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In 2001, the world was shocked by the story of Enron. It was a titan of America's economy, dealing in everything from electricity to paper to communications technology, yet the company faced a major scandal involving its finances, and when the truth about Enron finally emerged, thousands of lives were shattered. Today, we're still grappling with questions about the power of big business and whether corporate America needs tougher rules. With those conversations in the public spotlight, we've decided to reair our series on Enron. We hope you enjoy it. On Tuesday, August 14, 2001, the restaurant on Smith Street in Houston is jammed packed with the lunch crowd. Sharon Watkins looks around. She recognizes most of the faces of her co workers at Enron, and they seem oblivious. Watkins has seen the numbers, and she knows what they mean. The ship has hit the iceberg, it's sinking, and there aren't enough lifeboats. She pushes her plate away, having lost her appetite. Her friend Kathy looks concerned. Sharon, what's up? You've barely touched your salad, and Andy's expecting us back in 15. You can't keep the boss waiting. Watkins trusts Kathy Lynn, a former Enron VP, now at the subsidiary LGM, and she's a friend. The Watkins lowers her voice and leans across the table. Yeah, about Andy. Since June, he's had me reviewing assets, boring stuff, but he's trying to figure out how to get some cash flowing in within the next couple of years. But here's the problem. We have these assets of Vichy, Hanover, New Pound, all hedged with this financial entity called Raptor to shield losses, or at least the appearance of losses. Oh no, Raptor's plural. We have several of them. So yeah, I'm familiar with the Raptors. Well, are you familiar with the fact that they lose hundreds of millions of dollars a year? Because I wasn't until I looked into it. Enron Energy Services sent two guys to my office. They stood at a whiteboard and broke it down. Turns out, these Raptors lose money every day, so to keep them afloat, Enron is stuffing them with hundreds of millions of Enron stock. Look Sharon, it's a complex transaction. Yes. So if those Raptors go bankrupt, it could trigger huge losses for the LGM division. I looked at last year's statements, and guess what? Enron actually lost a half billion dollars, but because those losses are hidden in the Raptors, no one knows. Not the stock analyst, not the investors, and Jesus, if this thing gets out, Sharon, it's okay. All right? First of all, the Countens, Arthur Anderson, they signed off. You've got to be kidding me. Yeah. The Raptors do go bankrupt, and he doesn't care. He doesn't mean anything to LGM. He's structured the deal so he can pull all of his money out first. Sharon's head is spinning. Kathy, it matters to Enron. LGM and the Raptors might not have anything at risk, but Enron sure does. And whoever else invested in these things, and he created. If the Raptors go bankrupt, which they probably will, all the money will be gone. But Lynn just shrugs, the walkins acceded firmly in her chair. She feels like she's falling. She just told Lynn, her friend, that she's uncovered the worst accounting fraud she's ever seen in Lynn just shrugged. As walkins looks around, everyone's on their phone, talking at once, balled people from Enron, and one by one, the colored drains from their faces. Lynn reaches for her own phone. She recognizes the number and answers. Oh, oh my god, what? I wish Sharon now, yeah. Run her way. Lynn hangs up and swallows hard. Walkin leans forward. What is it? What happened? Jeff? He just resigned. Walkin stares back. Jeff's skilling, the CEO of Enron, one of the most famous corporate executives in history, is abruptly done with the company he helped build. He must know what walkins knows. And at that moment, walkins realizes there can be no more rationalizations, no more procrastination. Her company is corrupt and sinking fast. It's time for her to get out. From Wondry, I'm Lindsey Graham, and this is American Scandal. In the 1990s and early 2000s, Enron was like no corporation on earth. It called itself the world's leading energy company, and few dared to disagree. One specialized in delivering natural gas, electricity, paper, and communications technology. A posted earnings at a rate of 20% annually and generated profits of over $100 billion. Fortune hailed it as America's most innovative company, six years in a row. Enron was the pride of Houston, Texas, the ultimate corporate success story, and for a decade, a radiant affirmation of the American dream. It was founded in 1985, when the Nebraska based energy company Internorth merged with Houston natural gas corporation. In those days, Enron's mission was ambitious but straightforward. It aimed to be the premier natural gas pipeline in America. Its chairman and CEO, Kenneth Lay, considered himself one of the country's leading visionaries in energy, and his vision included deregulation. Luckily, he had friends in the White House, and well healed lobbyists on Capitol Hill. He wanted a free market energy business, unconstrained by federal oversight. Once unshackled from regulation, he felt the profit potential was enormous. And then in the 1980s, deregulation became a reality, and Enron was off to the