out.

He also can't afford to lose Skilling or the disastrous optics of two top executives leaving in the same month. Lay decides on the spot to give Skilling what he wants. Skilling smiles and eagerly pumps Lay's hand over Joyd. Lay nods, then makes his way up the stairs of his G-100 jet. As the plane pulls onto the tarmac, Leia is confident he's made the correct choice. Yes, he has dramatically increased the power and influence of Jeff Skilling within Enron, but that's a good thing. Skilling is aggressive, sometimes crude, but effective.

He's the hammer. Leia's the velvet-gloved hand that holds it. In the spring of 1996, Rebecca Mark feels unstoppable. She's the commanding presence in this conference room, and several of the board members smile at her in admiration. At 42, Mark is indisputably the top woman in the company, CEO of Enron International. She's very proud of that fact. The guys bulk up in the gym and scream at each other to display their power. Mark can scream too, of course, and she gets deals done. She also wears short skirts and ensures that her hair and makeup are always magazine cover ready.

There's an element of performance in what she does, but this is all one big game anyway. She's a star player. Mark knows that some call her a living legend and others call her a walking publicity stunt. She doesn't care, as long as they all remember to call her what she truly is, boss.

Sometimes though, when you're a boss, you have to take a little heat. Like this afternoon, Jeff Skilling is at it again. He's extra full of himself after getting promoted to COO. He openly despises Mark and never misses an opportunity to undermine her. She's just finished a presentation showing that Enron International is stronger than ever. It's successfully expanding by securing deals every month to deliver power all over the globe. Lay appears pleased, as do the other top Enron execs at the conference table. Skilling

scoffs. None of it's good enough for him. When it's his turn to speak, he practically screams, telling everyone that Mark's work doesn't matter. He says she's trying to make money the old way, building massive power plants and pipelines. She's out of touch and holding the company back. Enron needs to focus on the future, and the future is energy trading. Mark defends herself. Her financials are unimpeachable. She's not just bettering Enron's bottom line. She's bettering society by bringing energy to power-starved nations. Flustered, Skilling insists there's no way Mark's upcoming projects will deliver the promised returns. He wants to rerun her projection models himself.

Only then will the board see the truth. Calmly, Mark looks at Leigh, who looks back at her admiringly. She informs Skilling that Leigh and Kinder, prior to his departure, entrusted Mark to run Enron Global Power and Pipelines. Mark has her own bookkeepers, and Skilling has no role in her division. Skilling stammers and sputters, but then goes quiet. Mark allows herself a victorious smirk. Mark knows that Skilling wouldn't be going after her so hard if he didn't see her as a threat.

And Mark is a threat. She's his only real competition for CEO of the whole company. And that's why Skilling wants her out of the way. But Mark is a fighter. And if Skilling wants to bring her down, he's going to have to try a little harder. In January 1998, it's another miserable winter day in Houston, and a miserable day for Sharon Watkins, too. It was two years ago that Andy Fastow was screaming at her for making accounting jokes, and Watkins has since redeemed herself many times over. After she helped evaluate a massive metals trading unit acquisition, the higher-ups at Enron, including Fastow, started treating her

with real respect. For the last few months, she's been building up to her greatest achievement yet. And then, just like that, it all fell apart. Watkins had a plan, a plan that would get her promoted to at least an Enron VP. As VP, she'd get paid more, and her value to the company would be unquestioned. To become VP, she needed to go out into the world, look for a potentially massive deal, and close it herself. And after much work, she found such a deal. Cobre Mining Company in New Mexico needed a loan to improve and expand its copper mine. Enron would not only deliver the money, but sell Cobre power so its mine could be run more efficiently.

In return, Cobre would sell Enron the copper it produced at a discount, giving Enron's metals and mining trading unit a major boost. Watkins did all the legwork, got Enron and Cobre to agree to the terms. The only thing left is to make it official. Cobre's executives arrived in Houston last night to sign the contracts in person. Then this morning, at 7 a.m., Watkins got a call from Jeff Skilling. She picked up the phone and steeled herself for what she knew was going to be bad news. Skilling told her Enron was pulling out of the deal because stock analysts don't like the looks of it. They worry Enron is diversifying too fast and jumping into side businesses it doesn't know

enough about. Skilling tells Watkins to break the news to the Cobre guys, then hangs up. Watkins feels a sense of frustration and sadness worse than any she's ever felt in her professional life. The men from Cobre, Jeff Ward and Rich McNeely are waiting at the Four Seasons downtown, expecting Watkins to show up any minute with the final papers for them to sign. The hotel is 10 blocks from Enron headquarters.

