Deep Dive
Shownotes Transcript
As CEO of the company, I accept responsibility for Enron's collapse, as I've said before. However, that does not mean I knew everything that happened at Enron, and I firmly reject any notion that I engaged in any wrongful or criminal activity. It's been more than 20 years since the United States government launched an investigation into the business practices of a company called Enron.
And a lot has happened since. Millennials have overtaken baby boomers as America's largest generation. Which means fewer and fewer adults remember what happened when one of the biggest companies in the United States went belly up, seemingly overnight. But whether you know it or not, the story of Enron and its many conspiracies is as relevant as ever.
I'm Carter Roy, and you're listening to Conspiracy Theories, a Spotify podcast. Episodes release on Wednesdays. Be sure to check us out on Instagram at TheConspiracyPod. And we would love to hear from you. So if you're listening on the Spotify app, swipe up and give us your thoughts.
To help tell our story this week, we have one of our show's producers, Connor Sampson, here with us. Hi, Carter. Hey, Connor. It's so great to have you. For those people who don't know to pull back the curtain on the sausage making to mix our metaphors, Connor is one of an incredible team of people we have here who discover conspiracies, research them, write them, put it all together. So it is such a treat to have him in front of the mic this week to tell us this story. Thanks for having me, Carter. Happy to be here. Okay.
Stay with us.
This episode is brought to you by Oli. Back to school means food changes, early breakfasts, school lunches, after school snacks, and let's not even talk about dinner. Oli's here to help you cover all the wellness spaces from daily multivitamins to belly balancing probiotics. Oli's got your fam covered. Buy three and get one free with code bundle24 at O-L-L-Y dot com. These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.
This episode is brought to you by Vitamin Water. So much of what the world is obsessed with starts out in New York City. It's a place full of style and character that has something for everyone. With a range of flavors to meet any kind of taste, it's no wonder Vitamin Water was born there. Colorful, flavorful, anything but boring, Vitamin Water injects a daily dose of vibrancy into a watered-down life. Grab a Vitamin Water today. Vitamin Water is a registered trademark of Glasso.
Okay, let's jump straight in. What is Enron and why are we talking about it? Right. So Enron was an energy provider, among other things. Enron formed in 1985 when two already large companies, Houston Natural Gas and InterNorth, merged to form an even bigger energy company. It operated in some capacity until 2006 when it sold its last remaining subsidiary,
But the reason we're talking about it today, and the reason Enron's become such a cultural touchstone, is because of what happened a few years before it shuttered completely, in late 2001, early 2002. That's when shit hit the fan.
The collapse wiped out thousands of jobs and more than $2 billion in pension plans. If there was any time that there was anything that I was aware of that was inappropriate, we wouldn't have done it. He was found dead of a gunshot wound to the head. On the advice of my counsel, I respectfully decline to answer the question
based on the protection afforded me under the Constitution of the United States. In the span of a few months, Enron's CEO resigned, the company's stock price plummeted, the SEC launched an investigation into Enron's business practices, Enron fired a bunch of people, and then filed for what was, at the time, the largest bankruptcy in United States history. Wow.
Adding to the mess, there was a criminal investigation into the suspicious death of a former employee, which we'll get into next time. But by the end of the government's investigation, nearly two dozen of Enron's top executives and consultants got indicted on hundreds of charges that, when added together, form one giant conspiracy to defraud the American public. Our investigation discloses to
And every step of the way, the story was major news, even alongside September 11th and the beginning of the war on terror.
I know. I remember that time. And for people who weren't adults at that time, it's hard to overstate what it was like because Enron was already part of the cultural conversation even before the shit hit the fan. Like just as a company, it was something people talked about. Like you'd never talk about Procter & Gamble that way. And then when the scandal hit, it was just everywhere. That is 1000% right. And there's a lot of reasons that this company was so talked about.
For starters, it was massive. At its peak, it was the seventh largest company in the United States with 20,000 employees and a market value of almost $70 billion. Amazing. Yeah. Enron was an industry leader. They were named Fortune magazine's most innovative company for six years running right up until its collapse.
Plus, the United States hadn't really seen a scandal like Enron before. So it was sort of uncharted territory. I think the good news is that this is not something we've seen all over corporate America. But the other side of that story is sort of the Roach theory that when you see one, there are probably others under the baseboard. Now, in terms of conspiracies and conspiracy theories, there are plenty of proven conspiracies in this story.
But there is one really wild theory still bouncing around the internet, and it's wrapped up in one of the government's final verdicts. Hmm.
Okay, well, I'm very excited to get to that. But let's start with the proven conspiracies. When did those start and what exactly did Enron's executives do? What didn't they do is maybe the easier question. 31 different people appeared as defendants in court cases ultimately, and 21 of Enron's top executives were convicted with something. Insider trading, conspiracies to commit all kinds of fraud, you name it.
