BOOK 3: ENRON ASCENDING: THE FORGOTTEN YEARS, 1984-1996
Chapter 4 Internet Appendix
4.1 Valhalla Redux
References for Chapter 4 Appendix
4.1 Valhalla Redux
The two-part trading scandal at Enron Oil Corporation (EOC), which climaxed in October 1987, is the single most important episode in the history of Enron before the Jeff Skilling era (1997–2001). It is vitally important for understanding the mindset and, ultimately, the tragedy of Ken Lay. However, the event has had conflicting accounts from those involved and produced folklore that must be separated from fact.
- Enron’s Exposure
At no time did EOC’s exposure approach the net worth of Enron, which was approximately $1.2 billion at the time (Enron, 1986 Annual Report, 39; 1987 Annual Report, 37). In fact, as discussed in chapter 4, the exposure (paper losses) peaked at approximately $300 million and skillfully ended up at $142 million.
Mick Seidl’s remembers Lou Borget confessing to an out-of-the-money position of $25 to $50 million (Seidl Interview, 27). Borget also remembers this figure (Notes from Borget Interview). But the major Enron books tell a different story about the bombshell delivered to Seidl by Borget at their October 9, 1987, lunch.
Bethany McLean and Peter Elkind wrote that Seidl first told Lay that the loss made Enron “less than worthless” (22), and the company faced a liability in excess of a billion dollars (ibid.). Kurt Eichenwald quotes Seidl as telling Lay in their initial conversation that the loss was in the “hundreds of millions, maybe more than a billion if the market goes the wrong way” (38). But these authors never talked to Seidl (Seidl Interview, 28).
One book was closer to the mark. “By the time Houston was alerted,” wrote Mimi Swartz and Sherron Watkins, “the position had the potential to wipe out almost all of Enron’s 1987 earnings” (32). However, the same book states that prior to the oil trading blowup, “Lay’s new company was facing bankruptcy” (ibid.). Enron may have been close to being in violation of some of its bank-loan covenants, but it had a net worth throughout its worst period of more than one billion dollars.
Valhalla is popularly remembered as an event where “Muckleroy and his team saved the company” (Bryce, 42). Ken Lay, however, did not make this statement at the time. But in the all-employee meeting of October 23, 2001, Lay stated that Valhalla “could have taken the company down” (Johnson). That Lay did not state this in 1987 and did in 2001 is an example of whitewashing and reputation control by Enron’s CEO.
- Culpability
Lou Borget and Thomas Mastroeni were charged and found guilty of fraud against Enron in a court of law. But a review of events prior to October 1987, what chapter 4 calls Valhalla 1, indicates clear warnings about the rogue employees from the beginning. There was culpability in Enron’s Houston office of the chairman, not only in Valhalla, New York.
Enron chairman and CEO Ken Lay was the key decision-maker in the events leading up to Valhalla 2. He called the shots both in internal investigative meetings and in discussions with the board of directors regarding EOC. Had not a skillful and fortuitous cleanup occurred, the legend and career of Ken Lay at Enron could have taken a dramatic turn in 1987, not in 2001/2002.
Mick Seidl, number two at Enron as president and chief operating officer, was clearly complicit in the entrepreneurial error and ethical lapses that allowed Valhalla to spin out of control. From his first day at Houston Natural Gas in July 1984 to his tribute at Ken Lay’s funeral in July 2006, Seidl was a Lay admirer. They were close friends and vacationed together—even using an Enron jet—well after Seidl left the company in 1989.
Seidl was not going to buck the judgment of his superior regarding Valhalla. After all, Enron was desperate for Borget’s earnings, and the regular trading reports that Seidl read showed the Borget’s operation was making millions of dollars and on plan for 1987 after a big earnings year in 1986.
This leaves Richard Kinder, an executive whose career at Enron (and after) has made him appear to be everything that Ken Law was not—tough, decisive, entrepreneurial, and hard-asset driven. It is documented that Kinder, at a private moment during a pivotal Valhalla 1 meeting, stated his preference for firing Borget and Thomas Mastroeni (Beard Interview, 4). One of the Enron books reported a similar statement from Kinder (Swartz, with Watkins, 32).
Mike Muckleroy, who fussed with Kinder over the festering problem at EOC, questions whether Kinder really would have lowered the boom on the rogue traders to avoid Valhalla 2:
Kinder may have said it privately to a couple of the auditors, but I will guarantee it was just “cover my ass” and not something that he ever said directly to Lay with any witnesses or in writing. Further, as General Counsel at the time of Valhalla, I believe that Kinder’s responsibility would include making sure that the legal and moral violations—by the facts shown by the internal auditors in the Board meeting regarding the violations in the trading operations of Borget—would have made it his responsibility to report those actions to the Audit Committee of the Board.
Kinder, for his part, as part of his general policy, has never given his views about Valhalla. A top Enron executive stated to the present writer, however, that Kinder complained about Ken Lay’s pressure to make the numbers as the cause for his (Kinder’s) own shortcoming in this area (Burns).
- Other Points
Regarding the Valhalla 1 meeting in Houston with Borget and Mastroeni, Kurt Eichenwald quoted Ken Lay as saying: “If I find out Borget is trading on inside information, on tips he’s getting from somebody in OPEC, I’ll make sure he never works in the industry again” (19).
This point is highly dubious. Commodity trading on unique, nonpublic information is not necessarily illegal; it a progenitor of success in an activity such as oil trading. Lay and Seidl, not to mention Enron’s board of directors, believed Borget had special connections in and knowledge of the global oil market. (And Lay himself back in his early Florida Gas days bragged that he had special knowledge of Saudi Arabia’s intentions (Bradley, Edison to Enron, p. 302n28).
“In hindsight,” commented David Woytek on the CEO’s tough words, “I think that Lay was just trying to sound tough in front of us!” (Woytek, e-mail message to author, March 21, 2007).
References for Chapter 4 Appendix
Bryce, Robert. Pipe Dreams: Greed, Ego, and the Death of Enron. New York: Public Affairs, 2002.
Eichenwald, Kurt. Conspiracy of Fools: A True Story. New York: Broadway Books, 2005.
Enron Corp. Annual reports, various years.
Johnson, Carrie. “Prosecutors Link Enron Fall to 1987 Scandal.” Washington Post, November 5, 2005, A10.
McLean, Bethany, and Peter Elkind. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio, 2003.
Swartz, Mimi, with Sherron Watkins. Power Failure: The Inside Story of the Collapse of ENRON. New York: Doubleday, 2003.
Interviews
Beard, John. Interview by Robert Bradley Jr., Houston, TX, December 9, 2007.
Borget, Lou. Interview notes by Robert Bradley Jr. January 5, 2007 (copy in author’s possession).
Burns, Ron. Telephone interviews Robert Bradley Jr., August 16, 2000, and December 6, 2006.
Muckleroy, Mike. Interviews by Robert Bradley Jr., Winter Park, FL, June–October 2006.
Seidl, Mick. Interviews by Robert Bradley Jr., Houston, TX, September–October 2006.