races, expanding beyond pipelines to other unregulated energy markets. And then in 1990, Lay made a pivotal hire. Jeff Skilling was brought in to run Enron's finance division. He was cunning, aggressive, and brilliant. One of Skilling's most brilliant maneuvers was instituting an accounting system known as market to market. Under the market to market system, Enron could declare profits from a deal on the very day it was signed, even if it had no idea what those profits would be. But the key to Enron's success was accounting fraud. In the 1990s, a feverish bull market stoked Wall Street expectations. Big companies pushed themselves to show annual returns of 15% or more. In Enron, unethical and exploitative, fueled by greed and little else, began slowly rotting from the inside out. Wall Street didn't know about Enron's creative accounting practices. Analysts and stockholders were just impressed with the profits. And thanks to its numbers manipulation, Enron was on just about every analyst's buy list. But when Enron's earnings started to defy market forces, stock analysts and journalists became suspicious, eventually sounding the alarm. In 2001, Enron was revealed to be a fraud, but it was too late. When the company tanked, it shattered the lives of thousands of employees whose retirement accounts just vanished. Enron left wreckage from California to Wall Street. The sheer breadth and complexity of Enron's crimes stunned the world. In the aftermath of the company's bankruptcy, many asked how such a massive fraud could go undetected for so long. At the heart of the dark scam, where Enron's corrupt leaders and brokers, but they had help from a vast network of collaborators, including outside legal and accounting companies that covered for them. At the time, the scale of the legal manipulation of the American financial system was unprecedented. This is episode 1, A Sense of Urgency. It's February 1994, and as she walks across the snow, Sharon walk in smiles. She is officially an employee of Enron. She's only 34 years old and has been with the company a mere four months, but now she's here in Aspen, Colorado, America's most exclusive ski town. Walkins was sent here alongside several of her colleagues. Their boss, Jeff Skilling, the head of Enron's Capital and Trade Division, sent them to represent the company at an important conference, convened to help link those who run large public pension funds with big corporate money movers like Enron. The conference was a success, and at the end of each day, there was plenty of time left over to head out into the snow or try one of the fancy local restaurants. Tonight, walkins will do both. She approaches the meeting place and hears Andy's unmistakable laugh. Walkins likes Andy Fastow. He's a good guy, the one who hired her to manage investment portfolios. Fastow is one of the most energetic and innovative finance executives in the company, maybe even the country. Walkins reports directly to him, and his confidence she'll be able to move up steadily in his department. She jogs up to the group, there's a couple of guys from Enron, Chris Bauer of Pacific Corporation Group in California, and a friendly middle aged guy walkins doesn't yet recognize. Bauer explains that the man is with Pine Creek Cookhouse, the restaurant they'll be eating at tonight. And then upon closer inspection, walkins notices something. Everyone is standing in cross country skis. She's only wearing white, white, winter clothes. Someone apparently forgot to tell her to gear up to hit the slopes. The man from Pine Creek starts handing out poles, they're going to ski to the restaurant. He makes a vague gesture over his shoulder and says it's just around the mountain. And he asks that if anyone's really not up to skiing, he can send for a sleigh to take them instead. Fastow's look of disdain says everything. Enron guys don't do sleighs, and more than anything, walkins wants to be an Enron guy. One by one the group pushes off towards the mountain. Walkins is a little wobbly and immediately falls behind. But she grits her teeth and pushes her skis forward. Walkins calls to fastow and tailor to slow down, but they speed up. Within moments they're gone, she's been left behind. It's not long before walkins watches the sun disappear behind the trees. She should have reached the restaurant by now. Dask is becoming night and she's alone, starting to get very cold, and growing more and more concerned. She sees no sign of her team or the restaurant. She's lost in the dark, has gone too far to turn back, but she reminds herself that it will be okay. It has to be. Annie will realize she's gone too long and set off back down the trail to get her. And finally, light appears in the distance, lights, a building, and a sign that says pinecreek coax. She opens the door, scans the room, takes a moment to process what she sees. She kicks the door shut behind her, pulls off her gloves, angrily flings them to the floor. This owl notices her for the first time. He's in his regular clothes, his ski gear in a heap at his feet, casually chatting with Mitch Taylor. They appear to be on their second or third glass of wine. Dinner is over. Fast owl gives walkins a look like what's your problem. He didn't even notice she was missing. He didn't care. None of them did. Walkins