Today In Enron History

Saturday, October 27, 2001

Chuck Watson met with Ken Lay at Lay’s family home. The two business leaders began to discuss the nuts and bolts of a potential merger. Dynegy didn’t want Enron’s international unit — except it would take the London trading operation. Everything else would strictly be in North America.

The company’s name? Ken Lay proposed “Enron-Dynegy”. Watson flatly refused, stating that the name Enron had become poison. If the merger would happen, it would just be Dynegy, and Watson would run it while Ken Lay would be a board member. And as for management, only Greg Whalley was welcome at Dynegy.

As for price, the opening salvo was for Dynegy to buy Enron at current market price with no added value for shareholders.

This took Ken Lay aback. The stock closed at $15.04 on Friday – and had been at over $90. Ken Lay stated that the reason the stock was zooming downward was because of short sellers and the media. The value was there – it just wasn’t being reflected in the share price.

But even if Watson wouldn’t go for it, Ken Lay knew that this had to happen fast. The company was evaporating before his very eyes. The power dynamic had shifted so dramatically. Just months ago, Enron was the biggest, baddest company in Houston. Now it was asking smaller companies for favors.

Later that day, Rick Causey met with some Anderson accountants at his office. David Duncan, Tom Bauer, and Deb Cash were given a quick presentation on Chewco. Causey described the issue with Michael Kopper’s lover, an issue that had arisen with Barclay’s (the company’s investment looked like a loan; it wasn’t, but it looked like it) and the fact that distributions were sent to Andy Fastow’s wife. Maybe troubling, but was it legal? There was still no dramatic conclusion.

And the lawyers arrived. Two partners from Weil, Gotshal’s Dallas office were shown around the trading floor. The trading guys, who were known for aggression, were determined to survive even if the rest of the company collapsed. They were not going down without a fight. Mark Haedicke, lawyer for the trading division, was the main contact for the Weil, Gotshal attorneys. Finally the went into a conference room to meet with Jeff McMahon, Greg Whalley, and some of the trading team. Ideas were tossed around. They could borrow against assets. But all the international assets were under water. They could get a private equity fund to throw some money at the trading division. They could borrow against the pipelines.

The beautiful, sleek, perfect pipelines. The assets at Enron’s foundation, the assets that brought in hundreds of millions of dollars every year. The core of Enron. Maybe, to the outside world, some value was still locked in those.

Today In Enron History

October 25, 2001

The stock opened at $16.40. It would close at $16.35. Enron’s stock would never close higher than it opened again, not even on the day the Dynegy deal was announced, and the October 25 loss would be one of the smallest ones Enron would know from here on out.

Steve Bergstrom, president of Dynegy, was like most oil and gas execs in Houston: he knew everyone. One of his friends was Stan Horton, CEO of Enron Transportation Services, which was basically Enron’s pipelines. Horton called Bergstrom and asked him to meet for lunch, and added that he’d like Greg Walley and Mark Frevert who was CEO of Enron Wholesale, to join them.

Bergstrom had floated the idea of combining Enron’s European trading ops with Dynegy’s and since both Whalley and Frevert were coming from trading backgrounds, it looked to Bergstrom like maybe Enron was coming around to that idea in light of the crisis.

They met at the Plaza Club at One Shell Plaza. On the forty-ninth floor, it has an astonishing view of Houston (speaking from experience, especially at night). Whalley gave it to him straight: they wanted to discuss a merger. With the whole company. Not just European ops.

Bergstrom, taken aback, was certainly open the idea. He said he needed to talk to Ken Lay directly. Whalley said that was no problem. A few hours later, Ken Lay got in touch with CEO Chuck Watson. They made an appointment to meet on Saturday at Ken Lay’s home.

Meanwhile, Enron had announced its plan to draw down its $3 billion in bank lines. The WSJ was all over that. They called Mark Palmer and during that conversation casually mentioned Chewco — what was that? Palmer said he had no idea.

