VANITY FAIR
THE ENRON WARS
If there was one thing Jan Avery knew when she joined Enron in 1993, it was numbers. But nothing added up. New evidence reveals that the seeds of Ken Lay's pattern of hiding losses went back even further-all the way to 1987.
April 2002
BY MARIE BRENNER
Photography Director: Susan White

I was at first inconceivable to Jan Avery that her position at the Enron Corporation could make her a valuable witness in the largest bankruptcy case in American history. On the morning of January 25, when former Enron vice-chairman Cliff Baxter was found dead in his Mercedes with a suicide note and a bullet wound in his head, Avery was home sifting through proxy statements and S.E.C. filings she had kept in storage. Like Baxter, she had been interviewed by lawyers and investigators who were convinced that her testimony could illuminate what had led to Enron's collapse. Shortly before his death, Baxter told colleagues that he had become a pivotal figure in the scandal, and that he stood between Ken Lay and Jeff Skilling (former C.E.O.'s of Enron) going to jail. Avery was apprehensive as well. For eight years she had consulted on the myriad complex structures that fueled the Enron delusion. "The pattern began very early," she said, "much earlier than anyone has reported. It started in the gray area of what was acceptable in accounting principles and, in my opinion, later turned into a clear case of fraud."

The mystery of Enron presented itself to Avery in 1993, during her earliest days in the company's tax department. Trained as an accountant -what Enron called a "middle person"- she placed confidentiality at a premium. Avery's special expertise was in oil-and-gas tax procedures, used to compute state and federal taxes. From her days as a young woman going to night school, she had been taken by the simple beauty of accounting, balancing credits and debits. She had even run her own marketing company, jockeying to buy and move gas on the newly deregulated pipelines that crisscrossed Texas and New Mexico. In an Enron that would soon fill up with young M.B.A's in polo shirts and khakis, Avery was an anomaly. She dressed in blazers and suits and always kept flowers in her office. Her paternal grandmother had been born on a plantation in Alabama, and good breeding showed on Avery's face, but the family had lost everything, so a determination was there as well. In the wild, optimistic days of Enron's romance with the opening energy markets, Jan Avery was a perfect hire. The Soviet Union had fallen, and the idea of privatizing electricity, natural gas, and other commodities was sweeping the world. Like FedEx, Enron seemed poised to be in the vanguard of the newest frontier of American business.

Avery's first assignment, in 1993, seemed routine. She was to compute a schedule of amended state tax returns for Enron Oil, a former subsidiary of the company. Enron Oil had shown a loss on its books, her boss told her, and Avery was supposed to calculate the carryback on the company records. She had worked at such major accounting firms as Arthur Young, Arthur Andersen, and Touche Ross, so she knew what to expect: a thick file with a schedule of tax depreciations. It was standard stuff -years of book-value depletion for oil and gas, company officers' life insurance, liabilities of all kinds. She waited for the file to be delivered, but it didn't appear. "Where is the file?" she asked her colleagues, and they gave vague answers, as if they hadn't understood what she was talking about. Days passed, and still no file arrived. Finally, she says, she was given a thin manila folder containing three sheets, on one of which was a number: $142 million. This was no routine loss; it was a staggering amount for a young company. Avery assumed it was a mistake; she scoured the storage room next to her cubicle and continued to ask her co-workers, "Where are the books for Enron Oil? How am I supposed to justify a $142 million loss for state-tax purposes?" No one could answer her.

"It made no sense to me," she said. "You do not have an entire file of financials disappear." Enron Oil had gone out of business; there had to be officers you could track down. Since she had no data, she refused to sign off on the $142 million figure. "I questioned it and questioned it. I went to the financial office. Finally I wrote a research report, trying to come up with some kind of basis, but it was impossible to do the research without the facts," she said.

Soon after that Avery's boss walked into her office and said, "Here is your answer. We had a little problem." He paused and said, "Rogue traders." That was the first Avery heard of a bizarre case that had disappeared without much notice. For a moment she thought he was joking. She wondered if certain files were kept in his office so that Enron could claim that they were protected under attorney-client privilege and could not be subpoenaed. Finally he let Avery see the Enron Oil file, but it yielded no data to clarify what had really gone on. "This was the clear beginning for me, when I realized that they were trying to hide all the losses," she later said.