just shakes her head and asks if anyone realized that she hadn't made it until just now. This owl tells her that next time, she'll just have to do a better job of keeping up. Walkins finds a table. This has all been just another lesson on how things are done when you're part of Enron. Enraged and embarrassed. She grabs her menu and resolves to never allow herself to get left behind again. Ken Lay's executive suite at Enron headquarters has a splendid view. He would never admit this to anyone, of course, but he enjoys towering over the city of Houston. He earned his spot at the top of this high rise. After all, no one but him imagined a future in which the American energy industry was deregulated then dominated by a single company. With 20% growth, so consistent, you can set your watch by it. Lay believes a person in a position of power like this should maintain an air of politeness and humility at all times. Still, in private moments, he allows himself to admit the truth. The people who call him a visionary? They're right. The industry is a ship, and he's at the helm, and they're still far from port. Enron is about to turn 10 years old. Lay is only 52, and they're just getting started on this voyage. Before he packs up in heads home, there's a small bit of business to attend to. The door opens and Nancy enters, followed by James Alexander. Nancy is smiling. Alexander is not. Lay rises from his desk to shake his hand. Nancy exits swiftly and closes the door behind her. The two men sit down. Alexander launches into it. He's under attack. Enron spun off one of its entities, Global Power not too long ago. Though Enron owns 52% of global power stock, global power is still considered independent. It's a publicly traded company in its own right, and Alexander, its president, must answer to the many nonenron shareholders. But Rich Kinder, Enron's chief operating officer, is pressuring global power to buy up poorly performing power plants from Enron at prices far above market value. When Alexander pushed back, he was accused by Kinder and others at Enron of disloyalty. He's being asked why he refuses to be a team player. He's being told that Enron is Global Power of Parent Company, so Global Power needs to do what's best for Enron, not the other way around. Lay, his chin resting on his fists, nods sympathetically. He asks Alexander if there's any more. Yes, in fact there is. Alexander has heard rumors that some executives at Enron are suspected of boosting the price of power projects to increase their own compensation. Some are even employing questionable accounting practices. Alexander continues, but Lay rapidly loses interest. Alexander is clearly a man floundering, blaming others for his own shortcomings. When he's done speaking, Lay thanks him for sharing his concerns, and Lay promises he'll speak to Kinder. Alexander beams with relief. The two men shake hands once more and Alexander sees himself out. Lay suspects this is the last time he'll ever see Alexander, as he's already made his decision. Alexander can go. He's unworthy of Global Power, and once he's out, Lay will find those at Global Power who are truly loyal to Enron and transfer them to Enron Capital and Trade Management, a sort of investment bank, better known as ECT. Because ECT is run by a visionary like Lay himself, the talent is intelligent, irreplaceable, and he's a tough guy. Jeff's skilling is pleased to see the microphone already set up. He strides onto the trading floor, the centerpiece of Enron headquarters, the place where the real money is made. His men are hard at work buying and selling natural gas contracts. They race between hundreds of monitors, closing deals, setting prices. These men are the alphas of ECT and Enron in general. They've taken to calling themselves skillingites, and skilling has got no problem with that. Gentlemen, I'm here to tell you that you've done it again. ECT trading is up 15% from last quarter. I may be chairman and CEO of ECT, but I want to tell you I know I wouldn't be where I am without you. Together we've made Enron the biggest start up in the last 20 years, next to Microsoft, but f***ing Microsoft. He's been selling chuckles, but now he's arrived at his real reason for stopping by today. But I have to confess, I've been sent by HR. Yep. No, no. Let's just get this out of the way, right? There have been some complaints. Skilling turns to his left and tries not to laugh. It's there in the corner right where HR said it was. A large cork board with headshots of various women at Enron. He can tell the photos have been tacked, then re tacked again and again. And points to the photos. So please, someone, what the hell is this? That's a very highly sophisticated, ranking system. You call it the honey board. Okay, boys. But the honey boards got come down. Seriously, do me a favor. Clean up a couple things around here. Get HR off my back, okay? All right. The lecture over, get back to making money. Skilling steps away from the mic and heads for the elevators. His skilling nights gonna help him achieve the only thing in this life skilling really wants. The CEO chair when Ken Lay retires. Its December 1995 and Sharon Watkins sits behind her desk and stretches. He's about to walk out to tell the young accounting associate that he can head home when