Think Bernie Madoff without the Ponzi scheme, and if Bernie made a bunch of little clones of himself. We'll get to the bigger chargers later, but if you'll bear with me for a second, I would actually like to start with what Enron did right. Oh, okay. That's a pivot I didn't see coming. All right. I'm listening. Before diving into this story, I didn't know much about Enron's collapse at all. I think I was...
10 when the scandal came to light. So it's not like I was following the news very much. But because the story of Enron infiltrated pop culture so much, I've grown up with a very clear association. I thought of Enron as like the poster child for white collar crime, even if I had no idea how it earned that reputation.
But when I started researching Enron for this story, I found that much of the more recent coverage tended to focus on the good, the company's successes and lasting innovations. I wouldn't go so far as to say there are Enron apologists out there.
Enron's legacy feels like it's maybe crawling its way back from the brink. Yeah, I had no idea that this was even happening. I totally associate with all that went wrong. What are some of the things that are happening now? Yeah, exactly. I had no idea before any of this research. And I ran into this article. It was written in 2021 by a senior editor at Texas Monthly. His name is Russell Gold. And he wrote a piece called In Praise of Enron.
And in case it's not clear from my line reading, that's in praise of ellipsis Enron question mark. The grammar does help, right? Yeah, yeah, right. And it was all about how Enron's innovation set the stage for how the world's energy markets operate to this day.
And Enron innovated in more than just energy markets. The same year as that Texas Monthly piece, the one by Russell Gold, CNBC called attention to some of the services that Enron pioneered, which, I mean, you and I, Carter, probably take for granted today. Okay, yeah. Again, I had no idea. What kind of services did they develop that we're still using?
To name a few, Enron's strategy evolved and expanded into broadband, as in like broadband internet services. And before Americans had even heard of Skype or Zoom, Enron was apparently developing video conferencing tools, which we're using right now. I mean, right, totally. I can see. But this is, I mean, all of us know, especially pandemic, Zoom was a four, but boom, it blew up. But this is in the 90s.
The idea that this technology was being developed, that somebody had the foresight for this is amazing. And I certainly did not associate that with Enron. No, yeah, this is around the Y2K era. And while Netflix was still sending people DVDs in the mail, some of Enron's leaders were convinced that streaming services were the future of entertainment.
Wow. So they really were ahead of the curve in some ways. I mean, that's incredible foresight. Something that also surprised me was how some ex-employees reflect on their experience at Enron today. I would expect them all to have grudges because these are people who were undeniably victims. A lot of the employees had their 401k savings tied up in Enron stock because their executives encouraged them to. And when the company went belly up, they lost everything.
And they were pissed, rightfully so. I can imagine. You'd think they'd be furious. Yeah. Yeah. They were lied to. What Enron done to me is when they collapsed, I lost one point three million dollars.
That's how much stock that I had. Years later, a little over 20,000 of Enron's former employees filed a civil lawsuit to recoup their losses, and a judge awarded them $85 million. But even after all this time, some employees have said they actually really enjoyed working there. Now, I've moved on like most of us have, and I'm happy where I'm at.
One employee even called Enron one of the best jobs they've ever had. Wow. Yeah.
Yeah, we always associate Enron, obviously, with this horrible thing. And the ending had such a negative consequence for so many people, including employees. But we forget what it might have been like to actually work there at the time. And it sounds like it might have been a good thing for a lot of people. What did they love so much about working there at the time? Well, you've probably heard someone in the startup world say their company likes to move fast and break things. I have indeed, yes. Enron was kind of a pioneer of that hustle and grind culture.
As a workplace, it was cutthroat and demanding. But on the flip side, employees were apparently given a lot of autonomy to make decisions and influence strategy. If you're someone who thrives in that kind of environment, I can see the appeal. But my point is, if you were to draw a Venn diagram of Enron's innovations and Enron's crimes or Enron's good and Enron's bad, it wouldn't be a circle.
Enron's philanthropy funded scholarships, arts organizations, medical centers, and prizes for distinguished public service with recipients like Nelson Mandela. Okay, that's impressive. And at the same time,
They also built a 390-mile pipeline that cut through South America, deforesting protected land, killing endangered species, and building service roads that gave poachers easier access. So it's not really one thing, it's many. And I think it's easy to think otherwise, given the company's final bow, so to speak. Yeah, yeah, it's easy to make it a very black and white, like, oh, is this total evil entity? And it's crazy to think it's good when in fact it's
Sounds like you're saying it's a lot more complicated, in which case its downfall isn't necessarily indicative of the company as a whole because the company as a whole wasn't good or bad. So what did cause the fallout? Was it a few bad apples, so to speak, if it wasn't the whole company? Like I said, 21 of Enron's top executives were convicted of something, but the really big stuff, that was mostly the work of a select few.