Rebecca Smith and John Emshwiller had found the name in an LJM private placement document. Since Enron was in the throes of a crisis, they knew that they could get their names out there if they found a new controversy so they were attempting to find an angle nobody else had found yet. Chewco, it turned out, was that angle.

The article reads in part:

While Enron disclosed its Fastow-related transactions in SEC filings, a computerized search of the SEC’s database of public filings produced no reference to this other employee-related entity known as Chewco.

Chewco was established in 1997 “with approximately $400 million in capital commitments” to buy an interest in Enron assets, according to one of the partnerships documents. The document didn’t further specify what assets were purchased, and it didn’t disclose the financial impact of the transactions for either Chewco or Enron. Chewco was being run by Michael Kopper, a managing director in Enron’s Global Equity Markets Group, according to the document.

Enron, which has maintained that its complex financial transactions with employee-related entities were legal and properly disclosed, didn’t have any comment regarding its dealings with Chewco.

Mr. Kopper, who Enron says left the company this year to focus on helping to run the Fastow-related partnerships, didn’t return phone calls. A person at his office in Houston Thursday said Mr. Kopper was traveling. In response to questions about Chewco, an Enron spokesman would say only that “Michael Kopper was never an executive officer of Enron.” Mr. Fastow repeatedly has declined interview requests. He severed his relationships with the partnerships in July.

This statement is an apparent reference to SEC disclosure regulations regarding related-party transactions. Under SEC rule S-K, a company has to report any transaction that exceeds $60,000 and involves “any director or executive officer.” By contrast, Mr. Fastow, as CFO, would have fallen into that category, but Mr. Kopper, as managing director of a business unit, presumably wouldn’t have.

However, reporting guidance issued by the Financial Accounting Standards Board seems to have a broader definition, one that might include Mr. Kopper. According to FAS Statement 57, a related-party transaction involves a “material” piece of business between the company and a member of management. The statement defines management as directors, top officers, vice presidents in charge of major business units and “other persons who perform similar policy-making functions. Persons without formal titles may also be members of management.”

All that stuff about Michael Kopper is a transparent effort to cause trouble. Classic muckraking.

Inside Enron, Mark Palmer was trying to get some answers about Chewco so he could talk to Smith and Emshwiller about it. He wasn’t able to get good answers so he called a meeting with McMahon, Greg Whalley and a few others. Ken Lay got pulled in and basically everyone tried to cobble together what they knew about Chewco. Jeff McMahon mentioned that an issue was Michael Kopper’s partner was chief investor in the fund.

Ken Lay was confused. “He has another partner in this?”

“Um.. No,” McMahon said. “His.. lover. Michael Kopper’s gay lover.”

Ken Lay finally lost his composure. “What the fuck is happening here!?” he yelled.

The pressure Jeff McMahon was under during this time must have been otherworldly. He was working nonstop to keep the company afloat. Drawing down the bank lines was slated for that day, and the New York bankers weren’t happy about it. No bank had thought that Enron would draw down over $3 billion in one giant gulp. They didn’t want to send it. McMahon was a bulldog. “Send it,” he said.

“But … but.”

“Send it.”

Meanwhile, Andy Fastow, newly fired, spent the day on the phone with attorneys. From 11am to 1:30pm he was on a conference call with Michael Rubenstien, David Gerger, and Lea. Then from 1:30 to 3:00 he was on the phone with Gerger alone. Then at 5:30 he spoke to Gerger again for thirty minutes.

Today In Enron History

Wednesday, October 24, 2001.

The stock opened at $19.74 and would close at $16.41 at extremely heavy volume. The stock lost 17.4% of its value.

First thing in the morning, Andy Fastow and Whalley discussed the problems with the banks – or, more to the point, the problem the banks were having with Fastow. Andy said that he understood he was no longer effective in the role of CFO, and Whalley agreed. Andy then said he would talk to his team and McMahon and get back to him. Whalley politely said okay.

He showed Andy out and saw several others, including McMahon, waiting to speak to him. He asked them to head upstairs and he’d join them in a few minutes.