237A-082-008
The witness. Jan Avery, an accountant at Enron for eight years, with her daughter, Katherine, photographed in Houston on January 26, 2002.

Jan Avery had arrived early in the Enron Corporation's drama of willful blindness, during an attempt to perfume a disaster Kenneth Lay, Enron's architect, had inherited in 1985 when he merged his company, Houston Natural Gas, with InterNorth, an Omaha-based concern. In December 1993, Arthur Andersen would become the in-house auditors. Enron Oil was an overture to thousands of off-the-books partnerships which would subsequently dizzy readers trying to figure out what the Enron debacle was really about. It was a harbinger of the future Enron pattern of hiding losses, no matter what. Avery's initial confusion over accounting discrepancies and missing documents only presaged the bafflement of the battalion of bankruptcy lawyers who would be assigned to unravel the morass, of the thousands of Enron employees who would find that their 401(k) plans were nearly worthless, and of all the congressmen -71 in the Senate and 187 in the House- who had received campaign contributions from Enron. The taint of the energy giant would soon permeate the White House and the president's men as George W. Bush and Dick Cheney, close friends and associates of Ken and Linda Lay for years, stonewalled requests from the General Accounting Office for documents, issued new terrorist warnings, and gave lengthy interviews to The Washington Post in which Bush talked about being choked with emotion in the days after September 11. To many these actions appeared to be a full-out legal-defense and public-relations campaign, a smoke screen to keep the political leaders' web of Enron connections from scrutiny. They overwhelmed the footage on the nightly news shows of former Enron employees in T-shirts dragging ficus trees from their offices down the steps of the two gleaming corporate skyscrapers on Houston's Smith Street.

Avery had been hired to work on tax collages, researching case law and the tax code and briefing executives on Enron's interests in deals. "We take an aggressive position on losses," she was told, but that policy sounded benign. The enigma of the Enron Oil loss confounded her because it seemed to be constructed to cover up a criminal fiasco. In October 1985 the heads of a trading operation -soon to be renamed Enron Oil- based in Valhalla, New York, had set up a scam: using two sets of financial books, they ran hundreds of millions of dollars of phony trades through four sham Cayman Island partnerships. Masterminded by Louis Borget and Thomas Mastroeni, the president and vice president, the trades glided into the Enron Corporation's machinery, and in the swirl of the start-up the bogus trading operation continued smoothly for two years. One former executive remembered the day Enron got an urgent phone call from the Treasury Department questioning the enormousness of one Enron Oil trade.

In fact, the future Ken Lay business model started with Enron Oil, a flourishing petroleum-marketing operation with 28 employees and offices in New York, London, and Singapore. Enron Oil seemed to be the one bright spot in the sea of debt incurred in the Houston Natural Gas and InterNorth merger. On the books, it looked like a success story, earning $50 million over the two and a half years before its collapse. Months before federal prosecutors targeted the crime, an in-house Enron auditor began to keep a meticulous and lengthy file on the episode. Later, there was talk in the company that the auditor was so frustrated that he took 50 cartons of evidence and spirited them away in his attic.

Borget and Mastroeni pleaded guilty to conspiracy to defraud and to filing false tax returns, and Borget went to prison. The minor scandal hardly registered a blip in the financial press. Ken Lay told The New York Times that the loss was "an expensive embarrassment." The Enron board quickly voted to disband Enron Oil, and the loss almost tanked the new company. Enron had to liquidate assets, including a portion of a new power business, to cover it.

There remained, however, a larger question: How much of a loss had the company actually sustained? Enron gave the Times a figure of $85 million. Avery's file with no backup data said $142 million. No explanation for the loss ever appeared in subsequent annual reports, according to London's Financial Times. Avery became obsessed with trying to solve that first accounting puzzle. "It was clear to me, even then, that the management wanted as few people as possible to have any access to the records. It was the beginning of management's attempt to hide records from the S.E.C. and the shareholders."