And of those select few, the three biggest names that you need to know are Kenneth Lay, Jeffrey Skilling, and Andrew Fastow. Yes, I remember hearing those names in the headlines. And, well, they committed crimes, didn't they? Yeah, they absolutely did. And we will get into those crimes right after this.
Hey, we're invited to the Johnson Summer Pool Party this Saturday. Oh, Saturday? But that's when the Blinds guys come in to give us a quote. Oh, I already found everything we need at Blinds.com. They're totally online, so we don't have to wait around all day just to get a quote. And they're sending us free samples. Well, Blinds.com sounds like a no-brainer.
Shop Blinds.com now for summer savings up to 40% off site-wide. Up to 40% off at Blinds.com. Blinds.com. Rules and restrictions may apply. Okay, we've got Kenneth Lay, Jeffrey Skilling, and Andrew Fastow. What is it that they did? Let's start with Kenneth Lay.
He's the first long-standing CEO of Enron. After the 1985 merger, Lay's strategy was to "get big fast" or
I really think of it as "get bigger fast," because after the merger, Enron had the largest gas distribution system in the United States. If you can imagine Texas as the nucleus of the company, its headquarters, its pipelines ran outward, eventually as far north as Michigan, as far east as Florida, and as far west as California.
And in his first six months at the company, Lei spent more than a billion dollars in acquisitions to really cement Enron's position as a leader in the industry. But, and this is important, Enron took on a ton of debt to grow that quickly.
Lay thought it was a good bet because in the long run, he believed the United States government would deregulate energy markets in a big way, and that would drive profits. Okay, so he's kind of making a gamble that like, oh, I can take on all this debt, but it'll pay off because there'll be some sort of
deregulation and what led him to hedge that bet? Well, for the longest time, the federal government put a cap on the price of natural gas. But Ken Lay believed if a less regulated free market dictated the value of gas, prices would go up and there would be more incentive for companies like Enron to find ways to meet America's soaring demand at the time.
And naturally, the biggest players in the game would, you know, rake in the profits. Okay, so did he know that deregulation was coming? Did he have a crystal ball? Great question. He didn't really need one. The federal government had already taken steps toward deregulation, first in the late 70s, then again in the mid 80s. So progress seemed to be moving in that direction anyway. But also, Lay had worked for the government.
in the Interior Department as the Deputy Undersecretary of Energy under Nixon. So he presumably had a little inside knowledge. Lay was also a notorious networker, so he had the ear of many influential politicians, perhaps most famously his Houston neighbor, George Bush Sr. They were golfing buddies, and both Lay and Enron donated substantial sums to the Bushes' campaigns.
both senior and junior. I think I am smelling a conspiracy here. We're putting some pieces together with a lot of power. It kind of feels that way, doesn't it? Bush Jr., who was president during Enron's collapse, had to field a lot of questions. You know, Enron had made contributions to a lot of people around Washington, D.C. And if they came to this administration looking for help, they didn't find any.
But the truth is, regardless of how you or I, Carter, feel personally about it, lobbying is totally legal in the United States. The Supreme Court ruled that it's protected under the First Amendment as free speech. So even if there was conspiring, I'm personally not sure it meets the standards of a conspiracy. Oh, I see. That said, I think it's fair to wonder whether Lay's political contributions were really hispaniacal.
hypocritical maybe? I mean, he was a diehard deregulation kind of guy. And is it really a free market if you can put your thumb on the scale and influence policy? It's such a great question. One behind, I think, so many conspiracy theories, which is if you have big time players who are in a sort of dark room, so to speak, meaning out of the public eye, making deals or trading information,
That feels like a conspiracy. At the same time, it might not be illegal or rise to what we think of as conspiracy theory because that is kind of how policy in the market works. Even if it's not super ethical, it is legal. Yes, I think that hits on something that will come up a lot in this story is legally wrong versus morally wrong. And there's a lot in this story that is...
In my opinion, undoubtedly morally wrong. But we'll get into that more later. In terms of the story, in 1990, Ken Lay hires a guy named Jeffrey Skilling. And Skilling basically becomes the idea man to Lay's figurehead role. And right away, Skilling's focused on Enron's latest business venture.
Something called commodities trading. Which I totally understand because I'm like a genius or whatever. But in case anybody listening doesn't know, what is commodities trading? Commodities are goods that are worth basically the same amount regardless of where in the world it was produced or who produced it.
Most commodities are resources. Sugar, for example, I think that's a good one. From a consumer's perspective, a cup of sugar is worth about the same no matter who grew the cane or where it was harvested.