Whalley immediately went to Ken Lay’s office and informed him he was firing Andy Fastow and replacing him with Jeff McMahon. Lay hesitated. He still wanted to believe Andy was the old Andy Fastow – the brilliant star who had the world by the balls. He said he’d take it up with the board. Whalley felt that Lay didn’t quite understand the urgency of the matter. NO BANK WOULD DO BUSINESS WITH ENRON IF ANDY FASTOW WAS CFO! So he basically gave Lay an ultimatum: either Enron would have a new CFO or it would have a new COO.

Whalley left Ken’s office and hustled up to the meeting with Andy, McMahon and others. Without board approval, he fired Andy Fastow and replaced him with McMahon. Both were shocked. Not that it was done, but that it was done like that. Whalley understood the situation. He was an excellent COO, seeing what was in front of him, not what he wanted to see. And he was moving quickly to fix it as best he could. He was sort of a little like Jeff Skilling in this way. Whalley immediately moved on to the next order of business: pulling down the revolving credit lines, which McMahon suggested the day before. Fastow objected but nobody listened.

McMahon deputized Ray Bowen, then they assembled a team who would try to rescue Enron from financial meltdown. He said he’d meet Bowen in the new Enron tower on the fourth floor in thirty minutes. There was no time to waste.

Dazed from being fired, Andy Fastow made it to his office in time to field a phone call from Jeff Skilling. Skilling had no idea that he’d just been fired and was surprised by the news. He tried to say a few encouraging words to his old friend, but Andy quickly got off the phone with him. Andy dialed his attorney, David Gerger. He then got in touch with Michael Rubenstein, another attorney. Andy and Lea had a conference call with Rubenstein that lasted two hours.

Ken Lay was spending the day in a management meeting at the Four Seasons Hotel. He directors listened as Ken Lay expressed concerns that Andy Fastow might not be able to fulfill his role as CFO any longer. He was unaware that Whalley had already tossed him out and filled the position with McMahon. John Duncan mentioned that his call with Andy the previous day had revealed that Andy made much more money on the LJMs than they’d been led to believe. He admitted to $45 million. Ken Lay was shocked; he felt then that he had been deceived by Andy Fastow. He would have to be terminated. But there was a catch. Andy Fastow had an employment contract that stated the board needed special cause to fire him. So one of the board members made a motion that Andy Fastow would take a leave of absence and McMahon would replace him, effective immediately. It passed unanimously.

McMahon was trying to keep calm over in the new Enron building, but he could not believe his ears. The financial SWAT team he’d assembled needed answers – how much cash Enron had on hand, how much it owed, a maturities schedule for debt. And nobody could produce any of it.

Ken Lay kept thinking about Jeff’s offer to come back to Enron. He was desperate and needed something to stop the vortex of doom that was sucking them all down. And maybe Jeff was that thing. He asked Whalley to meet with him and he agreed. He’d go to Jeff’s house — there was no frecking way Jeff could show up at the building without causing a huge commotion.

Jeff was waiting for him. Before he even stopped his car in Jeff’s drive, Jeff was outside, walking toward him. “What the fuck is going on?” Jeff demanded.

“It’s bad,” Whalley said. “Really, really bad.”

Back inside, they discussed facts and figures. Whalley estimated they needed about $3.2 billion to keep the trading business alive.

Jeff was immediately animated. He wanted to jet to New York immediately – just let him change out of his shorts and shave, and he was ready. He believed that if he could meet with the bankers, tell them there wasn’t a problem, that the banks would get their money back, it would all be okay. This was freaking Enron! There was no problem Enron couldn’t handle. It was the darling of Houston.. a shining star on Wall Street.

Whalley returned to the office a true believer. He told Lay that they should bring Skilling back. They decided they’d talk to the management committee about it.

But it wasn’t happening. Back at Jeff’s house, the phone wasn’t ringing. Jeff wasn’t having it. He called Whalley back, demanding to know what was going on, and trying to impress upon him that they needed to be in New York that night. They needed to be taking bankers to dinner, proving themselves. Whalley, who had shown a penchant for speed with Andy Fastow, said there was simply nothing to do: they had to have a management meeting.
When the call finally came, it was not good news. Skilling could not return to Enron. The management team had suddenly turned a cold shoulder to their former CEO.

