Enron: The Fastows' Plea

Enron Probe

Enron Corp. former chief financial officer Andrew S. Fastow and his wife today are expected to plead guilty to criminal charges. The deal could lead investigators to what other top executives knew about massive fraud at the energy giant.

Peter Elkind, co-author of "The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron," was online Wednesday, Jan. 14 at 2 p.m. ET to discuss the plea and investigation.

A transcript follows.

Elkind is a Fortune senior writer. He is an award-winning investigative reporter and the author of "The Death Shift." He has written for The New York Times Magazine, The Washington Post, and Texas Monthly.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Bethesda, Md.: I read your book & found it terrifically informative. So... now, I guess, we know what happens when the consultants actually take over a company...

And, by the way, it looks (given that the Fastows make their pleas this afternoon) that the prosecutors are really going to go after Skilling and Lay, no?

washingtonpost.com: Peter, a lot of readers have asked similar questions - how important is Andrew Fastow to the Enron investigation?

Peter Elkind: Glad you liked the book. Yes, the Enron story does show there's a big difference between theorizing about a business, and actually running one--sort of like the difference between accounting profits and cash profits.

While people are impatient with the pace of progress on the prosecution front, I think it's been clear for some time that the feds are very much gunning for Skilling and Lay. Lay's political connections notwithstanding, these are professional prosecutors who want to take the case as far as they can. Even if you're viewing it cynically, there's no political advantage these days to be cutting Ken Lay any slack.

On the question of how important Fastow is to the investigation, the answer is extremely important. While he's not the only possible path to the top executives at Enron (Skilling and Lay), he's the most direct path. If anyone will know what directions Skilling and Lay gave--what specific knowledge they had about Enron's fraud--it's Andy Fastow.

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Oakton, Va.: Are the Fastows victims/scape goats of the Enron debacle or true criminals?

Peter Elkind: Barring a dramatic last-second turn of events, they're going to admit to being true criminals within the hour. Andy Fastow was at the center of Enron's misdeeds. Lea was a far smaller player. I certainly wouldn't call either of them scapegoats.

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Washington, D.C.: What role did Enron's outside auditors play in the company's collapse? Were warnings sounded before the company's debt hit 38 BILLION dollars?

Peter Elkind: Enron's outside auditors played a big role in allowing the Enron fraud. Like the company's bankers, and lawyers, they didn't know everything bad that Enron was doing--some things were deliberately withheld from them. But they knew plenty about what was going on, and simply failed to say 'no.' there were plenty of warning signs for years--to the extent that Arthur Andersen accountants joked openly about how Enron pushed the envelope. The accountants, bankers, and lawyers were all Enron's enablers. A fraud this big couldn't have happened without them.

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Dulles, Va.: What was the hardest part about writing this book? Were key players willing to talk to you at all?

Peter Elkind: Without disclosing sources, I'd tell you that we had very good access to people at all levels of the company, from the bottom to the top. Needless to say, many were wary, wanting to keep their heads down, lest they get cut off. There were a dozen investigations underway while we were reporting and writing--most significantly, the criminal investigation by the justice dept--not to mention civil litigation of various stripes. All that made coaxing sources to talk to us considerably more challenging, but we're ultimately very happy with the access we got.

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Long Beach, Calif.: What do you know about Enron's white elephant Power plant in India? I find it outrageous that Dick Cheney would openly blackmail the Indians to buy the billion dollar mistake as part of our National energy policy. What do Indian power plants that charge four times the going rate have to do with US energy policy? Will this EVER be investigated?

Peter Elkind: We talk about the India plant in great detail--it's a good part of a chapter in the book. It's a complex piece of the tale, and says a lot about what happened to Enron.

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Washington, D.C.: Isn't Wall Street to blame for not scrutinizing Enron enough?

Peter Elkind: Absolutely. When the book was published, we excerpted a chapter from the book--supplemented by some additional reporting and documents we obtained--as a cover story in FORTUNE. It focused specifically on the role of Wall Street. the headline was: Partners in Crime. We obtained scores of documents making clear the banks knew they were collaborating in deals that would mislead investors.

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Washington, D.C.: What was the attitude of Enron officials? I've heard that they were pretty condescending -- telling people who didn't understand how the business worked that it was too complicated for most folks to grasp.

Peter Elkind: Arrogance played a big part in what went wrong at Enron. It was in the air there--and angered and alienated many of those who did business with the company. When Jeff Skilling was a mckinsey consultant, there was a saying about him: "Sometimes wrong, but never in doubt." that became true of Enron. Those who didn't buy into Enron's story were dismissed as being intellectually inferior: "You don't get it!" was the stock line.

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Alexandria, Va.: What kind of picture do people paint of Andrew Fastow? Was he a bully who forced through his plans, or was he more subtle in his manipulations?