Corn, wheat, coffee, even orange juice, believe it or not, are considered commodities. Oil and gas are as well, but they're considered hard commodities because they need to be mined or extracted from the earth. Okay, so then are there soft commodities? I mentioned a few already: sugar, coffee, pork, basically anything that falls under livestock or agriculture.
They're called soft commodities because their supply is dependent on factors that are outside of human control, like weather or disease.
Okay, that actually makes sense to me. And much like you buy and trade stocks based on the market value of companies, you can also buy and trade commodities, usually through what's known as futures contracts. Okay, I might need a little more information on that. What are futures contracts? Well, they're agreements to sell something at a predetermined price at a predetermined date in the future. But for our purposes, you don't need to get too bogged down in the details. All
Ultimately, what we all need to know is that Jeffrey Skilling becomes convinced that energy trading is the future for Enron. He called it his asset light strategy. He wanted the company to move away from investing in physical infrastructure. I mean, why take on more liabilities when Enron could just sit back and act like a middleman? So he created this system where Enron acted as a natural gas bank.
And the details here, again, are a little complicated. But basically, they bought from producers at a fixed price and then sold their supplies to consumers at a future fixed price. And by doing so, they were able to offer a premium and reliable service in a notoriously volatile market. People could suddenly anticipate the price of energy because Enron assumed a lot of the risk themselves.
Okay, so they're carving out this new way of doing business. And I'm assuming from their end, because it sounds like they might be taking on the risk if the future price doesn't match the price they paid. There's probably a high reward for the risk they're taking. Yeah, of course, they wouldn't be doing it. If not high risk, high reward. And Enron also found creative ways around the risk, which is part of what
gets them in trouble. But, I mean, abusing the system doesn't invalidate the system's worth, right? Skilling's natural gas bank is the thing that's still the foundation for how a lot of energy markets operate today. So, way back then, when it first comes out, Jeffrey Skilling was rightfully hailed as a genius because of it. Everyone was thrilled. Energy producers, consumers, but maybe none more so than Enron's investors.
Skilling's ascension at the company was the start of Enron's hustle and grind culture because his strategy prioritized hiring aggressive traders. It was always more deals than the day before, and not just more deals, but more lucrative deals. He was a big believer in Darwinism, survival of the fittest, do whatever you can to earn profits and drive up the company's stock price, which was Enron's true North Star. And Skilling's strategy paid off.
On paper, Enron was remarkably good at trading commodities. Despite the risk involved throughout the 90s and up until 2001, Enron somehow always came out on top.
Which at some level starts to become suspicious to always come out on top. We see that later with Bernie Madoff. Companies are like, how are they always winning? But sorry, interrupting. Go on. No, no, absolutely. And remember how they spent all that money hoping deregulation was around the corner?
Well, his bet paid off. States like California started to seriously deregulate energy markets, which opened the door for higher prices and companies like Enron to manipulate the market to work in their favor. And all of this was happening during the bull market of the 90s.
A spontaneous roar erupted at the closing bell. For the first time ever, the Dow ended the day above 10,000. So Enron was just dripping into profits. And it became a really desirable place to work, making Fortune's magazine list of 100 best companies to work for in America a couple times and peaking at number 22. I mean, it was a really desirable place to work.
You could be a kid in your 20s, hired straight out of college, but so long as you hit your goals, you could be making a bonus of $5 million in a given year. That is incredible. Yeah. Have you ever heard the term, fuck you money? No.
Hell yeah, I have. Yeah, this was fuck you money. As part of my research, I read The Smartest Guys in the Room by Bethany McLean and Peter Elkin. And they said that Ken Lay would have his assistants unwrap his lunch to put it on fine china that they'd place on
on a literal silver platter. All while his family jetted around the country on the company's private jets. That is the definition of F.U. money right there. Silver platters and private planes. Yes. And it gets so much more wild. Jeffrey Skilling would take his employees out on these elaborate machismo adventure vacations to places like
the Australian outback and the glaciers of Patagonia. Everyone knew there was an element of danger to them, and people really actually got hurt on these vacations. I'm talking breaking ribs while flipping cars. Andrew Fastow, the company's eventual CFO, once fell off an embankment and landed hard on a cactus, which though harrowing and painful in the moment, I'm sure is a pretty funny visual in hindsight.
I mean, he ended up being fine physically. Emotionally, who's to say? But this is all just to paint a picture of the type of extravagance that existed at Enron. There were mansions and gourmet meals and massages. And you know, why not bask in that excess? Because the company could afford it.
Throughout the 90s, Enron stock steadily rose. At the start of the dot-com boom, they created an internet trading division called Enron Online, which took off. They diversified the kinds of commodities they traded and began dealing in electricity, coal, paper. At one point, they even started trading the weather.