This was one of those “if only…” moments. If only Jeff had been permitted to return. If the market saw that he was truly invested in the company, that he loved it… if only. Maybe there would have been a slight slowing of the hemorrhaging, just enough to catch their breath. Just enough to calm the panicking markets.

But it wasn’t to be. Skilling was out and he was going to stay out.

Enron issued a press release in the mid-afternoon:


ENRON NAMES JEFF McMAHON CHIEF FINANCIAL OFFICER

FOR IMMEDIATE RELEASE: Wednesday, October 24, 2001

HOUSTON – Enron Corp. announced today that it has named Jeff McMahon chief financial officer. McMahon had been serving as chairman and CEO of Enron’s Industrial Markets group. From 1998 to 2000, McMahon was Enron’s treasurer.

“Jeff has unparalleled qualifications and a deep and thorough understanding of Enron,” said Kenneth L. Lay, Enron chairman and CEO. “He has the trust and confidence of our investors and financial institutions.”

Andrew Fastow, previously Enron’s CFO, will be on a leave of absence from the company. “In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as CFO,” Lay said.

McMahon, 40, joined Enron in 1994 and spent three years in the London office as chief financial officer for Enron’s European operations. Upon returning to the United States, McMahon was executive vice president of finance and treasurer for Enron Corp. In 2000, he was named president and chief operating officer of Enron Net Works, where he had responsibility for Enron’s e-commerce activities.

McMahon has a bachelor’s degree in business from the University of Richmond in Virginia. He is a Certified Public Accountant, SFA registered and is a member of the American Institute of Public Accountants and Association of Corporate Treasurers.

Sherron Watkins was thrilled by the changing of the guard in the upper echelons of Enron. With her nemesis out as CFO and her friend Jeff McMahon in the power position, she thought for sure she could leverage the situation. In fact, she was pretty sure Jeff McMahon needed her advice on lots of things – like whether to get rid of Glisan. Now there was no love lost between Glisan and McMahon, but Sherron Watkins was not in a position to be advocating for firings. In any case, as soon as the email announcing McMahon’s new position was sent, she drafted a letter to McMahon:

—–Original Message—–
From: Watkins, Sherron
Sent: Wednesday, October 24, 2001 4:12 PM
To: McMahon, Jeffrey
Subject: Your new CFO spot and the job I want

Jeff, Congratulations, you deserve the job and can do it superbly! You know you will need to replace Ben Gilson as Treasurer – possibly with Bill Brown.

My issue, and I feel very strongly about this, is that I want to be on the crisis management team to determine how we save our trading franchise. It can disappear over night and I believe there’s more bad news coming re: these raptor deals (ie, restatement). I have clearly proven myself to be the only person at Enron that had the character, at great risk to my own career, much less personal risk, to go to Ken Lay and let him know what was going on here. I resent all these late comers joining the band wagon – it’s damn easy to make a statement now, when Ken has made the hard decision to unwind these deals and write them off. Mainly I resent being stuffed into a holding tank, I should not be the pariah here! Despite your comment to me several weeks ago when I told you that’s how I felt and you replied “what did you expect?” I have been professional in this 100%, I went to Ken and Ken alone, in contrast to yesterday’s VP Jim S. who put Ken on the spot by asking unanswerable questions at the all employee meeting. I hope to meet with Ken Lay soon. But I’d like to talk to you about my role in the ‘inner circle’, because I firmly believe I deserve it and have proven so by my past evaluations of the negative impact of these structures and then by my actions in doing something about it. You can help me with your endorsement of me to Greg Whalley, Mark Frevert and Ken Lay. I hope I have it. Thanks and good luck in the new job,

Sherron

What a delusional psychopath.