Peter Elkind: Fastow was a bully--not only to those outside Enron (such as bankers), but to those inside the company--those, for example, that were questioning the sweet deals that he'd set up for his own LJM partnership, which was doing business with the company. But he could also be more artful at times. He was a practitioner of the carrot-and-stick approach (the carrot being Enron's massive investment banking fees, in the case of the banks; the stick being a profanity-laden, threatening tirade).

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Herndon, Va.: I'm excited to read your book. Have you investigated any linkage between the California power shortages of a few years back and Enron's malfeasances?

Peter Elkind: Thanks. We do have a chapter on California, which talks in great detail about Enron's role. It's a pretty fascinating story.

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Tulsa, Okla.: Do you think the Bush family has been fairly or unfairly labeled a "friend" of Enron/Lay? Is Bush tainted by this scandal? Wasn't Lay also tight with the Clintons?

Peter Elkind: It's certainly fair to call the bushes friends of Enron historically. While the current president was pretty disingenuous in how far he went in trying to distance himself from lay after the scandal broke--he made it sound as though they had no relationship, despite their exchanges of personal notes and many meetings--it's the first president bush who was closer to Ken Lay personally. It's also quite true that Enron and lay sought--and received political favors--from the clinton administration too.

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Laurel, Md.: "Enron" has many culprits on many levels. What about the press? The 90s euphoria taught certain publications and electronic outlets that a rising stock market was good for ratings. Was too much of the press willing to go along with the story about a brilliant new business model, without asking the skeptical questions it should?

Peter Elkind: In a word, yes. The press absolutely joined in with everyone else in buying into the brilliance of Enron's business model. There were precious few skeptics--notably a story by Forbes' houston writer Toni Mack very early, warning about mark-to-market accounting; a piece in Fortune by Harry Hurt, and then my co-author, Bethany McLean's, piece in Fortune in early 2001. The press Enron received--and fortune was certainly no exception, as we acknowledge in the book--was almost universally positive. It's entirely justified to put the media in the group of those who didn't ask enough tough questions about Enron.

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Redmond, Wash.: After reading your book I got the impression that Ken Lay and Jeff Skilling actively allowed Fastow to proceed with all the questionable deals but were in fact not actively involved in the actual deals. Do you agree and how do you think that will play out in the criminal investigation of them?

Peter Elkind: Lay and Skilling certainly allowed fastow to proceed with many questionable deals, while removing themselves from many of the details of actually carrying them out. That, of course, doesn't mean they were clueless about what was going on. far from it. What remains to be known is precisely what direction they gave fastow in approving these transactions--whether there were smoking-gun kinds of conversations. With fastow's cooperation, we'll know precisely what words passed among them.

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California: What role, if any, has the Bush administration taken in trying to influence the Enron case -- especially in terms of protecting Lay?

What is Bush and Lay's relationship like now?

Peter Elkind: I know of no indication the Bush administration has tried to influence the case in any way.

I think it's reasonable to conclude that the Bush-Lay relationship is now nonexistent. Ken Lay has become politically radioactive.

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Severn, Md.: How long do you think it will take for small investors to again trust any of the major players in the investment world - i.e., CEO's, Corporate directors, accounting firms, mutual fund managers, Wall Street gurus, etc? It's hard enough to make a return on your dollars without all these other people ripping off illegal chunks of the profits? RWA

Peter Elkind: A long time. There's clearly a sense of helplessness on the part of small investors--that those who knew better misled them.

Enron was a watershed, ushering in a whole string of accounting scandals. In many ways, it's the most extraordinary--and the most interesting of the scandals on a human level. It illustrates how all this can happen--the impulses that drive and permit such a fraud. The story makes clear why we need strong oversight on business (and a sense of responsibility)from all the players: most obviously, govt. But also from those on the inside who are charged with responsibility for making sure a company does the right thing and that its dealings are honest: including auditors, lawyers, and bankers. In the aftermath of the Enron scandal, everyone involved pointed the finger at someone else. Our final chapter is titled: "Isn't anybody sorry?" unless everyone is held accountable--and has a sense of moral responsibility--this will too easily again.

In the meantime, individual investors need to remain skeptical about any company whose story seems to defy common sense.

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Fort Worth, Texas: Thanks for taking my question.

Ever since the Enron collapse I have been obsessed by it because I discovered that an old friend of mine that I have known since grade school and had lost touch with after highschool, Ben Glisan, was the Treasurer for Enron during many of the SPEs that were created.

My question is, from your research, how much do you think, as the Treasurer, Glisan knew about the suspect SPEs that Enron was creating. Do you think he was hoodwinked by Fastow or offered a nice bonus (bribed) by Fastow, in the form of a $1M return off of a $5K investment, to stay quiet.

Every book I have read about Enron only gives him mention on 6 or 7 pages, while the just about every page mentions Fastow, Skilling, and Causey. Yet he was the first, I believe, to be charged and sentenced.

Thanks again for helping me come to grips with my struggle of realizing that people are not the same as you may remember them while growing up.

Peter Elkind: Your insight about Ben Glisan is very interesting.