Watkins decides to walk there from her office. On the way, she tries to think of how she's going to explain this. When she arrives at Ward and McNeely's hotel suite, her face says it all. Ward immediately reddens. He asks, is Enron backing out? And Watkins nods. Ward sweeps his hand across the table, sending a metal tissue dispenser flying. He asks Watkins if she understands that she's just destroyed his company. McNeely reminds Watkins that Cobre had been fending off a hostile takeover by a rival mining group. Enron was supposed to step in and save them. Enron made a promise. Now there's no way he and Ward can hold on to Cobre, and it's too late to secure another partner.

Watkins feels tears coming, but she doesn't let them fall. She needed this to work. Ward and McNeely needed this to work, but all she can do is apologize. Ward sucks in his rage and hisses at her. You can just tell Ken Lay and Jeff Skilling they are the most unethical people I've ever met, and honestly, I don't see how you can stay here and work at this company. On the walk back to Enron offices, Ward's words reverberate in Watkins' head. Maybe it's time to look for employment elsewhere. But then she grimaces. She can't afford to leave now. Every job interview will contain the same question. How did you work at Enron for four years without making VP? Watkins will look like she's too unambitious or unimaginative to be worthy of promotion. She makes a decision. Once she gets a promotion, then she'll look for another job. But first, she has to find another deal. And soon.

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Exclusively with Wondery Plus. Andy Fastow can never tell what Ken Lay is thinking. The man's a sphinx. A classic old-school Midwestern type. Not like Fastow. Fastow is a fast-talking, jersey-hard-on-the-sleeve kind of guy. Fastow and Skilling are done breaking it down. They have just told Ken Lay about LJM, and they're awaiting his response. LJM is ostensibly an investment fund,

but more to the point, it's a special purpose entity, or SPE. Accountants use SPEs to isolate financial risk. A company like Enron might own an asset, and that asset might be failing. The SPE exists on paper to buy that failing asset and take it off Enron's hands and take it off Enron's balance sheet. SPEs can be very, very useful when you want to minimize the appearance of losses. And LJM is not Fastow's first SPE creation. There's Jedi, Jedi 2, Shuko, but LJM is bigger than all of those and more important. And that's why Fastow used the initials of his wife and sons to name it, LJM, and not Star Wars characters. But there are some at Enron that just don't get it. They're not bold enough to comprehend the truth that in business, some rules can be bent and

others can be bent and others can be broken. And if you're smart enough, like an Andy Fastow or a Jeff Skilling, then reality can be what you say it is. Fastow and Skilling explain LJM will live on paper and save Enron millions. That's all anyone really needs to know. Lay says he's on board. Fastow smiles, but now comes the tricky part. Fastow explains that actually there is a slight catch. Since LJM is technically an investment fund under Fastow's control, Fastow would need to be exempted from Enron's code of ethics. Fastow plans to invest about a million dollars of his own money in the fund,

but that's not all. He also intends to collect management fees from the other investors. The problem is, the code says no employee of Enron may profit from a company that works with Enron. This provision may be waived, however, as long as the business in question does not adversely affect the best interests of Enron. Fastow promises Lay that LJM won't hurt Enron in any way. Ken Lay nods once again. He understands perfectly, and will talk to the board about getting Fastow the exemption. Skilling gives Fastow a victorious look that says,

You did it, buddy. 1999 has been a very good year for Sharon Watkins. Almost a year to the day after Cobre blew up in her face, she closed a major deal in Korea worth a half billion dollars. And at last, she's an Enron VP. She's also a mother, recently giving birth to her first child, Marion. Now Watkins is doing deal support work, advising those making Enron deals in the Caribbean. She's at her desk drafting some routine contracts. For weeks now, Watkins has been deeply involved in the business of the company's

latest off-the-balance-sheet SPE called Whitewing. Enron recently sold Whitewing a natural gas pipeline in Colombia. It's called Promigas, and it went for $136 million in cash, at least on paper. and went for $136 million in cash, at least on paper. Even though White Wing was officially the buyer, Enron put up the money itself, and it recorded the transaction as profit for Enron, not a cost. Watkins isn't entirely comfortable with this practice, but she also knows that Enron did generate over a billion dollars in actual cash flow this year.