he staggers through the doorway, cradling a stack of documents as if it's a severed limb. He's in shock. Watkins asks what happened. The associate oversees the interest rate books on the ECT trading desk. He hedges the interest rate risk so that ECT's trading position stays well balanced between losses and gains. Usually the cash flow doesn't vary from day to day. But today is different. Watkins isn't ready to panic. She picks up the phone and calls the head of accounting, telling her about the missing $70 million. The accountant tells Watkins not to worry, sounding like an affable customer service rep. Enron is doing just a little fine tuning and correcting of its books. The company made more money during the fiscal year than it actually needed, so it decided to move $70 million into next year's earnings book for now. In early 1996, the money will simply flow back into the Young Accountants records. Watkins thanks the head of accounting for the explanation and hangs up. Somewhat bewildered she explains to the young man what she was just told. He's relieved, but Watkins is disturbed. What the head of accounting just explained to her is earnings manipulation. Not really illegal, but frowned upon and hidden from investors. But Enron didn't get to be where it is by being like the rest of the business world. He has to remind herself of this from time to time, though lately, she's been doing it more. It's the summer of 1996, and Jeff Skilling is ready to put his fist through the wall. He has a huge problem he can't figure out how to fix. He's the smartest guy in the company, so if he can't figure this out, they might be screwed. The second smartest guy in the company, his second in command, Andy Fastow, is also at a loss. Enron's calls Fastow, Watkins, and other account experts to a conference room for an all hands meeting. The issue is this, the ECT traders bet wrong on the price of gas, and now Enron is $190 million short of its earnings targets. That's a problem, because Enron never misses its earnings targets. Skilling stares directly into the eyes of each person in the room. Make no mistake, they're in the same boat he's in. They traded their way into this mess. The question is whether they can trade their way out of it. The group agrees though, that that's not an option, so it's time to get innovative. One executive whose name Skilling can't even remember looks timidly to his left and right. Skilling tells the man to speak up if he has an idea. The executive proposes ECT try, fair value accounting. Skilling's intrigued. What's that? Basically the executive explains Enron reavaluates some of its key assets. When the company claims these assets would bring in huge money in the months and years to come, fair value could more than make up for the current losses. Skilling loves it, it's a similar principle to mark to market. Perfectly reasonable, perfectly legal. Wall Street stays happy, and more importantly for Skilling, Ken Lai stays happy. Skilling looks around and sees a lot of smiles and nods. Sharon Wacken looks unimpressed, but who cares? Andy looks to be fully on board, and that's good enough for Skilling. But they're not done yet. Fair value can only work if Enron's accounting firm are through Anderson approves. Skilling orders Wacken's to call them immediately and ask for permission to deploy the new fair value strategy. The ball is now in the accountants court. If they approve of fair value, Enron is saved. If they don't, it's doomed. If you're into true crime, the Generation Y podcast is essential listening. We started this podcast over 10 years ago to dissect some of the craziest and most notable murders, crimes, and conspiracy theories together, and we'd love for you to join us. Generation Y is one of the longest running true crime podcasts out there, and we are still at it, unraveling a new case every week. 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Drew is the third generation of famous Barrymore's, but her long lineage comes with its fair share of drama. In our series, Drew Barrymore rewriting the story will tell you all about Drew's big break, landing the role in ET at the age of six, to becoming a romcom darling, and most recently, a daytime talk show host. Listen to Drew Barrymore rewriting the story on Even the Rich, available on Apple podcasts, Amazon Music, or the Wondry app. And again, Wondry Plus subscribers can binge all four episodes before anyone else. Subscribe to Wondry Plus in the Wondry app or an Apple podcast today. Everybody wins. Walkins phone rings. It's fast out secretary. She sounds concerned when she tells Walkins that fast out wants to see her. As Walkins walks down the hallway to fast out office, she has a sickening feeling, like being called to the principal's office, though she can't fathom what she did wrong. And he looks up when she enters. He's frowning. Sit down Sharon. She can tell right away he's angry. Sharon has been brought to my attention that you fucked up. Oh, I'm sorry I don't understand. You don't? You don't remember the other day when the guys from Arthur Anderson were here and you said, quote, you guys are really going to let us get away with this fair value stuff? When are you going to grow some balls? You don't remember that? Walkins actually gulps. What she says next comes