By all accounts, Glisan was a good guy who was very much seduced by the Enron culture. As you probably know, he's the first Enron executive to actually start serving a prison sentence, after pleading guilty.

He was a crack accountant, very skillful at devising ways through and around accounting rules to accomplish Enron's goals and he was a key player in many of Enron's sleaziest deals--with Fastow, and Michael Kopper, he was viewed as part of an "unholy Trinity" that conceived and executed the most complex transactions. As we describe in the book, at the time, everyone at Enron patted themselves on the back for dreaming up such brilliant, clever schemes.

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Fairfax, Va.: So what comes next? How long might it take to present a case against other Enron officials? And in what other directions might the investigation go?

Peter Elkind: I think it's fair to assume that things move forward fairly rapidly now. There are certainly various midlevel Enron executives who may face additional charges. But the top priority of prosecutors will be looking at the guys at the top--skilling and fastow. Another executive who is subject to scrutiny is Greg Whalley, head of the trading operation, who served as COO of Enron in its final months. Dave Delainey, an Enron executive who's pled guilty already and is cooperating with prosecutors, worked closely with Whalley.

In terms of how long, I suspect we'll have a good sense of how high up this will go by year end, at the latest.

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Annapolis, Md.: Based on Fastow's "sweetheart" plea agreement with prosecutors thus far it seems that Lay, Skilling and Fastow are all too rich and powerful to have to deal with any real consequences from their past business practices. I am certain that if any real prison time is assigned, the three will ultimately retire comfortably while those they stole from will struggle to make ends meet. Can we really expect for any of the three of these men to suffer for their crimes?

Peter Elkind: It's very hard to feel sympathetic for the people at the top, who made millions--even hundreds of millions--while many hard-working people lost their entire life's saving. At the same time, by the standards of white-collar crime deals, Fastow's getting a stiff sentence.

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Arlington, Va.: Why is it that no one has made the obvious connection between the energy attack on the state of California and Enron/Ken Lay's connection with the fanatic Bush supporters? Enron was front and center one of the largest of the predators.

Another question: why are members of the media addressing this whole matter as an accounting fraud with complicity from auditing firms and banks, instead of calling it the obscene business scam that it really is? If a criminal blamed the cops and courts for not being competent enough to "stop me before I kill again," he and his lawyer would be laughed out of court for such a defense. Yet Enron and Ken Lay claim it was auditors who are responsible for not stopping their astounding criminal greed and flim-flammery. And yet all of you take that seriously, and make that the focus of your reports. My question is: when are you guys gonna get off your butts and re-frame, and cover, the real story?

Peter Elkind: On your second point, while we don't use your words, I would say that we do describe what happened at Enron as an obscene business scam. We don't think anyone's excused by pointing the finger at others. To the contrary, we think there's a huge amount of blame to go around.

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Springfield, Va.: Could Enron have occurred without the tech bubble, when so many companies were using fuzzy math?

Peter Elkind: Interesting question. I think the tech bubble helped make the magnitude of the Enron fraud possible. In a sense, it provided cover for the crazy valuation of the company, and the "fuzzy-math" ways--to put it kindly--in which it was doing business. It was a time when no one was worrying enough about a company's profits, much less cash flow. At the same time, the Enron problems both preceded the tech bubble and ran deeper than it. In sum, the Enron fraud wasn't a creation of the tech bubble--but that mentality helped spur it on.

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Boston: I bought a number of pieces of artwork from both the Enron and Arthur Andersen corporate collections online last December at ridiculously low prices.....Do you have any idea how much money these furnishing liquidations have brought in for the creditors......and what's left to sell off?

Peter Elkind: Sounds like they didn't bring in very much. From the creditors' perspective, the answer is: not enough.

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Baltimore: Do you think the government was correct in the way they went after Arthur Andersen the company? Just like with Enron lots of people lost jobs that had nothing at all to do with what happened.

Peter Elkind: Andersen's a complicated question, but it was in part a self-inflicted death. AA top mgmt didn't take the govt's charges seriously enough, soon enough--especially given that it was essentially on "probation" from previous episodes of accounting fraud, notably Waste Management.

Even if had won the trial in houston, it had already lost the war to keep the firm alive.

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Bowie, Md.: One of Enron's annual reports contained a footnote that (maybe you can correct my details) if their stock price dropped below $48, they would be obliged to issue more stock to a certain creditor (which would obviously begin a snowball effect.)

Wasn't this something brand new in an annual report, to collateralize a creditor this way? Why didn't it raise more red flags at the time?

Peter Elkind: It should have raised red flags. In the book, we discuss just how many red flags were out there about Enron's questionable finances, in publicly filed documents. People simply didn't read them--even Enron board members told us they didn't read the company's SEC filings. Pretty shocking.

But for all that was secret at Enron, there was enough that was public to raise tough questions long before Enron went bankrupt. Too few questions were asked--and they were too readily dropped when the company blew them off.

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washingtonpost.com: Peter, thanks for joining us. Visit washingtonpost'com's Enron special report page for continuing coverage.

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