A well-researched book based on sound archival material, it argues that Enron was a product of scheming minds.
KENNETH LAY and Jeff Skilling were once icons and symbols of successful private enterprise in the United States. They had nearly monopolised social attention in the Houston of mid-1990s. Enron was a household name in the region because it offered employment to so many. It also compensated them quite handsomely. Investors too were happy at the returns they got from the Enron stock. It was therefore a rude shock to many, when around 2001 news started trickling in that all was not well with the energy giant and it was strapped for cash.
Rumours and suspicion gradually yielded place to well-researched reports - such as the ones carried by The Wall Street Journal, stating that gross manipulation of accounts had been going on for quite some time and that Enron's health was not what was claimed by its top executives.
The corporation filed for bankruptcy in December 2001. And the four-year investigation, first by the Securities and Exchange Commission (SEC) and later by a Special Task Force of the Federal Bureau of Investigation (FBI), culminated in a federal trial that lasted 56 days during which the jury consisting of eight women and four men were more than impressed by the evidence that had been marshalled against the wrongdoers.
Judge Lake III convicted Lay on all 10 conspiracy and fraud charges and Skilling on 19 out of 28 counts cited against him. The sentencing hearing was first posted to September 11, before being postponed to October 23. Ironically, the whole Enron episode itself is sometimes referred to as the "9/11 of financial markets", and the judge could not have initially chosen a more appropriate date to pass the sentence orders.
Known as the Northern Natural Gas Company when it was first founded in 1930, Enron became the InterNorth after it merged with the latter following reorganisation in 1979. The name Enron was given in 1985 by Lay, who was then the chief executive officer of a competitor, Houston Natural Gas Company, which was acquired by InterNorth.
What was essentially an outfit to transmit and distribute electricity and gas throughout the U.S. and set up power plants, pipelines and associated infrastructure in the rest of the world, Enron slowly changed in character. It moved into the water sector in 1999 by creating the Azurix Corporation, which did not do very well, especially in Argentina. Named "America's Most Innovative Company" by Fortune magazine for six consecutive years between 1996 and 2001, Enron cunningly hid its losses with the help of its offshore partnerships, a brainwave mainly of its chief financial officer Andy Fastow.
These partnerships included RADR and Southampton, which were funded by Enron but whose principal beneficiaries were Enron officials and their families. Dishonesty and recklessness went unchecked for a while, and they became public knowledge only in October 2001 when the company itself announced that it was worth much less than what had been reported earlier. From this point onwards the slide was fast and steep. The share price dropped from $90 to the ludicrous figure of just 30 cents.
Conspiracy of Fools is a well researched book by Kurt Eichenwald, a New York Times columnist, which captures the sordid details of how the predatory Enron leadership, which included Lay, Skilling and Fastow, took shareholders for a ride through dishonest accounting. Eichenwald no doubt believes that Enron fitted in admirably with the U.S. business environment of the late 1990s, one that was characterised by a low concern for ethics. How else can you explain a series of scandals such as WorldCom, Tyco, Adelphia and Global Crossing, each of which, along with Enron, was a shame on the country's image as a global business leader. While saying so, it was Enron that led the pack and was different from the rest of them for its dimensions, and the appalling stupidity of the mechanics employed by its top executives, which lent the eminently appropriate title to the book under review.
It is easy to put Enron into the pigeonhole of corporate crime. This would, however, be too simplistic a rubric for a mind-boggling set of transactions linking a complicated web of relationships.
In Eichenwald's words: "Crime at Enron was just one ingredient in the toxic stew that poisoned the company. Shocking incompetence, unjustified arrogance, compromised ethics, and an utter contempt for the market's judgment, all played decisive roles. Ultimately it was Enron's tragedy to be filled with people smart enough to know how to manoeuvre around the rules, but not wise enough to understand why the rules had been written in the first place."
The usual scepticism about books of this kind is that seldom can authors report so faithfully on individual internal meetings and confidential records. Eichenwald seemed to have been conscious of this potential criticism. He rests on sound archival material to buttress his argument that Enron was the product of many scheming minds that had no regard for values. This ability to sift credible details from the not-so-credible and suspect ones and arrange them tidily into a believable whole is the supreme prowess of the author. There is a unique final section devoted to notes and sources.
Eichenwald concedes that he faced the problem of conflict between recollections and documents. This is why he had evolved certain standards and ground rules for himself, in order to decide what type of source will get precedence over others. He decided that tapes and transcripts of events would outclass personal recollections and documents. Contemporaneous records such as e-mails, travel documents, diaries, notes and phone logs fell into the second most reliable source. Then came the sworn statements before law enforcement authorities.
I am astonished particularly at Eichenwald's concern for the accuracy of every word he puts down. For instance, he refers to February 2, 1987, as a "brilliant winter morning", a morning when David Woytek and John Beard of Enron's internal audit team walked into Enron headquarters to report to Lay that the company had been cheated by two executives, Borget and Mastroeni. It was an eventful day in the life of Enron. Eichenwald confirms from the records of the National Climatic Data Centre that it was indeed a "brilliant winter morning".
Can there be any piece of writing that can show greater regard for truth and accuracy. This is something budding journalists would do well to emulate for their own benefit. It is often said that there is no substitute for hard work and that hard work is good for health. Eichenwald seems to confirm this home truth in an authoritative manner.
What I am more impressed with Eichenwald is the skill with which he draws the silhouette of the principal conspirators. Most important of the latter was Fastow, who emerges as a scheming functionary having somehow won the total confidence of his CEO.
In the eyes of the latter, he could do no wrong, even as Fastow was lining his pocket with many dubious deals that led Enron eventually to ruin. Many reviewers of the book take umbrage to Eichenwald's portrayal of Skilling and Lay as perhaps innocent figures who allowed themselves to be kept in the dark by Fastow. We could easily dismiss Skilling as an unstable and fragile alcoholic, whose only fault was that he liked the good things of life (including Rebecca Carter of Enron's investor relations department). I am in agreement with these critics who are unwilling to buy the theory that the two CEOs were more sinned against than sinning.
The trial court's verdict discounts any plea of ignorance on the part of these two men.
I would rate Conspiracy of Fools as an outstanding book that should be required reading for the MBA-aspirant. It would caution him of the usual pitfalls that surround a senior manager in a large successful organisation.
It would particularly tell him that while delegation is good, unsupervised delegation is a definite recipe for disaster.