out fast. Andy, I didn't mean anything by it. I was just busting the chops. You know, he's a joke. Everyone knew it was a joke. It was just shut the fuck up. He holds his hands up for her to stop. Fast out shakes his head and looks down and massages his temples. It's as if the sound of her voice alone gives him a headache. Walkins is floor. Fast out is never spoken to her this way. Listen, you manage investments, right? Whether it's not your place to question or make fun of new accounting practices. I don't give a shit whether you're joking or not. Just stick to what you know, or keep your mouth closed. Clear? Clear, yeah. Yeah, I'm sorry. Don't let it happen again. And without another word, he turns back to his computer and starts typing. She heads back to her office, Walkins feels shaken. She's convinced she's made a serious career misstep. She'll have to figure out some way to make up for it. Candelae's private jet is in the hangar gleaming just the way he likes it. He's headed to Washington for some policy discussions. The plane stairs are lowered, waiting for him. Jeff's skilling stands outside the plane, looking irritated. He's not scheduled to go on this trip, so seeing skilling, lay wonders what could possibly be wrong. Scaling doesn't hesitate to tell him. He tells lay he knows Rich Kinder is resigning, leaving the COO position open. Well, that's correct, lay explains. Kinder wanted Lay's job and grew tired of waiting for Lay to retire. What Lay doesn't say though, is that he was all too happy to see Kinder leave after he learned Kinder was sleeping with Nancy McNeil, Lay's assistant turned NRON VP. That's unacceptable. Nancy's absolute loyalty to Lay was now compromised. Kinder had been a hero once. He gave the whole company what everyone referred to as a sense of urgency. With his simple phrase, Kinder defined NRON's high stakes, succeeded all cost culture. Lay trusted him above anyone else. But that was the past. Now Kinder has to go. Lay can get down to brass tax. He tells Lay that he's made a lot of money for NRON, and his time has come. Either Lay agrees to promote him to COO immediately, or skilling leaves the company. Lay looks at his watch. He's less than 10 minutes from wheels up, and he can't afford to drag this out. He also can't afford to lose skilling, or the disastrous optics of two top executives leaving in the same month. Lay decides on the spot to give skilling what he wants. Lying smiles, and eagerly pumps Lay's hand overjoyed. Lay nods, and makes his way up the stairs if his G100 jet. As the plane pulls onto the tarmac, Lay is confident he's made the correct choice. Yes, he has dramatically increased the power and influence of Jeff's skilling within NRON. But that's a good thing. Skilling is aggressive, sometimes crude, but effective. He's the hammer. Lay is the velvet clubbed hand that holds it. In the spring of 1996, Rebecca Mark feels unstoppable. She's the commanding presence in this conference room, and several of the board members smile at her in admiration. At 42, Mark is indisputably the top woman in the company, CEO of NRON International. She's very proud of that fact. The guys bulk up in the gym and scream at each other to display their power. Mark can scream too, of course, and she gets deals done. She also wears short skirts and ensures that her hair and makeup are always magazine cover ready. There's an element of performance in what she does, but this is all one big game anyway. And she's a star player. Mark knows that some call her a living legend, and others call her a walking publicity stunt. She doesn't care. As long as they all remember to call her what she truly is, boss. As though, when you're a boss, you have to take a little heat. Like this afternoon, Jeff Skilling is at it again. He's extra full of himself after getting promoted to COO. He openly despises Mark and never misses an opportunity to undermine her. She's just finished a presentation showing that NRON International is stronger than ever. It's successfully expanding by securing deals every month to deliver power all over the globe. Lay appears pleased as do the other top NRON execs at the conference table. Skilling scoffs. None of it's good enough for him. When it's his turn to speak, he practically screams, telling everyone that Mark's work doesn't matter. He says she's trying to make money the old way, building massive power plants and pipelines. She's out of touch and holding the company back. NRON needs to focus on the future and the future is energy trading. Mark defends herself, her financials are unimpeachable. She's not just bettering NRON's bottom line. She's bettering society by bringing energy to power starves nations. Flustered, Skilling insists there's no way Mark's upcoming projects will deliver the promise returns. He wants to rerun her projection models himself. Only then will the board see the truth. Comly Mark looks at Lay, who looks back at her admiringly. She informs Skilling that Lay and Kinder, prior to his departure, entrusted Mark to run NRON global power and pipelines. Mark has her own bookkeepers, and Skilling has no role in her division. Skilling stammer and spotters but then goes quiet. Mark allows herself a victorious smirk. Mark knows that Skilling wouldn't be going after her so hard if he didn't see