Reaping the Wind
The media scrum sweated bullets outside the federal building last week, expectantly awaiting two headliners of the developing legal war on the former Enron leadership. The first executive was in the bag, with former managing director Michael Kopper turning government witness. Both he and Leslie Caldwell, chief prosecutor of the federal task force on Enron, finally showed up before the cameras.
Kopper said nothing. Caldwell added little beyond the facts in the plea agreement, but their expressions told it all. The stone-faced Kopper seemed be staring out through several veils of valium. He'd just confessed to two counts of conspiracy carrying a possible 15-year sentence, and he'd given up $12 million and implicated former friend and boss Andy Fastow.
Caldwell's broad smile showed just how much easier her life had gotten with Kopper's decision to squeal. "His knowledge is now our knowledge," she crowed. They might be sharing knowledge, but on this morning they certainly weren't sharing his pain.
After looking over the menu of Kopper's admitted misdeeds in his plea, the only debate among the journalist rabble on the sidewalk seemed to be when Fastow would be barbecued and whether the order would be rare or well done. New York Times reporter Kurt Eichenwald -- balding, bespectacled and dapper in a suit among a crowd clad in jeans, khakis and summer cottons -- helpfully chewed over background details with fellow reporters. Houston Chronicle reporter Mary Flood, an attorney herself, passed out bottled water to the thirsty media masses. Texas Monthly writer Mimi Swartz, on leave to write a book on the Enron saga with company whistle-blower Sherron Watkins, huddled off to the side on a stone ledge devouring fresh information in the pleadings.
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The gathering had all the camaraderie of a campout crew who've been there before. And they are certain to be there again as investigators climb toward their two dream Enron targets, former chairman Ken Lay and former CEO Jeff Skilling.
This is the highest-profile federal task force investigation in Houston since the long-running "Hotel Six" City Hall sting that stretched from 1995 through three trials before ending in 1999. Last week, it seemed like déjà vu when Lay's attorney Mike Ramsey seized the occasion to spin the Lay-Skilling "ignorance is bliss" defense for reporters.
In Hotel Six, Ramsey's client was former councilman Ben Reyes. The lawyer got an acquittal for River Oaks bookie James Angleton, accused of hiring his brother to murder his wife, Doris. Ramsey carries the mantle once held by the legendary Percy Foreman and then successor Richard "Racehorse" Haynes. The presence of Ramsey and other legal Houdinis in a case carried the implication that their clients would need a magic act to get off scot-free.
"Criminals like to hide things," Ramsey lectured to a reporter who had the nerve to suggest that Lay should have known that busy little spiders a few corporate rungs below him were spinning special partnership webs of breathtaking complexity.
A source involved in the Hotel Six investigation sounded envious when contemplating what a cooperating witness of Kopper's stature would have meant for that case. Of the seven defendants indicted, only Reyes and former port commissioner Betti Maldonado were eventually convicted.
"By having Kopper or having someone high up plead, it creates enormous pressure on the people above him, and we never had that," the source said. "If someone would have wilted under the pressure, it would have made a big difference."
How big a difference is highlighted in evidence brought to light by Kopper's plea. It included a previous missing link that may explain the evolution of the Ponzi scheme that ended with Enron's bankruptcy. It also could tie Lay into the roots of the conspiracy.
In November 1997, Lay addressed the Nature Conservancy's International Leadership Council in Santa Barbara, California. He was helping to unveil Enron Earth Smart Power, billed as environmentally friendly energy generated from a 39-megawatt wind farm the company had purchased from Zond Corporation.
"January 1, 1998, will be a historic day in California," Lay told his listeners. "Not only are Californians going to be able to choose their electric company, they will also have the ability to show their commitment to the environment by selecting a brand of electricity which includes power from new clean generation sources."
The energy produced by the 75-foot-tall turbine towers at the Tehachapi facility may have been clean, but the business maneuvering behind Enron's handling of the venture couldn't have been dirtier. As the first of a host of fraudulent deals, it involved, appropriately, tilting at California windmills.
After that hoopla, Kopper claims he and Fastow created one of those now infamous special partnerships called RADR to buy the Zond wind farms from Enron. According to the court pleading, that deal was "to enrich themselves and to enable Enron to retain secret control over the facilities."
Secrecy was necessary because Enron was in the process of purchasing an electric utility in Portland, Oregon, a move that would have disqualified the corporation from the tax breaks available for alternative energy producers. Since Lay was involved in pushing the wind-generation project, it's hard to imagine that he wouldn't also have been aware of the maneuvering behind the scenes to preserve the tax benefits.
Using a loan from an Enron subsidiary, Kopper told the feds, he and Fastow set up RADR. For investors, they recruited the trio of William Dodson (Kopper's domestic partner), a friend of Fastow's wife and an unnamed Houston real estate broker. They got the money to buy into the deal from a loan from Fastow to Kopper, who then doled out the money.
The scheme violated a host of accounting regulations and allowed Enron to list the sale of the wind farms as a profit while disguising its control. Over the next two years, Kopper and buddies would receive $2.7 million from the bogus investment. Part of the game was that they had to kick back money to Fastow, according to Kopper. Enron officially repurchased RADR in 2000, with another payout of $1.8 million to the gang. Two months ago the bankrupt Enron finally sold off its wind-generation assets to GE Power Systems.
Curiously, Dodson's name has been absent thus far from the federal court pleadings. Although it's not spelled out in Kopper's plea, immunity for his partner seems to be one of the unwritten conditions of the agreement. It is reminiscent of the federal plea by junk bond king Michael Milkin. He took an enormous financial hit and served jail time, but managed to save his brother Lowell from prosecution, despite Lowell's involvement in the case.
"This plea agreement has a whiff of that," opines a legal source. "Kopper's taking a big hit, giving up a lot of money, probably going to go to jail. And where's Dodson, who clearly received some of the benefit? It sounds like that may have been part of the package, at least on a handshake."
It remains to be seen whether Fastow's wife, Lea, who also worked at Enron, will face indictment. There's no indication the former financial officer has decided to cooperate with the feds, but with Kopper's plea the pressure may be insurmountable.
Veteran Houston attorney David Berg believes the federal task force has been lucky in getting early guilty pleas from Arthur Andersen exec David Duncan and Kopper. He says Duncan never could have been found guilty in a trial, and that his plea contributed to the conviction of his accounting firm and the pressure that cracked Kopper.
According to Berg, the pleas demonstrate the difference between the legal culture of the East Coast, where out-of-court settlements are favored, and the Houston tradition of taking the fight to the prosecutor and saving any deals for the sentencing phase. It's a "put on your boots and come down to court and let's settle this like real men" mentality passed down from Foreman and Haynes to current court gunslingers like Ramsey, the DeGuerin/DeGeurin brothers and Dan Cogdell.
"I would have tried these lawsuits," says Berg. "Every Houston lawyer I know would have tried them. But having said that, with the dominoes starting to fall, they will lead inexorably to the top."
And how high is that?
"It seems to me Mr. Lay is in a difficult position to deny knowledge of anything and everything," the attorney says. On the other hand, "those are much easier cases to defend, and he does have a superb lawyer."
However it goes, fans can look forward to some spectacular legal fireworks in the coming year. Forget the Texans and the Rockets. The real contact sports season is about to begin: It's between Caldwell's Team USA and Andy, Ken and Jeff's Enron Raiders. Place your bets early.
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