Studying S.E.C. documents, Avery discovered that in an 8-K filing for 1987 the loss showed up as $85 million. This number appeared to her to have been computed using a standard that would become applicable only the following year. "This was a huge discrepancy," she later said. I asked Avery to explain what the numbers meant. She faxed several pages photocopied from 8-K's and Enron financials, and wrote, "It appears that management convinced Arthur Andersen to sign off on showing the loss and provides the first hint of Enron's ability to persuade Andersen to see things in Enron's best light."

Jan Avery and I met in early January for the first of many conversations. Like most people I interviewed during weeks of traveling back and forth between New York and Houston, she radiated anxiety about being seen with a reporter. A divorcée with a daughter who is a college freshman, Avery was concerned that she would be recognized in River Oaks by friends in the oil-and-gas business. In her years at Enron, she had participated in a heady world of ego and manipulation, dealing with an array of Cayman Island partnerships charted on whiteboards in conference rooms, jimmying utilities contracts during the California brownouts, bundling energy for Safeway stores, and creating a nationwide energy program for Citigroup. She supervised teams building power plants in Nicaragua and spent nine months in Europe, traveling often to the United Arab Emirates, where she was closing the $3 billion creation of the Dolphin pipeline.

For days I remained at the St. Regis Hotel in Houston as frightened Enron managers, lawyers, deal originators, and vice presidents -most of them women- came through the lobby, past the holiday gingerbread house that seemed frozen in the air-conditioning. It was the women of Enron, I soon discovered, who had detected the web of intrigue, predicted the fall, written futile letters to board members, tipped financial analysts, and tried to avert the final collapse.

Cynthia Harkness, an Enron lawyer, still at the company, described the moment when chief financial officer Andrew Fastow introduced her to a concept of monetization in which future revenue is booked immediately. The lawyer was baffled by the nerve behind Fastow's logic.

She told him, "Andy, it seems to me that if you do a 10-year deal, and suck all the earnings out in one year, you will then have to keep the profit coming through years 4, 5, 6, and all the way to 10, by doing more of these deals...How are you going to do that if the market changes? Book more deals?" It looked to Harkness like a pyramid scheme, but she knew that the accounting department had signed off on it. She recalled Fastow looking at her and saying, "Yes, you have to keep doing more of these deals each year."

It was Harkness's first week in Enron's global finance group, and she had yet to parse the world within the world that was Enron. Harkness had come to Houston from a large French investment bank, and she asked her new colleagues about partnerships called LJM, which were controlled by Fastow. (The name came from the initials for Fastow's wife and children.) "Isn't there a conflict here?" she asked. "Their answer always was 'This has been approved by the board.' They said, 'It's dicey, but it has been carefully scrubbed. They have put in extra hoops and procedures to make sure they're all right."

The language of the culture was borrowed from ornithology, with partnerships called Osprey, Raptor, and Condor as created vehicles to hide debts and losses. A special fiefdom was arranged for Fastow, with names taken from George Lucas films: JEDI, Chewco. It was a sign of status to have earned a life-size, furry Chewbacca head as a token of having worked on the Chewco deal. "At first we believed there was nothing wrong with this," Shirley Hudler, the manager of the JEDI I partnership, said, as friends of Fastow's walked away with huge profits.

Hudler, like Harkness, worked with Fastow and understood the mechanism of the partnership deals. "They would say, 'O.K., we need to get these assets off the books. We can either put it in Osprey or, if Osprey is full right now, we can sell it to LJM, which can hold it. And then we can move it." Years before that, the future whistleblower Sherron Watkins would sit in meetings and say openly, "This is a circle jerk." Hudler said, "There was so much pressure on us to make earnings, and the Arthur Andersen staff we worked with would never challenge these structures. We could always bully them into getting what we wanted. We made them push the envelope. If they had questions, they would call Chicago -their headquarters. I don't think they were doing their job." (Arthur Andersen lays the entire blame for Enron's difficulties on Enron's board and management.)

Enron, many of the women said, was a hotbed of hormones, a testosterone culture. A vice president openly displayed a "hottie board," on which he ranked the sexual allure of Enron women. There was occasional violence. One trader, learning that his annual bonus was a mere $500,000, was said to have thrown his plasma screen across the trading floor. Another, fearing he would be a victim of an upcoming performance review, slammed his boss up against a wall, accusing him of lying about the trader's performance. "Forget you saw that," the mans boss told the woman who later described the event. "He's having a bad day."