her as a threat. And Mark is a threat. She is his only real competition for CEO of the whole company. That's why Skilling wants her out of the way. But Mark is a fighter, and if Skilling wants to bring her down, he's going to have to try a little harder. In January 1998, it's another miserable winter day in Houston, and a miserable day for Sharon Watkins too. It was two years ago that Andy Fastile was screaming at her for making accounting jokes, and Watkins has since redeemed herself many times over. After she helped evaluate a massive metals trading unit acquisition, the higher ups at NRON, including FASTile, started treating her with real respect. For the last few months, she's been building up to her greatest achievement yet, and then just like that, it all fell apart. Watkins had a plan, a plan that would get her promoted to at least an NRON VP. As VP, she gets paid more, and her value to the company would be unquestioned. To become VP, she needed to go out into the world, look for a potentially massive deal and close it herself, and after much work, she found such a deal. Cobre mining company in New Mexico needed a loan to improve and expand its copper mine. NRON would not only deliver the money, but sell Cobre power so its mine could be run more efficiently. In return, Cobre would sell NRON the copper it produced at a discount, giving NRON's metals and mining trading unit a major boost. Watkins did all the legwork. Got NRON and Cobre to agree to the terms, the only thing left is to make it official. Cobre's executives arrived in Houston last night to sign the contracts in person. Then this morning, at 7am, Watkins got a call from Jeff's killing. She picked up the phone and stealed herself for what she knew was going to be bad news. Scaling told her NRON was pulling out of the deal because stock analysts don't like the looks of it. They worry NRON is diversifying too fast, and jumping into side businesses it doesn't know enough about. Scaling tells Watkins to break the news to the Cobre guys, then hangs up. Watkins feels a sense of frustration and sadness, worth than any she's ever felt in her professional life. The men from Cobre, Jeff Ward and Rich McNeely are waiting at the four seasons downtown, expecting Watkins to show up any minute with the final papers for them to sign. The hotel is 10 blocks from NRON headquarters. Watkins decides the walk there from her office. On the way she tries to think of how she's going to explain this. When she arrives at Ward McNeely's hotel suite, her face says it all. Ward immediately reddens. He asks, is NRON backing out in Watkins knots? Ward sweeps his hand across the table, sending a metal tissue dispenser flying. He asks Watkins if she understands that she's just destroyed his company. McNeely reminds Watkins that Cobre had been fending off a hostile takeover by a rival mining group. NRON was supposed to step in and save them, and NRON made a promise. Now there's no way he and Ward can hold on to Cobre, and it's too late to secure another partner. Watkins feels tears coming, but she doesn't let them fall. She needed this to work. Ward and McNeely needed this to work, but all she can do is apologize. Ward sucked in his rage and hissed at her. You can just help Kenlay and Jeff's skilling they are the most unethical people I've ever met and honestly, I don't see how you can stay here and work at this company. On the walk back to NRON offices, Ward's words reverberate in Watkins head. Maybe it's time to look for employment elsewhere. But then she grimaces. She can't afford to leave now. Every job interview will contain the same question. How did you work at NRON for four years without making VP? Watkins will look like she's too unambitious or unimaginative to be worthy of promotion. She makes the decision. Once she gets a promotion, then she'll look for another job. But first, she has to find another deal. And soon. Andy Fastow can never tell what Kenlay is thinking. The man's a ssfinks. A classic old school midwestern type. Not like Fastow. Fastow is a fast talking jersey harder than the sleeve kind of guy. Fastow and skilling are done breaking it down. They have just told Kenlay about LGM and they're awaiting his response. LGM is ostensibly an investment fund. But more to the point, it's a special purpose entity, where SPE. Accountants use SPE's to isolate financial risk. A company like NRON might own an asset and that asset might be failing. The SPE exists on paper to buy that failing asset and take it off NRON's hands and take it off NRON's balance sheet. SPE's can be very, very useful when you want to minimize the appearance of losses. And LGM is not FASTOW's first SPE creation. There's Jedi. Jedi 2. Chuko. But LGM is bigger than all of those. And more important. And that's why FASTOW used the initials of his wife and sons to name it. LGM. And not Star Wars characters. But there are some at NRON that just don't get it. They're not bold enough to comprehend the truth that in business some rules can be bent and others can be broken. And if you're smart enough, like an anti FASTOW or a Jeff's skilling, then reality can be what you say it is. FASTOW and skilling explain LGM will live on paper and save NRON millions. That's all anyone really needs to know. LAY says he's on board. FASTOW smiles but