Which is something I will never wrap my head around. What? Yeah, but it actually eventually took them to a place where they were making $2.5 billion of trades every day. That is just mammoth. It's hard to even comprehend how big a company that is. Yeah, and it grew and grew and grew until it became this cultural symbol that we were talking about earlier. They were a Wall Street darling.
Teflon. Analysts bet on them time and time again. Their stock reached an all-time high in August 2000. And six months later, in February 2001, Jeffrey Skilling took over as CEO for Kenley. Okay, and for those paying attention out there on the timeline, this is now less than a year out from disaster for the company, right? Oh, no. We're less than a year out from everything hitting the fan. Oh. Disaster? Yeah.
had already struck many times over. The world just didn't know it yet. Okay, so far, 1985, we have a merger of energy companies to create Enron. We have Ken Lay, who's like, let's get big, fast, let's buy all these things, massive pipelines. And then we have Skilling come in and say, hey, there's a new way of trading energy. We can do these future contracts. We're going to just
hustle and grind our way to sell more trades than anybody. And they've blossomed this mammoth company that's a Wall Street darling. The stock price is going up and up. Everybody loves it. It just seems like everything is going up and up. Yeah, that is a great recap. So Enron's making money hand over fist.
When do things go off the rails then, and why? To answer that question, I'd love to travel back in time a bit to the beginning of Enron, before Enron's Wolf of Wall Street fantasy, and before Jeffrey Skilling was hired. Okay, take me there. It's January 1987.
Enron's third year in operation and the head of the company's internal audit department notices some discrepancies in the books of one of Enron's subsidiaries, Enron Oil. Million-dollar wire transfers coming in from foreign islands. Million-dollar transfers going out to bank accounts and employees' names.
The note the auditor writes to himself reads, misstatement of records, deliberate manipulation of records, impact on financials for the year ending 12-31-86. And that's just the beginning of what he finds. Executives are taking lucrative kickbacks from fraudulent transactions and pocketing money, all in the name of shifting cash around to make it look like the company is way more profitable than it is. And it
It's all about optics. Remember, Enron has been taking on massive amounts of debt. And in order for them to continue growing, they need to take on more loans. But no bank is going to give them money if they see that many losses. So what do they do? They cook the books a little to make the company appear healthier. And the men, getting their hands dirty, decide they might as well enrich themselves in the process. I mean, this is, at some level, not only fraudulent, but like...
the makings of a Ponzi scheme, moving money around to hide losses to get more money and then grifting on top of it. And this sounds like from early on in the company. And does anyone else besides this auditor at the company know that this is happening? The auditor tells them. He brings it up to Ken Lay and the board of directors. And they actually hold a meeting about it. And Lay later admits that what the men did was, in his own words, quote,
completely unacceptable. But, and this is strange,
nothing actually comes of it. Like, no one gets punished. They keep it a company secret. Wow, everything's going so well, they just bury it. Yeah, yeah. Like, even after Enron hires an external auditing company that corroborates everything everyone already knew from the first auditor, the president of Enron Oil sends a message to one of the men responsible, and he says this...
Thank you for your perseverance. You understand your business better than anyone alive. Yada, yada, yada. I have complete confidence in your business judgment and ability and your personal integrity.
That, ladies and gentlemen, is the sound of the largest broom in the world sweeping something under the rug. That is incredible. So an outside auditing firm comes in as like, yes, we absolutely have fraudulent activity going on. And the president of Enron Oil says to the people doing it, like, great job. We're making a ton. Don't pay attention to the auditing. Keep doing what you're doing. Exactly right. And after thanking him, he adds, quote,
Please keep making us millions.
I mean, this is incredible. You talk about the idea of conspiracies being in room. And these are people who know they're doing something wrong and are just giving themselves the rubber stamp of, hey, as long as our pockets are lined, all systems go. That's insane to me. Yeah, totally wild. Eventually, there is a little recourse. The Securities and Exchange Commission launches an investigation and two of the men responsible are convicted of some crimes,
One receives a suspended sentence and the other is convicted of fraud and spends a year in jail.
But Ken Lay, who is made aware of everything, walks away completely unscathed. But what about all the private jets, those elaborate trips? Where was all that money coming from? Was any of it real or was it all smoke and mirrors? Well, for the most part, Enron got back on the straight and narrow after this first scandal. And for years after, parts of Enron's business were making money. Just not all of them.
At its peak, Enron owned and operated an estimated 3,500 different subsidiaries and affiliates. And despite Skilling's asset-light strategy, Ken Lay's growth mindset never really went away. Over the course of 16 years, they went from $10 billion in assets to more than $65 billion.
Throughout its life, the company kept taking on debt to finance new projects domestically, overseas, and many of them were frankly money pits. So while aspects of the company, including its trading business, were profitable, the company as a whole couldn't always say the same.