So you could argue it doesn't matter if a single $136 million deal isn't correctly accounted for. She's received word that Enron may want to buy Promigaz back from Whitewing at some point in the future. That way, everything will end up in the right accounting column in the future. She's working on that paper now. And then there's a soft rap at her office door. In walks Chief Accounting Officer Rick Cossie. He asks Watkins what she's working on. She explains that she's drafting the white wing buyback agreements. Cossie says she can stop what she's doing right now. Watkins asks why. Because no paper trail can exist with any buyback rights. Then Cossie heads back to his office.

Watkins has been at Enron long enough to understand what just happened. Obviously, if Cossie is wearing of a white wing paper trail, that means that white wings legal status as an off balance sheet SPE is questionable. Arthur Anderson has been supportive up until now, but the accounting firm is telling Enron it will only be pushed so far. Obviously, Enron is hiding something. Watkins starts to think. She's got her promotion. Perhaps it's time to move on.

But she can't. She wants to have another baby soon, and companies don't often respond well when you request maternity leave right after they hire you. So Watkins puts her day's work in the shredder. She'll stick it out just a bit longer. That same night, in her office at Enron Global Power and Pipelines, Rebecca Mark allows her rage and frustration to boil over. It's nearly 10 p.m., and everyone is exhausted,

but she's not going to let any of her consultants go home yet. Not until they deliver some answers on how to save Azarex, her latest and grandest venture yet. Goddammit, I get that Azarex is failing. What I don't get is why. Enron conquered natural gas. It conquered natural gas trading. It's about to conquer electricity. We own Azarex.

Why can't it conquer water? One of her consultants tries to explain. The idea was solid, Rebecca. Set up Azarex as a global water provider. It makes sense, but the obstacles, unfortunately, are just way more daunting than anyone anticipated. That's not good enough. Water is going to be the leading commodity of the 21st century. The water industry currently generates $300 billion a year. Why can't we get a piece of that? We can't afford for Azarex to fail, because if it does, we all lose our jobs. So figure it out. Rebecca, we've tried, but our model simply isn't working. We tried to buy other companies.

I tried to buy other companies. I went to Brazil. I went to Mexico, Argentina. It made sense at the time, but those smaller companies, well, the French have dominated the global water business since there's been a global water business. And frankly, Azarex has run out of smaller water companies to buy. We're just out of time. We have to announce that there's no way Azarex can make its fourth quarter earnings. God damn it. God damn it. Rebecca would flip the table if she could. She breathes hard and tries to regain control.

She can rage all she wants. It won't change the facts. There's no way out. Azarex is going down, taking her career with it. He knew this would happen. Who? No. Pack up.

Go home. Rebecca Mark has to smile. Skilling set a trap for her, and she fell right into it. Skilling oversaw Enron's initial investment in Azarex, and he set the terms. Azarex has to pay Enron back its investment immediately after filing its IPO. It was a typically hard bargain from Skilling. But Mark didn't mind. She was confident Azarex would generate huge profits,

confident she could prove Skilling and all the rest of the doubters were wrong, just like she always had. But this time, it was different. This time, Mark bet big on herself, and for the first time in her life, she lost. She thought Skilling underestimated her, but it turns out she underestimated him.