Arriving at the St. Regis Hotel on a Sunday morning, Avery wore a black pantsuit and high-heeled boots and carried a slim folder of documents, as if she were on her way to a deposition. She had driven from her house near West University, a neighborhood formerly inhabited by Rice University professors which had been taken over by the young Enron crowd.

Many of the brick cottages had been expanded into mini-mansions, and S.U.V.'s and Porsches circled the area. At former chief financial officer Andrew Fastow's house, a guard stood in the winter fog. There was an atmosphere of impending catastrophe in the city.

I had first noticed Avery a month earlier at an Enron hearing in federal court. She was seated directly behind me in the press section, scribbling in a black ledger. She wore a vivid purple suit and had the put-together look of a woman who knew her way around Neiman Marcus. It was impossible not to notice her in the press seats, because she did not join in the easy conversation of the reporters seated around her. She had an aura of vulnerability underneath her good looks, a sadness around the edges. I guessed she might work for a law firm, but before I could speak to her she had vanished. Later, Avery told me she was actually trying to look like a reporter. It was her first time inside federal court, and before the hearing she had sat in the empty courtroom and watched a flotilla of lawyers wheel in seven carts of documents. To calm herself, she started counting the attorneys arriving in Judge Lee Rosenthal's court; she stopped at 30. Fearing that she would be caught in the background by one of the camera crews outside, she left during a break.

Avery had come to court to watch Wilham Lerach in action. Lerach and his firm, Milberg Weiss Bershad Hynes & Lerach, were vying for a share of the billions of dollars in potential awards claimed by the hundreds of corporate creditors and pension funds that had seen their investments in Enron become worthless. The University of California retirement system alone had lost $145 million; Florida claimed $335 million. The total loss to state pension funds was $2.9 billion. Lerach's assistant worked the press row, passing out an oversize color chart. It was the first time I had ever seen a lawyer employ a public-relations intern at a routine hearing. The chart appeared to show the astonishing profits made by 29 Enron officials who had sold off $1.1 billion of company shares.

This was early in December, and the narrative of Enron as corporate Antichrist had yet to grip the networks. There was no mob of shouting bankrupt employees outside the courthouse, no Jesse Jackson, no CNN tent in front of the chrome Enron headquarters, no Linda Lay dragging NBC across an emerald lawn and declaring that the Lay family was impoverished. Lerach was attempting to freeze the assets of the 29 officials, but he was also selling his story, attempting to launch a fusillade into the national media.

"This is fraud at the top," Lerach declared in a booming voice with the thick sound of his native Pittsburgh. "Enron’s goal...was to keep these debts off the balance sheet so the rating agencies would not be able to see them." Lerach's task was to convince Judge Rosenthal that a group of Houston's finest citizens, whom she saw socially in River Oaks, had morphed into this decade's Robert Vesco and Marc Rich, global money launderers, and might be attempting to evade prosecution. "We know that the other night [Andrew Fastow] pre-cleared customs in Houston ... and had booked passage to Tel Aviv on three separate flights! ... Skilling has been in Brazil for the last couple of weeks! ... One top executive named McMahon, the treasurer, was known for going around the company after he met with Skilling, Lay, and Fastow, and they directed him to do some bogus deal and say, 'Well, we've all got to go drink the Kool-Aid.' " Lerach tossed out unfamiliar terms like grenades-"costless collars," "derivative trades."

Lerach, the scourge of the tort-reform anti-lawsuit lobby in Washington for his championing of class-action suits, from tobacco cases to those involving nursing homes, has a passion for theatrics, and his unruly hair looks as if he had stuck his finger into an electrical outlet. Standing in front of a chart of what he called "the Mike Milken model"-a reference to the Drexel Burnham Lambert architect of junk-bond finance in the 80s, who ultimately went to jail for securities fraud-Lerach pounded on the board with his black marker and then drew an immense daisy. "[Milken] was here in the middle ... so what Milken used to do is trade the bonds around .... It goes around and around in a big circle ... it creates the phony appearance of a market." Then Lerach threw out more sinister phrases -"dark swaps," "massive insider trading."