now comes the tricky part. FASTOW explains that actually there is a slight catch. Since LGM is technically an investment fund under FASTOW's control, FASTOW would need to be exempted from NRON's code of ethics. FASTOW plans to invest about a million dollars of his own money in the fund, but that's not all. He also intends to collect management fees from the other investors. The problem is, the code says no employee of NRON may profit from a company that works with NRON. This provision may be waived, however, as long as the business in question does not adversely affect the best interests of NRON. FASTOW promises LAY that LGM won't hurt NRON in any way. Canlay nods once again. He understands perfectly and will talk to the board about getting FASTOW the exemption. Skilling gives FASTOW a victorious look that says, you did it buddy. 1999 has been a very good year for Sharon Watkins. Once a year to the day after Cobra blew up in her face, she closed a major deal in Korea worth a half billion dollars. And at last, she's an NRON VP. She's also a mother, recently giving birth to her first child, Marion. Now Watkins is doing deal support work, advising those making NRON deals in the Caribbean. She's at her desk drafting some routine contracts. For weeks now, Watkins has been deeply involved in the business of the company's latest off the balance sheet SPE called Whitewing. NRON recently sold Whitewing a natural gas pipeline in Columbia. It's called PromiGus. It went for $136 million in cash, at least on paper. Even though Whitewing was officially the buyer, NRON put up the money itself. And it recorded the transaction as profit for NRON, not a cost. Watkins isn't entirely comfortable with this practice, which she also knows NRON did generate over a billion dollars in actual cash flow this year. So you could argue it doesn't matter if a single $136 million deal isn't correctly accounted for. She's received word that NRON may want to buy PromiGus back from Whitewing at some point in the future. That way, everything will end up in the right accounting column in the future. She's working on that paper now. And then there's a soft rapid at office door. InWalk's chief accounting officer, Rick Cossie. He asks Watkins what she's working on. She explains that she's drafting the Whitewing buyback agreements. Cossie says she can stop what she's doing right now. Watkins asks why. Because no paper trail can exist with any buyback rights, then Cossie heads back to his office. Watkins has been at NRON long enough to understand what just happened. Obviously, if Cossie is wearing a Whitewing paper trail, that means that Whitewing's legal status as an off balance sheet SPE is questionable. Arthur Anderson has been supportive up until now, but the accounting firm is telling NRON it will only be pushed so far. Obviously, NRON is hiding something. Watkins starts to think. She's got her promotion. Perhaps it's time to move on. But she can't. She wants to have another baby soon, and companies don't often respond well when you request maternity leave right after they hire you. So Watkins puts her day's work in the shredder. She'll stick it out just a bit longer. That same night, in her office at NRON Global Power and Pipelines, Rebecca Mark allows her rage and frustration to boil over. It's nearly 10 pm and everyone is exhausted, but she's not going to let any of her consultants go home yet, not until they deliver some answers on how to save Azarex, her latest and grandest venture yet. God damn it, I get that Azarex is failing. What I don't get is why. NRON conquered natural gas. It conquered natural gas trading. It's about to conquer electricity. We own Azarex. Why can't it conquer water? One of her consultants tries to explain. The idea was solid, Rebecca. Set up Azarex as a global water provider. It makes sense. But the obstacles, unfortunately, are just way more daunting than anyone anticipated. That's not good enough. Here is going to be the leading commodity of the 21st century. The water industry currently generates $300 billion a year. Why can't we get a piece of that? We can't afford for Azarex to fail because if it does, we all lose our jobs, so figure it out. Rebecca, we've tried. What our model simply isn't working. We tried to buy other companies. I tried to buy other companies. I went to Brazil. I went to Mexico, Argentina. It made sense at the time, but those smaller companies, well, the French have dominated the global water business since there's been a global water business. And frankly, Azarex has run out of smaller water companies to buy. We're just out of time. We have to announce that there's no way Azarex can make its fourth quarter earnings. God damn it. God damn it. Rebecca would flip the table if she could. She breathes hard and tries to regain control. Even rage, all she wants, it won't change the facts. There's no way out. Azarex is going down, taking her career with it. He knew this would happen. Who? No. Pack up. Go home. Rebecca Marquesa smile. Skilling set a trap for her and she fell right into it. Skilling oversaw Enron's initial investment in Azarex and he set the terms. This has to pay Enron back, its investment immediately after filing its IPO. It was a typically hard bargain from Skilling, but Mark didn't mind. She was confident Azarex