But anyway, after she sent that crazy, self-serving email, she forwarded it to Cindy Olson with a message:

—–Original Message—–
From: Watkins, Sherron
Sent: Wednesday, October 24, 2001 4:14 PM
To: Olson, Cindy
Subject:FW: Your new CFO spot and the job I want

Cindy, I sent this to Jeff McMahon today. I wanted you to see it. You can forward it to Ken if you’d like – I am very interested in speaking with him as soon as that can be arranged. I very much appreciate your insightful and professional support of me in all of this from day one! Thanks, Sherron.

Need I point out that Enron was on fire and this woman was only concerned with her career. McMahon was tied up with the financial SWAT team all day, trying to figure out the real position of Enron. He didn’t have time to baby-step Sherron Watkins career up the ladder. I do love the fact that she thinks she belongs in the “inner circle.” Again, I repeat what one of her former bosses told me: she was one of 180 VPs, she was utterly undistinguished and she knew absolutely nothing about deals. He did say she was aggressive and ambitious though, and that comes through in these emails.

Jeff McMahon called Ken Lay that afternoon, not to discuss the social climbing Watkins but to apprise him of the situation Enron was really in. Thirty billion in debt, about $10 billion current. They had to visit with the banks and try to renegotiate the debt. McMahon then called Whalley and told him the same thing.

Another option, Whalley said, was a merger. A merger with someone with a stronger balance sheet would at least save the company – there was no shame in that. McMahon said he’d give it some thought.

That night, McMahon and some other guys met at a dim, dank Houston landmark bar called Kenneally’s that supposedly serves the best pizza in town. McMahon had been thinking about Whalley’s idea of a merger. He threw it out there to see what the guys thought.

They pondered who would be a good candidate for a merger. Exxon? Shell?

“Dynegy,” someone said.

Today In Enron History

Tuesday, October 23, 2001.

The stock opened at $23.25, its high for the day.

Ken Lay convened a conference call with analysts to try and keep them apprised of what was happening ( Call transcript here ). The room at the Enron building was packed; Ron Astin, a V&E attorney, was present, as were Richard Causey, Ben Glisan, Greg Whalley, Mark Palmer, Andy Fastow. Tension zinged through the room. The only thing Whalley could say was that an SEC investigation had begun but he could give no other details, which was the only thing that the world wanted to know. Causey was uncomfortable; Fastow was angry.

Most of the analysts were polite, until Richard Grubman took the line. Only a few months earlier, Jeff Skilling had called the Highfields Capital short seller an asshole ( transcript here). Grubman asked a question about Azurix, saying that the water company would require a billion dollars of support from Enron, and had Enron taken reserves against that liability?

Causey answered that Azurix was well-positioned to handle all of its obligations. Grubman persisted, stating that the value just wasn’t there.

Ken Lay stepped in. “Richard… I know you want to drive the stock price down. And you’ve done a good job of doing that, but let’s move on to the next question.”

Lay and Grubman tangled for a few more moments.

Listening from home, Jeff Skilling must have been smugly satisfied. That guy was a pill, and it was difficult for even consummately professional Lay to gracefully handle him.

David Duncan had been watching the stock price during the conversation. It was chugging downward with every second.

An analyst from Goldman Sachs finally got to the question everyone wanted answered – whether there was more to come in terms of LJM. Ken Lay said that he couldn’t say much about LJM because of the SEC investigation.

Skilling thought this was exactly the wrong answer. This was what people wanted to know – the one question that had the potential to turn around the stock price and people’s perception of Enron, and Lay refused to answer it.

That was when Skilling called Enron. Lay was still on the call, but Skilling asked his secretary to have him call back asap.

When the call ended, the general feeling in the room was that they’d just created another disaster. A huge, ugly, nasty disaster.

Shutting off the webcast in his office, David Duncan reiterated the document policy and told his team to get in compliance with it.

When he was finished with the analyst call, Ken Lay called Skilling. Skilling asked to be brought back to Enron. He believed it would send a good signal to the street and help tourniquet the blood loss the company was experiencing. Ken Lay said he’d think about it.