Judge Rosenthal studied Lerach coolly, as if she were trying to come to terms with a new set of variables for the Ken Lay who had chaired a campaign for the local United Way, who went to dinners at the White House, and who threw out the first baseball at Enron Field. Lerach, who once directed a civil case against Milken and others that collected damages of almost a billion dollars, appeared hard-wired with moral outrage as he told the court, "A member of Enron's tax group who structured many of these transactions has told us he was told his job was to keep Fastow out of jail!" At that moment, I turned in my seat and saw the woman in purple behind me blanch. Later, I would learn that the remark had been made to her as a joke by Fastow's friend Jordan Mintz, an Enron senior attorney who in February would testify before the House of Representatives that he had attempted to warn Jeff Skilling in May 2001 that his off-the-books partnerships were questionable. "I am keeping all my papers in a salt dome," Mintz had told a friend.

Lerach, who calls himself a private attorney general, is a connoisseur of criminal schmutz. He and his partner Mel Weiss run a thriving class-action firm which employs about 200 lawyers from San Diego to New York and 12 private investigators. They target savings banks, drug companies, and offshore scams. Their specialty is securities fraud, a form of plaintiff law that has been stymied by the 1995 tort-reform act, which was pushed through Congress by a group led primarily by Chris Dodd, senator from Connecticut, with the financial backing of the powerful insurance lobby. Tort-reform advocates insist that it lessens the ambulance chasing that used to clog the legal system; trial lawyers rail that it punishes victims and allows large corporations to get away with outrageous financial manipulations. The act put a stop to virtual automatic discovery of legal documents in class-action cases; because of that, lawyers like Lerach say, the standard of proof for legal pleadings has become onerous, and the investigations needed to file airtight complaints have become unduly expensive.

William Lerach is one of the foremost practitioners of aggressive research, and his investigators scour the world for witnesses and class members, an activity that is questionable under the new law, which prohibits lawyers from trolling for victims. Lerach is also criticized for his public displays. Last fall he chose an unusual strategy to win the Enron case. He decided to feed the media openly and ignore the barrage of legal moralists who would take him to task for it. He reasoned correctly that the bigger the story became, the sooner Enron whistle-blowers and witnesses would come out of hiding. Under tort reform, plaintiff firms must compete for the ultimate stake of being the assigned class leader. "I see it as a $3 billion case," Lerach told a partner, meaning the aggregate of all the claims. The class leader could reportedly earn between 10 and 30 percent of that.

By the time I saw Lerach in court, he was competing with law firms representing Florida and Illinois. Outside in the hall that day, he held forth with fiery indignation. "This is nothing but a Ponzi scheme! There it all was: You have to drink the Kool-Aid!" Within weeks Lerach's accusations proved to be accurate and made the leads of national news stories. His strategycalled "Leraching" by his detractors had worked perfectly. According to one of his partners, "After that hearing we went back to the Four Seasons and for two days did not leave the room, there were so many Enron former employees who wanted to talk to us." (In February, Milberg Weiss won the class-leader position.)

In the early days of the scandal, Houston reverberated with the social and legal conflicts arising out of all the possible Enron prosecutions. Judge Rosenthal's husband, Gary, is an attorney who used to work at Vinson & Elkins, Enron's lawyers, and the Houston Press would later report that Ken Lay had once lobbied unsuccessfully to get Lee Rosenthal a circuit judgeship. Within weeks, Judge Rosenthal recused herself from the case, as did the entire Houston U.S. Attorney's Office. By the time I arrived in the city, fear verging on panic was spreading through the River Oaks set. As a South Texas native, I had a modest acquaintance with the folkways of Houston, but Enron had turned the village of oil into an almost unrecognizable society. One truism remained: the city has never been neutral about the poetry of money. The collapse of Enron had caused the cave dwellers to begin to reconsider their friendships with Ken and Linda Lay. Lay had ascended into an orbit so rarefied in Houston that his very presence at parties could change the atmosphere.