would generate huge profits. Confident she could prove Skilling and all the rest of the doubters were wrong, just like she always had. But this time it was different. This time Mark bet big on herself and for the first time in her life, she lost. She thought Skilling underestimated her, but it turns out she underestimated him. Now Rebecca Marques will have to stand before Enron's board of directors in the entire world and admit she failed. Days later, Jeff Skilling lets the California sun wash over him. Enron stock prices soaring and Rebecca Marques has been squashed. There's just one last item for Skilling to check off his end of the millennium to do list. Skilling strives into the California Public Utilities Commission building to deliver his prepared remarks on deregulation. The utility execs a plot and Skilling describes what deregulation of the state's electricity market can do for them. Dregulation will lead to a free market. Dregulation means more competition between suppliers and deregulation, Skilling assures them will lead to lower prices. Skilling tells them if California deregulates Enron can help the state save $9 billion a year. And with that sort of money, let me tell you what you can buy every year, Skilling says. You can triple the number of police in Los Angeles, San Francisco, Oakland, and San Diego, and you could double the number of teachers. The enthusiastic ovation that follows tells Skilling all he needs to know. California will deregulate, and when it does, Skilling will be there to make billions. And California's future will be powered by Enron Corporation. On May 24, 1999, Tim Belden is nervously cracking his knuckles. He's young, slender, balding, and smart. In a battle of wits, Fuse stands a chance against him. That's probably why Enron hired him to run its West Coast trading after California deregulated electricity. There in the office, amidst nerf footballs and blaring plasma TVs, Belden hunkered down every night and boned up on California energy law. All 1100 or so pages of it. It's mind numbing stuff, but Belden memorized it. And he did it for one reason to exploit California's arcane and poorly managed power delivery system. And now that he's finished studying, it's time for a little test. At 610 AM, Belden contacts California independent system operator, or Ioso. He tells them Enron is projecting a peak in energy demand for the next day. It's news to them, but they're happy for the heads up. Then Belden goes to the state's electricity market, the California power exchange, and submits bids to sell them about 3,000 megawatts to help them meet the unexpected demand. Then he waits. Less than an hour later, the exchange office gets back to him. They'll buy the 3,000 megawatts. So on to phase 2. With his bids accepted, Belden now has to select a transmission path to deliver his 3,000 megawatts to the exchange. He picks the silver peak route, because he know it can only handle 15 megawatts at a time. Belden again waits for the call, and gets it 4 hours later. It's the ISO. Belden's absurd request set off alarm bells. The ISO rep wants to know if there's been some kind of mistake. Belden smiles and admits that he did it on purpose. He just wanted to see what would happen. And after clearing everything up with the ISO rep, Belden hangs up, shaking his head, not believing it worked. Belden knows the rules. Because the line was congested, his 3,000 watts couldn't be delivered. Of course, that's because he deliberately overloaded the line. But now the ISO is required by law to scramble for ways to send his 3,000 watts along other roots. And the ISO will pay any company it can for help alleviating the congestion he created, including Enron. These frenzied last minute transactions will cause the price of electricity to spike by more than 70%. Enron can then jump in and sell the state power it never actually needed in the first place at a huge profit. The people running the ISO's Byzantine system don't even know they're being lied to. Belden has just poisoned the ISO's and then sold them the antidote. Tim Belden knows that when state authorities figure out what he's done, you'll probably get fined. 10, 20 grand maybe. But that's a small price to pay for a very good joke that today made his company $10 million dollars, with hundreds of millions of dollars a month to come. From Wondery, this is episode 1 of 5 of Enron for American Scandal. On the next episode, Enron plays games with California and the state descends into an energy crisis. Sharon Watkins strikes a Faustian bargain with Andy Fasthau and Jeff Skilling learns to be careful what you wish for. If you'd like to learn more about Enron, we recommend Power Failure by Mimi Swartz with Sharon Watkins. The smartest guys in the room, the amazing rise in Scandal is Fall of Enron by Bethany McLean and Peter Elkand. This episode contains reenactments and dramatized details. And while in most cases we can't know exactly what was said, all our dramatizations are based on historical research. American Scandal is hosted, edited and executed produced by me Lindsey Graham for airship, sound designed by Derek Barons. This episode is written by Hannibal Diaz. Our senior editor is Karen Lowe. The producers are Stephanie Jenns, Jenny Lauer Beckman and her nonlopes for Wondering.