And throughout the 90s, even the profit margins on Enron's trading arm slimmed because there were more competitors entering the market and the dot-com boom eventually came to an end. I see. So the margins are starting to tighten up a little bit. But then couldn't they have just cut back on their extravagant spending? I'm not sure if that would have been enough, but it couldn't have hurt. I think Enron's real downfall, though, was its hubris. Yeah.
Enron was so big, so on top of the world, that I genuinely don't think most people working there could have imagined a hole that they couldn't have climbed out of. So long as they could buy themselves a little more time to recoup the losses. Here's one former employee.
Enron is a very arrogant place with a feeling of invincibility, and I'm not certain people felt like it was that imminent. They just felt like Mr. Fastow, along with the accountants, would come up with some magic in the future. Yeah, sounds like a case of Icarus flying too close to the sun. Oh, totally. And I'd actually say that...
In this case, Enron was Icarus trying to glue his wings together as he was flying. That's definitely worse. And rather than focusing on the act of flying, they were more concerned about their appearance. Like they were in it for the glamour shot.
Right. Well, and partly the way they keep moving the needle down the line in terms of the timeline is to appear successful, generate more stock prices, generate more money. They don't have to pay the piper that way.
But eventually, they do. Yes. And so how does it all come crashing down? Because of its debt problem, by 1999, Enron starts to get creative with its accounting again. And one of the men responsible for handling the books this time is the company's chief financial officer, Andrew Fastow.
And Fastow acted as, like, a magician. He and other execs used a bunch of accounting loopholes to hide all of Enron's problems and make them appear more profitable. "Accounting tricks hit weak business ventures and poor assets."
Okay, this sounds like something that we hear a lot in financial world shenanigans, but I don't actually know. What does it look like in practice? What does it mean to do that? I still don't fully understand it, but to give you a very general idea, there are two main methods looked like. One, hiding their debt by transferring failed assets or failing assets to outside special purpose entities or SPEs that were owned and operated by Andrew Fastow himself.
And two, abusing a legitimate accounting technique known as mark-to-market accounting to exorbitantly overstate its revenues. Okay, I see. So you're sort of moving the worst case scenarios
out, so to speak, but he's taking that on and that kind of hides it and then, yeah, inflating your value, though it sounds like legally. I think that's exactly right. But it's also complicated that Enron literally said that its business model was too confusing intentionally because it didn't want people to know how it made money.
That its model was, quote, proprietary. Okay, so that's sort of their cloak. They have this genes like, oh, we're doing these nefarious things kind of. But in case you're going to look, that's actually our geniuses. You can't possibly know how we're doing this. Exactly. Yeah. If you don't understand it, that's on you. Skilling's attitude literally was, if you're a skeptic, you're either too ignorant to understand my innovative waves or you're just bitter because you're not making money with us.
Wow, that is very brash and almost con man level brashness to keep people off their tail. Now, it's bad enough that Skilling and Lay and everyone else are deceiving the general public by creating this elaborate facade. But things hit a real low at an employee meeting in December 1999.
Ken Lay and Jeffrey Skilling are on stage answering questions during an all-hands meeting. And an HR rep reads a question from the audience off a card. She's like, should we, meaning the employees...
Invest all of our 401ks in Enron stock. Wow, that's an incredible question for an employee to trust their employer to answer at some level. And also, for those who don't know, that would mean basically employees who have this retirement savings are saying, should we...
spend our savings on company stock because that's the best bet with what to do with our savings. That's essentially what they're asking. Yeah. Now, imagine you're Jeffrey Skilling Carter. Okay. You know more or less everything that's happening behind the scenes. You know Enron is sitting on top of a mountain of lies. What do you say?
I see. Well, Carter would probably say, no, save yourself. But if we know anything about Jeffrey Skilling in the sense of like, this is what he does. He sells the idea of Enron's greatness. He probably says something different. Yeah, well, he kind of gets off the hook a little. Because without blinking, the HR rep responds for him and says, absolutely. And then she turns to Skilling and Leigh and says, don't you guys agree? And Skilling smiles and goes...
You're doing good. Amazing. So he sort of sidesteps taking responsibility for it. So he doesn't explicitly say, yes, that's what you should do, but he allows them to think so. And then how long does this dubious accounting go on for?
By that meeting, it had been going on for about two years, and it continued after. It got to the point that by February 2001, when Skilling took over as CEO, Enron's value as a publicly traded company was listed as more than 70 times their actual earnings. It makes me wonder, I guess, how is it possible that
That no one's catching on. I mean, it sounds like this fraud started in the 80s when they started, and maybe they tamped it down a little bit. Now it's come back. It's a publicly traded company, so people should be looking. Analysts should be looking. It's a huge company. People should be paying attention. And yet it seems like no one looked at the books and thought, well, that's a little weird. You're right. No one really did.