He would stand in one place, as a king might, and allow himself to be greeted with fulsome praise. He brought a new persona to Houston, appearing to be a kindly naif, in contrast to Oscar Wyatt, the former head of Coastal Corporation, the energy company. Houston has long tolerated the foibles of Wyatt, who revels in his flamboyant reputation for buying oil from Saddam Hussein.

By early December the easy hyperbole of Texans swearing eternal loyalty to friends who are potential felons was sounding thin. Ken Lay and chief officers Jeff Skilling, who had left the company abruptly in August, and Andrew Fastow, who had been fired by October, were at ground zero in the Texas endgame, victims of the "tall poppy" syndrome, the phrase Australian Enron traders used for unspeakable hubris.

On my first night in town, at a grand dinner in the Huntingdon, a luxurious River Oaks highrise, several floors away from the Lays' 13,000-square-foot, $7 million spread, Ken Lay's friends were speaking in code about the loss of his fortune. "Ken went to see Fayez to ask him for help," one said. "Fayez told him no way." In the Houston big-money world, this haiku spoke volumes. Fayez Sarofim, the secretive Egyptian money manager with multiple mansions, Rolls-Royces, and wives -one of whom died after collapsing mysteriously on Mount Kilimanjaro two years ago-could have delayed Lay's fate with a single call, but he dismissed him peremptorily. "I wouldn't dream of recommending Enron," he said. His remark circulated quickly through the Tudor mansions of River Oaks and Shadyside, many of whose owners are Sarofim clients. That same week Lay appeared pink-cheeked and cheerful to have lunch at the Coronado Club, implying in the casual tone he had learned to use that he was in communication with the president and Laura. But, as Lay's intimates could tell you, their friend was out selling. It was known that Ken's fervent phone calls to "the Oval" were not being returned.

“Hi, I'm Jan Avery, the president of Southwest Reserves and their only employee. I am a WMBE -a woman in a minority business enterprise- trying to move MM B.T.U.'s from the Permian Basin to the California border." That's how Jan Avery would cajole representatives from the pipeline companies who worked the booths at gas trade shows and energy conventions in New Mexico and Oklahoma. It was 1990. Avery had invested $250 to start her one-woman corporation, taking advantage of a new regulation which gave women and minorities special advantages. She had the legs of a model and did not play down her good looks, but she was also adept at fending off advances at a time when a subtext of sexual favors permeated the wildcatter atmosphere. Avery was struggling with a vicious divorce. She had run away from a grueling marriage to a rich lawyer from Arkansas and was living with her seven-year-old daughter, Kay, short for Katherine, in a small rented house in Santa Fe. The only telephone was in the hallway, and all day long she would make calls on it, pretending she was in an office, trying to get people to buy her brokered gas.

When Jan Avery talks about her history, she tends to skip over difficult periods. She grew up in Leeds, Alabama, outside Birmingham. Her father was a sheet-metal worker, the son of an heiress whose only remaining legacy was her insistence on fine linens, good manners, and a fulltime housekeeper. She taught her granddaughter to appreciate finery and to excel in school. After attending a junior college, Jan worked as a receptionist for a forklift company. She also helped out with the books and became so intrigued with accounting that she enrolled in night school. In 1974 she married her first husband, Gary Kirsch, and soon followed him to Houston, where at 29 she got a job at Arthur Andersen. In the office she met Bob Avery, who worked near her in the tax department. Her marriage broke up, but she and Kirsch remained friends. Avery moved to Tulsa, and Jan followed, getting a job at Arthur Young, just when oil was moving toward $60 a barrel. There she had her first view of the sea of criminality surrounding the wildcatter crowd. When she came to believe that one of her clients was defrauding investors, she and Arthur Young walked away from the account.

Avery and Jan went out for three years before they married. Avery's wealthy father owned an oil-field-machinery company. The couple moved to the Avery-family plantation in Eudora, Arkansas, but when the marriage crumbled, Jan took her baby daughter and fled. She struggled over custody issues while trying to maintain a relationship with Avery. "I loved him," she said, "and I wanted Kay to have a father." When Kay was five, Jan moved to Santa Fe, where she worked part-time as an accountant and sold gas on the phone in the hall. A neighbor recalls that Jan said she was terrified of Avery.

