Vanity Fair, April 2002.
Mary Brenner article on Jan Avery of Enron, page
205
"In Houston, Avery went to Broadband Services, and
during her interview there she was asked to take a look at the projected trading
models. It would be her job to help determine the pricing for the
Broadband swaps - trades that would later provide the basis of Bill Lerach's
invective in court, when he would compare them to Michael Milken's fraudulent
operations.....
Avery studied the models and told the head of the
division, "There is no way that these can work." She then walked away from
the job and was moved to the international group, where she worked on a deal to
create a trading hub for liquid gas in Malaysia. Skilling's purge had now
infected the entire company, and there were waves of firings. While in
Kuala Lumpur to negotiate with the local oil-and-gas company, Avery learned of
the "ethnic cleansing" being used to close down her division. "Don't
worry, they are keeping the best people and re-deploying them," she was
told.
She was next assigned to Enron Energy Services
(E.E.S.), the playground of Lou Pai, who had set up a division to trade energy
in California. The move meant changing buildings and giving up her large
office for a trading desk. E.E.S. sold "bundled energy" to customers such
as Starwood Hotels, J. C. Penney, QUAKER OATS, and Owens-Illinois, the glass
company. The "bundle" was a promise of future service -- meaning
air-conditioning replaced, lightbulbs changed, wiring fixed. In her first
weeks, Avery approached a commodity analyst who was proposing a price that would
absolutely guarantee a loss to Enron. "We can't do this," Avery told
him. "How can you be selling something that is a negative?" The
commodity analyst replied belligerently, "Just do it. We sell negatives
all the time."
($101 billion comes in as revenue in 2000, and
in order to reduce it to a near-normal expected thin profit margin
characteristic of a trading company, negative deals are done and treated as
"cost of goods sold" ...)
------------------------- BAXTER
p. 180
The Enron Wars
If there was one thing Jan Avery knew when she
joined Enron in 1993, it was numbers. But nothing added up. New
evidence reveals that the seeds of Ken Lay's pattern of hiding loses went
back even further -- all the way to 1987.
By Marie Brenner.
... shortly before his death, Baxter told
colleagues that he had become a pivotal figure in the scandal, and that he stood
between Ken Lay and Jeff Skilling (former C.E.O.'s of Enron) going to
jail. Avery was apprehensive as well ...
-----------------------------
p. 196, caption under picture of Michael
Milken:
"convicted junk-bond tycoon Michael Milken, left,
who helped Lay finance the Enron merger."
"As the Enron tentacles spread, it became
increasingly difficult for Fastow and Skilling to disguise their
ambitions. The deal structures became more and more byzantine. At
the broadband division, which trafficked in the fiber-optic cable used in
high-speed Internet connections, trades called "Barney deals" - meaning "I love
you, you love me" - were constructed. Enron would sometimes swap control
of its fiber lines with those of another company, only to undo the transaction a
few days later, so as to create the appearance of volume. Other maneuvers
pushed hundreds of millions of dollars of trading equity around in a circle, a
practice employed by such companies as Qwest, Cisco, and Global Crossing, which
was headed by Gary Winnick, who had trained at Drexel Burnham.
p. 195
.... The aura of fraud permeated Enron from its
inception in 1985, when the legacy and corporate style of Michael Milken were
imprinted on Lay and his company. It was Michael Milken and Drexel Burnham
that helped raise the $2.3 billion needed for the InterNorth-Houston Natural Gas
merger. A little-known fact is that Enron stock was one ingredient of the
scandal that brought down Michael Milken and Dennis Levine. Tipped off by
a banker at Lazard Freres, Levine and his group of insider traders profiteered
on the merger, as James B. Stewart has reported in "Den of Thieves." They
later went to prison.
When Lay became allied with Milken in 1985, the
junk-bond king's reputation as the genius of inventive financial structures was
at its peak. Not long before Drexel Burnham chief executive Frederick
Joseph denounced the press for its "outrageous" allegations linking Milken to
insider trading and the unsavory affairs of arbitrageur Ivan Boesky, Lay arrived
in Beverly Hills in search of the financing he needed to realize his
dream. The steady drumbeat of allegations in 1986 concerning Milken's
honesty would have alarmed a more prudent C.E.O. In a 1987 interview,
Milken went as far as to defend his business practices by boasting that he was
helping Enron increase the size of its debt offering by an additional $225
million. Lay never cut his ties with Milken, and would later talk about
him as a visionary who had been unfairly prosecuted. After Milken got out
of jail, Lay invited him to speak at an Enron conference, despite a vocal
protest from lawyers inside the company. "Ken always thought Mike was an
out-of-the-box thinker who deserved sympathy," an Enron executive
said.