And that was a failure of a lot of different people. Like you said, Wall Street analysts, for one, the people whose job it was to actually look at the company's numbers and evaluate its performance. Now, many of them blame being blinded by Enron's image. The company had a whole PR strategy devoted to making themselves appear like the smartest people in the game. So for a long time, analysts were essentially evaluating the company based on faith in its leadership.
And when it comes to the stock market, perception is a powerful force. But analysts weren't the only ones blinded by Enron's tactics. They had a board of directors who were responsible for general oversight,
And separately, Enron had an internal committee and an outside company responsible for auditing their books. That company was called Arthur Anderson, and it was a company that was responsible for auditing their books.
And they later ended up getting indicted by the federal government, too, on charges of obstruction of justice for helping Enron cover their tracks. They were convicted, but it was eventually overturned by the Supreme Court. And we'll get into all those details later. So all of this is happening in the background when Jeffrey Skilling takes over as CEO. And now what happens next? Well, Skilling isn't CEO for very long. He takes over in February 2001.
And then, less than six months later, he suddenly and unexpectedly resigns.
And I'm assuming he saw the writing on the wall. That's the popular assumption, but to this day he maintains that he left for personal reasons. He's never really elaborated on what that means, and there's no record of anything out of the ordinary happening in his life, but yes, apparently he stands by personal reasons. I did not leave the company because I thought the company was in imminent financial danger.
All right, so he leaves the company and then who takes over? Lay comes back. He's reinstated as CEO and it is all downhill from there. Skilling's departure attracts a bunch of unwanted attention, the stock price plummets, and by October 2001, Enron announces huge third quarter losses. Three days after it does, the SEC, the Securities and Exchange Commission, launches an official inquiry into the company's financial practices.
And even though Enron publicly swears up and down that they have nothing to hide, days after Ken Lay says he has the highest faith and confidence in Andrew Fastow's work and integrity, Fastow is fired.
which is quickly followed by Enron's treasurer getting fired, then its in-house general counsel. And fast forward to December 2001 and the company, which held up to $65 billion in assets, declares bankruptcy, which, for perspective, is more than the GDP of some small countries today. The curtain comes down and thousands of people lose everything.
$2 billion in pensions and retirement funds go up in smoke just like that. Just like that, indeed. I mean, we are talking from October when they announced their losses to December. That is insane.
It's hard, I think, to now even imagine it would be like for a company of that size to disappear in a matter of two months. And then, yes, to have all these people who've invested their life savings to have it evaporate essentially in a season. OK, let's keep going and let's get on to the justice part of the story, if we may. Yes. My favorite part. Skilling, Fastow and Lay are all eventually indicted and
And that all happens by 2004. The charges against them include insider trading, accounting fraud, securities fraud, wire fraud, bank fraud, making false statements. The list goes on and on. The government wants $139.3 million from Skilling and $43.5 million from Lay.
Andrew Fastow ends up pleading guilty to conspiracy to commit securities and wire fraud. And he also agrees to cooperate with the government's investigation. And he coughs up $20 million.
And ultimately, he's sentenced to six years in prison. Jeffrey Skilling and Ken Lay, on the other hand, both plead not guilty. And do they seriously think they have a shot of getting off? I mean, I know they have a lot of money to pay lawyers, but it still seems pretty clear they've done some bad things. Oh, they are deadly serious. I'm innocent of the charges against me. As I have said from day one, I still firmly believe that as of this day.
"I will not sign something that says that I'm guilty. I'm not guilty." The main thrust of their argument is they were too high up and had little to no knowledge of the misguided decisions of their accounting teams. Skilling's famous line was, "I'm not an accountant." "As I said, Senator, I am not an accountant."
But their other part of their argument is, well, maybe Enron took advantage of some loopholes in accounting law, but that's not bad behavior. That's just good business. I mean, it sounds like they're still doing what they've been doing the whole time, which is a little bit of song and dance, pretending it's not them, that everything's great. Hey, we're still good company.
How does that strategy play out? Well, juries of their peers do not share their point of view. The jury in Houston deliberated for 30 hours over five days. Company founder Kenneth Lay was convicted on all six counts against him. Former CEO Jeffrey Skilling was convicted on 19 of the 28 counts against him. Lay and Skilling were charged with conspiracy to commit securities and wire fraud in connection with the collapse of Enron. We're shocked. Certainly this was not the outcome we expected.
"The message of today's verdict is simple: our criminal laws will be enforced just as vigorously against corporate executives as they will street criminals." Both decisions are aided by the testimony of a former Enron employee named Sharon Watkins. You heard her voice a little earlier. She flagged concerns over the company's accounting practices to the government's investigation.