A little while later, Ken Lay headed to the Imperial Ballroom of the Hyatt for an all-employee meeting ( Transcript here). The employees were worried about the stock price; many were angry. Ken Lay was calm and affable, as always, and assured them that the stock was way undervalued.

The employees had been asked to provide questions anonymously to Mr. Lay. Most of them were concerns about the stock price and what the company’s strategy would be going forward. Then he picked up a question written on a card and said, “A lot of these I think I’m going to have to handle, like this one.” He read: “I would like to know if you are on crack.”

The crowd laughed.

“If so,” he continued, “that would explain a lot. If not, you may want to start because it is going to be a long time before we can trust you again.”

The crowd laughed again. Even under attack, Dr. Lay looked relaxed and appeared to be enjoying himself, though we know that could not possibly be happening.

“I think that’s not a very happy employee,” Lay said. “I’m sure a lot of you have some hatred.” He paused. “No, I’m not on crack.”

The decision of the board to ask Andy Fastow how much he had earned with the LJM structures had been made last week. Today John Duncan and Mickey LaMaistre would ask. Jim Derrick, the firm’s general counsel, had composed a script (script here) to make sure they asked the right questions.

LaMaistre, who was in Colorado at the time, looked down at the script and began to read it.

“Andy, because of the current controversy surrounding LJM1 and LJM2, we believe it would be helpful for the board to have a general understanding of the amount of your investment and your return on investment in the LJM entities.” He asked four specific questions, which allowed for no wiggle room.

Fastow answered that he made twenty-three million on LJM1 and twenty-two million on LJM2. The actual number would be about fifteen million dollars higher — over sixty million dollars all told.

In Global Finance, two very bad things were happening. The first was that Enron’s short term loans in the commercial paper market weren’t rolling over. The second was that Ben Glisan was attempting to get some credit from bankers, to no avail. No bank wanted to do business with Enron as long as Fastow was still CFO. Thus Ben Glisan was put in the uncomfortable position of having to tell his boss that he was the corporate equivalent of anthrax.

Pug Winokur, a board member, and president Greg Whalley were at that moment fighting over whether Andy Fastow would stay as CFO. The board – and Pug – adored Andy. Whalley believed Fastow was poison.

Fastow and Glisan convened the finance team – including Rick Causey – trying to find a way out of the morass of problems that had been dumped on their laps. Whalley suggested they call Jeff McMahon.

McMahon and Glisan were not on good terms. Just three days earlier McMahon had tried to fire Glisan. But the Boy Scout had survived. So when Glisan told him that the company was unable to roll commercial paper, McMahon could only roll his eyes. Obviously Glisan was too stupid to even know the words he was using.

“Ben, obviously you didn’t mean you couldn’t roll it,” McMahon said. Probably what had happened was that he couldn’t issue as much as the company would like, which was not a surprise in this market.

Then Andy’s voice came on the line. “No, Jeff. Ben is right. We were unable to find any buyers for our commercial paper.”

McMahon was stunned. And sickened. Through the astonishment of the situation, only one solution presented itself. It was time to draw down the revolving credit lines that backed the commercial paper.

Getting off the phone with Glisan, Causey and Fastow, McMahon then called Whalley. “We have a major liquidity crisis,” he said.

The stock closed at $19.79, a loss of 4 percent of its value.

Today In Enron History

October 18 was a frenetic day for everyone at Enron. Ken Lay and a few others were on the east coast speaking with investors. Back in Houston, Mark Palmer at Corporate was getting the crap beat out of him by reporters at the Wall Street Journal.

Both Rebecca Smith and John Emnshwiller had been contacted by Jim Chanos. He called Emshwiller first to inform him that he had “missed” the $1.2 billion equity write-down that was mentioned in Enron’s conference call. Then he called Rebecca Smith and told her not only about the write-down (which as a journalist she should have gotten herself) but supplied her with the third quarterly report for LJM2 investors – and implied there was something unsavory about it. Thus, Rebecca Smith called Mark Palmer and yelled at him for “trying to cover up” the $1.2 billion – which Ken Lay announced on the phone to journalists and analysts that morning. She then dug into the LJM issues.