In one magazine spread, Lay was portrayed as the
wizard of energy, his body a glowing electric-power line. As for the
Kool-Aid, it was the elixir of money."
----------------------------- daisey and closed
loop imagry presented by Bill LeRach is noted in the article
-------------------------------------
Mary Brenner's article references the April 1987
Board minutes of Enron. The members of the board knew about millions
missing and voted to keep the employees on board:
p. 198
On January 23, 1987, (Herb) Perry (former Enron
auditor) says, his boss, David Woytek, the vice president of audit, got a call
from a security officer at Apple Bank on 42nd Street in New York. "Hey,
something interesting happend. You should know about it. There are
unusual cash transactions from the Isle of Guernsey coming into my bank from
Enron in $100,000 increments!" the officer said. The approvals of the
transactions, he went on, were not coming from authorized corporate treasurers
but from two executives in Valhalla, New York, named Louis Borget and Thomas
Mastroeini. "Broget and Mastroeini appear to be writing checks to
themselves." the bank officer said.
Woyteck called Rich Kinder and then spoke to an
aide of Enron's John Harding. The news of the suspected fraud rocked the
audit staff. Enron Oil appeared to be a great source of profit for Enron,
and Harding had personally appeared before the board, one auditor told me,
describing in detail the connections to the Saudi royals and Kuwait that had
enabled his executives to make such vast trading profits. All the
midwesterners at Enron, including Ken Lay, understood pipelines and their rich,
dependable cash flow, but Harding's description of the potential bonanza to be
made in trading money thrilled them..."Lay told us 'Just go up there and get the
money back,'" Perry said. By then the audit department had gotten
statements from Apple Bank and suspected that Borget and Mastroeini were keeping
double books. Perry, who went with Woytek to Valhalla, was sternly warned
"Whatever you do, do not upset Borget.'"
(story continues two days later) 'I can't believe
you are going to ask us to do this,' Kinder told Woytek, 'Get out of the
building and come back to Houston.You are off the case.'" The reason?
"They were all scared," one auditor told me, "that the traders would get upset
and they would lose the income."
Perry remembers Kinder saying, "We are turning the
investigation over to Arthur Andersen." ... I asked the auditor to read me the
minutes from the April 29, 1987 meeting. "Dr. Jaedicke called upon
management for a matter that involved Enron Oil Corporation that was
investigated by the company and subsequently investigated by Arthur Andersen ...
After a full discussion, management ("This was Ken Lay,' the auditor said)
recommeneded the person involved be kept on the payroll but relieved of
financial responsibility, and a new chief financial officer of Enron Oil Corp.
be appointed. The committee agreed with reservations ... For the Enron
auditors, the April board meeting was prophetic. "It was obvious to us and
to Arthur Andersen that (Borget and Mastroeini) had opened fraudulent bank
accounts, and we felt that they were going to continue to manipulate
transactions," one auditor told me. "Lay read the report and he read his
budget, and estimated how much they made and if they were fired what he could
lose ... My conclusion was that this is a guy who puts earnings before scruples,
rather than reacting to the dishonesty right in front of him."
...
Lay's designated watchdog was delayed in getting to
Valhalla in 1987, and soon Borget and Mastroeini had spun out of control.
They bet long on oil as the prices dropped and shorted when the prices
rose. Borget called Houston and said, "There is going to be a huge
loss. About a billion dollars."
(goes on to explain that the transactions were
unwound through negotiations such that the loss was reduced to $185
million. Later we may hear war stories of strong arm tactics used to
threaten counter-parties).
-----------------------
NOTE: In testimony before the Senate, no year
was used and the dialogue blended in. I was left with the distinct
impression that the $1 billion "loss" occurred in 1993 and that is the same year
the MIPS was created. As it turns out, the $1 billion loss occurred in
1987 and the MIPS was created in 1993, however it cannot be confirmed that it
was created to offset a $1 billion write-down or adjustment. By
coincidence, Jan Avery was hired in 1993 to "take care of a $142 million loss"
and there were no records. Her impression at the time Mary Brenner wrote
the article was that it might related back to the matter that occurred in
1987. Jan Avery had only one piece of the puzzle. The losses in 1993
may have been greater with other units combined, such that the MIPS was a
vehicle to provide $1.2 billion in liquidity to Enron while offsetting losses
... we will have to see what discovery brings.
--------------------------
When Skilling or Fastow would order bizarre and
questionable off-the-books deals, Jeff McMahon then as Treasurer would follow up
with staff and frequently say "We all have to drink the Kool-Aid." While
the interpretations given by people suggest this was a sugar-coated phrase
.... it could also be intrepreted to mean "we must all commit suicide together"
if McMahon intended this to be a reference to Jonestown. Recall that Jeff
McMahon is serving as President of Enron.
--------------------------
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