A newly released memo shows that Enron executive Sharon Watkins warned chairman Kenneth Lay at the end of October that the company needed to, as she put it, come clean about the huge financial losses resulting from its maze of partnerships. That was two months after she wrote him about fears of a wave of accounting scandals. I continue to ask questions and seek answers primarily from former co-workers in the global finance group or in the business units that had hedged assets with Raptor.
I never heard reassuring explanations. I was not comfortable confronting either Mr. Skilling or Mr. Fastow with my concerns. To do so, I believe, would have been a job-terminating move.
So there was some honesty at the company. Yeah. Sharon received some flack for not blowing the whistle to the public as soon as she found out. But it took an enormous amount of courage for her to speak up at all. So personally, I think she deserves some grace. Completely. I think it takes a lot to come forward. Right. And in this case, it might be the difference of us knowing what happened at all versus having it all hidden. So yeah.
So kudos to her. OK, so how long do these men actually spend in prison? Well, thanks to his plea agreement, Fastow serves slightly less than a six year sentence. And even though he initially gets 24 plus years, Skilling basically serves half of that. After a number of appeals, none of which are upheld, he makes a deal.
If he coughs up another $42 million, which will go to the victims of Enron's fraud and never makes another appeal again, he'll get out sooner. So he's released after a little over 12 years. Ken Lay, however, doesn't serve any time at all.
I'm sorry. Mm-hmm. What? He dies of a heart attack while waiting for his sentencing. Ah, okay. And does he die in a jail cell? No. I mean, I don't think it will surprise anyone that Lay could afford bail. So he bailed himself out, and he was actually in Aspen, Colorado, vacationing with his wife when it happened. Huh.
Hundreds attended the private service in Aspen Sunday, security guards using umbrellas to shield them from photographers. Two of those attending, ex-Enron CEO Jeffrey Skilling and lawyer Daniel Petruccelli. And because he dies before his sentence happens and thus doesn't have the opportunity to appeal and really get due process, his conviction gets vacated. Okay, so...
So there's an upside to him dying? I know that sounds kind of bad, but yeah. Remember when I said there's one really wild theory still bouncing around the internet that's wrapped up in one of Enron's verdicts? This is it. Okay, so we're getting a little conspiracy theory tingle here based on Ken Lay's perhaps timely death. So what's the theory?
Do you want to take a guess? Let's see. Somebody dying. Well, I mean, I've been doing this a long time. Maybe somebody didn't die and got away with all the money is usually what these conspiracies would look like. I mean, you have been doing this long enough. Yeah. The theory is that Ken Lay either faked his own death or died by suicide to avoid sentencing. And so his family could keep some of their wealth. And
Now, is there anything that supports these theories? Is there any evidence? That's actually one of the questions I asked Bethany McLean. In 2001, Bethany was a young up-and-coming journalist working at Fortune magazine. She's credited as the first reporter to publicly question how Enron made money.
And she co-authored the book I talked about earlier, The Smartest Guys in the Room. And she jokes that she's become known as Enron Girl. Okay, she sounds like the expert. And what did she say? Well, you'll find out next week. Okay, I'll be there. Thank you so much, Connor, for joining us. It was such a pleasure to have you here in front of the mic and with all this great knowledge. Yeah, thanks so much for having me. All right, everybody. We'll see you next week.
Thank you for listening to Conspiracy Theories, a Spotify podcast. We're here with a new episode every Wednesday. Be sure to check us out on Instagram at The Conspiracy Pod. And we would love to hear from you. So if you're listening on the Spotify app, swipe up and give us your thoughts. Do you have a personal relationship to the stories we tell? Well, email us at conspiracystoriesatspotify.com.
Amongst the many sources we used, we found Bethany McLean and Peter Elkin's book, The Smartest Guys in the Room, extremely helpful to our research. The audiobook edition is available for Spotify Premium subscribers in Spotify's audiobook catalog. Until next time, remember, the truth isn't always the best story, and the official story isn't always the truth.
Conspiracy Theories is a Spotify podcast. This episode was researched and written by Connor Sampson, edited by Mickey Taylor, fact-checked by Laurie Siegel, and sound designed by Alex Button. Our head of programming is Julian Boisreau. Our head of production is Nick Johnson, and Spencer Howard is our post-production supervisor. I'm your host, Carter Roy. This episode is brought to you by Hills Pet Nutrition.
When you feed your pet Hills, you help feed a shelter pet, providing dogs and cats in need with science-led nutrition that helps make them happy, healthy, and ready to be adopted. It's an initiative that Hills has supported since 2002. And since then, the Food, Shelter, and Love program has helped more than 14 million pets find new homes, changing their life forever so they can change yours.
Science did that. Learn more at hillspet.com slash podcast.