Meanwhile, Jim Derrick, general counsel for Enron, got a call from the SEC. They were opening a “preliminary inquiry” into the company’s dealings.

A few hours after hanging up with Rebecca Smith, Palmer picked up the phone and heard her screechy little voice yapping at him again. She was curious about funds from Raptors going to Andy Fastow and Michael Kopper. She also said that somebody (probably Sherron Watkins) said that Jeff McMahon heard bankers complaining that they were being forced to do deals with LJM to get a seat at the Enron table.

By this time, James Derrick had called V&E lawyers. The V&E lawyers called McMahon and asked if it was true about Andy corralling bankers by forcing them into LJM deals. McMahon said it was not true.

With all the stuff happening in Houston, Ken Lay cut short his trip and headed back to the Lone Star State.

Today In Enron History

October 5, 1998, Shell Oil signed the contract with Enron to build Cuiba, a $500 million plant and pipeline.

October 5, 2004, Former Assistant Treasurer Timothy Despain pleaded guilty to a charge of conspiracy to commit securities fraud. According to his plea deal, Mr. Despain was tasked with coordinating interactions between Enron and national debt rating agencies. Despain claimed that he did not truthful present the financial position of Enron to the companies, such as Moody’s and Standard and Poor’s, for instance, he claimed that he and others falsely represented to credit rating agencies that Enron’s cash flows from its non-regulated businesses were stable and predictable. This was the government’s attempt to go after Project Nahanni – the sale of $485 million US Treasury securities.

The most damaging and untruthful claim by Despain was that Enron achieved artificial cash flows through Prepays. Prepays were exactly what they sound like – marks received from mark-to-market accounting transactions – recorded as “debt-like” obligations on Enron’s books, and in fact cash generated from Enron’s monetization of trading contracts.

In addition to casting aspersions on some of Enron’s accounting structures, Mr. Despain pointed his finger at a most unlikely person in his attempt to advance his allegation of wide-spread fraud at Enron: Jeff McManhon. Jeff McManhon, who was Enron’s President and Chief Operating Officer in the period after Jeff Skilling departed the company. Mr. McMahon has never been indicted – for anything. Ever.

Mr. Despain was eventually sentenced to probation.

Today In Enron History

Today in 2002, Enron Corporation announced that Jeffrey McMahon would resign as President and Chief Operating Officer of the company effective June 1, 2002.

Mr. McMahon had worked closely with the turnaround team to reorganize the company around the pipelines after the collapse and bankruptcy of the company.

“I strongly believe that the best course for the Enron estate, its creditors, and its employees is to use our core pipeline and electricity assets to create a new company apart from the litigation and diversions of bankruptcy,” McMahon said. “For that effort to have every chance of success, it became clear to me that outside leadership is required. Because I thrive in challenging situations, this decision was personally difficult. But professionally, I believe that making room for new leadership before we announce the plan for the new company is best for Enron’s stakeholders and for me.”

The decision to resign was McMahon’s, and Cooper said he accepted that decision in order to keep the company focused on the future.

“Regrettably, I support Jeff’s decision,” Cooper said. “Last fall, during tremendous turmoil within the organization, Jeff stepped up as a true leader. He worked tirelessly to create value for the company and as an advocate for employees. He is an exceptional individual.”

McMahon joined Enron in 1994 and spent three years in the London office as chief financial officer for Enron’s European operations. Since that time, he has held several executive positions in the company. Last October, McMahon was named chief financial officer of Enron as part of a reorganization of its executive ranks, and in January he was named president and chief operating officer.

Today In Enron History

February 26, 2002

Enron executives Jeff Skilling, Jeff McMahon and Sherron Watkins testified before the House. There were actually 65 House and Senate hearings on the subject of Enron, but this is the one most people will remember. Jeff Skilling answered every question. He talked about his friend Cliff Baxter. He defended himself and Enron.

Sherron Watkins glared at him like she was hexing him.

sharronwatkinsglare