Now Rebecca Mark will have to stand before Enron's board of directors and the entire world and admit she failed. Days later, Jeff Skilling lets the California sun wash over him. Enron's stock price is soaring, and Rebecca Mark has been squashed. There's just one last item for Skilling to check off his end-of-the-millennium to-do list. Skilling strides into the California Public Utilities Commission building to deliver his prepared remarks on deregulation. The utility execs applaud as Skilling describes what deregulation of the state's electricity market can do for them. Deregulation will lead to a free market. Deregulation means more competition between suppliers. And deregulation, Skilling assures them, will lead to lower prices. Skilling tells them if California deregulates,

Enron can help the state save $9 billion a year. And with that sort of money, let me tell you what you can buy every year, Skilling says. You can triple the number of police in Los Angeles, San Francisco, Oakland, and San Diego, and you could double the number of teachers. The enthusiastic ovation that follows tells Skilling all he needs to know. California will deregulate, and when it does, Skilling will be there to make billions. Soon, California's future will be powered by Enron Corporation. On May 24, 1999, Tim Belden is nervously cracking his knuckles. He's young, slender, balding, and smart. In a battle of wits, few stand a chance against him.

That's probably why Enron hired him to run its West Coast trading after California deregulated electricity. There in the office, amidst Nerf footballs and blaring plasma TVs, Belden hunkered down every night and boned up on California energy law. All 1,100 or so pages of it. It's mind-numbing stuff, but Belden memorized it. And he did it for one reason, to exploit California's arcane and poorly managed power delivery system.

And now that he's finished studying, it's time for a little test. It's 6.10 a.m. Belden contacts California Independent System Operator, or ISO. He tells them Enron is projecting a peak in energy demand for the next day. It's news to them, but they're happy for the heads up. Then Belden goes to the state's electricity market, the California Power Exchange, and submits bids to sell them about 3,000 megawatts to help them meet the unexpected demand. Then he waits. Less than an hour later, the exchange office gets back to him. They'll buy the 3,000 megawatts. So on to phase two. With his bids

accepted, Belden now has to select a transmission path to deliver his 3,000 megawatts to the exchange. He picks the Silver Peak route because he knows it can only handle 15 megawatts at a time. Belden again waits for the call and gets it four hours later. It's the ISO. Belden's absurd request set off alarm bells. The ISO rep wants to know if there's been some kind of mistake. Belden smiles and admits that he did it on purpose. He just wanted to see what would happen. And after clearing everything up with the ISO rep, Belden hangs up, shaking his head, not believing it worked. Belden knows the rules. Because the line was congested, his 3,000 watts couldn't be delivered. Of course, that's because he deliberately overloaded the line. But now the

ISO is required by law to scramble for ways to send his 3,000 watts along other routes. And the ISO will pay any company it can for help alleviating the congestion he created, including Enron. These frenzied, last-minute transactions will cause the price of electricity to spike by more than 70%. Enron can then jump in and sell the state power it never actually needed in the first place at a huge profit. The people running the ISO's Byzantine system don't even know they're being lied to. Belden has just poisoned the ISOs and then sold them the antidote. Tim Belden knows that when state authorities figure out what he's done, he'll probably get fined.

Ten, twenty grand maybe. But that's a small price to pay for a very good joke that today made his company ten million dollars, with hundreds of millions of dollars a month to come. From Wondery, this is episode one of five of Enron for American Scandal. On the next episode, Enron plays games with California and the state descends into an energy crisis.

Sharon Watkins strikes a Faustian bargain with Andy Fastow. And Jeff Skilling learns to be careful what you wish for. To listen to the rest of this season of American Scandal, start your free trial of Wondery Plus in the Wondery app, Apple Podcasts, or Spotify.

With Wondery Plus, you can listen to other incredible history podcasts like American History Tellers, History Daily, Tides of History, and more. Download the Wondery+, you can listen to other incredible history podcasts like American History Tellers, History Daily, Tides of History, and more. Download the Wondery app today. If you'd like to learn more about Enron, we recommend Power Failure by Mimi Swartz with Sharon Watkins, and The Smartest Guys in the Room, The Amazing Rise and Scandalous Fall of Enron by Bethany McClain and Peter Elkind.

This episode contains reenactments and dramatized details. And while in most cases we can't know exactly what was said, all our dramatizations are based on historical research. American Scandal is hosted, edited, and executive produced by me, Lindsey Graham, for Airship. Sound design by Derek Behrens. This episode is written by Hannibal Diaz. Our senior editor is Karen Lowe.

Executive producers are Stephanie Jens, Jenny Lauer-Beckman, and Hernán López for Wondery. Wondery.