Through cold-calling Jan met the chairman of Gas Mark in Houston, and he agreed to back her on her first deal to move gas on Enron's pipeline to Southern California. Then the market changed, and only big players could stay in the business. Jan became clinically depressed and for a time followed a doctor's advice and took lithium, a fact she confided to Bob Avery. That year Kay went to see her father and his new wife and children over spring vacation, and Avery, a part-time district attorney, filed a motion for custody. According to Jan, he refused to allow his daughter to return home, using the fact that Jan had once fled as a way to convince the court that she was an unfit mother.

Jan finally had to agree to an onerous custody situation; she could visit Kay four weekends a year and have her for summer vacations and alternating holidays. They were allowed to talk on the phone once a week for 15 minutes. Jan always spoke to her daughter as if she were an adult. "I am going to fight for you, but it is going to be very expensive," she told her. "You know how much I love you, and I will do everything in my power to get you back." (Robert Avery rejects Jan's version of events.)

Avery moved to Houston in order to be closer to her daughter. Through friends at Arthur Andersen, she started working part-time at Enron. She became married to her job, spending long hours working on the tax aspects of the multiplying partnerships -there would be about 3,000 by the time the company imploded. She was often sharp with her colleagues, quick to assert herself: "I am the only person who can work on that deal. I know how they work," she would say. Her bonuses depended on the earnings value of the deals she structured. The more money I make, she thought, the sooner I can afford the legal fees to fight for Kay.

When Jan Avery arrived at Enron, she already possessed an understanding of the arrogance of the company's culture. Of all the energy companies she knew, only Enron didn't deal with businesses owned by women. "I could never get them to give me the time of day," she told me. "And they controlled the best pipelines." By 1993, Ken Lay had established his system of rivalries. Forrest Hoglund ran the oil-and-gas division, Stan Horton was in place at the staid and traditional pipeline company, Jeff Skilling had arrived to set up a trading operation, and Rich Kinder, the chief operating officer, kept a brake on the financials, discouraging Lay's grandiose schemes with a droll Texas remark, "Let's not drink our own whiskey, Ken." From time to time Kinder would lose his temper. "Goddamn it, how can we be doing all this?" He was uncomfortable with the rapid expansion, and Lay would say teasingly, "I'll die with a lot of friends, and Rich will have all the money."

And then there was Rebecca Mark, a young banker who in 1982 moved to what would become, in 1985, Enron's treasury department. With her blond hair and gold earrings, she looked like a Texas sun queen. Her mentor at the time was John Wing, a West Point graduate and canny negotiator, whom she reported to. She and Wing went to work opening power plants, but her division was partially sold to help cover the debt incurred by the rogue-trading scandal. In 1988 she took time off, bundled up her toddler twin boys, and entered Harvard Business School. She negotiated the contracts for a power plant for Enron outside Boston, and after she earned her M.B.A. she returned to the company full-time. Soon she was setting up power plants and pipelines in England, India, and the Philippines. Mark would ultimately spar with Jeff Skilling, who had been a Baker Scholar at Harvard Business School and a consultant at McKinsey & Company before joining Enron. "Jeff may have been the single best student I ever had, and he did not suffer fools," said Chip Bupp, a professor of Skilling's at Harvard. Bupp likened Skilling's personality to the icy capability of Robert McNamara, President Kennedy's secretary of defense.

Skilling thrived on confrontation and had a perfect command of the minutiae of deals. In interviews he could stun financial writers with his grasp of details, but that same superiority made corporate meetings enervating for his colleagues. His vision was messianic. Skilling kept a sign on his desk: I.R.I.s., which stood for "First they Ignore you, then Ridicule you, then Imitate you, and then Steal your idea." From the beginning, colleagues say, Skilling's pattern was to scapegoat others without leaving a trail that could lead back to him. In meetings that Ken Lay chaired, Skilling was often silent, letting Lay believe that he was completely in control. But at other times Skilling could be very volatile. He was divorced, and his office was a shrine to his children; on long plane rides with colleagues he might spend hours talking about them. He would often blurt out astonishing remarks in public -he once, famously, called a stock analyst an asshole during a conference call- and the public-relations staff worried each time he gave an interview.

Andrew Fastow, a Skilling protégé, was recruited early on in Skilling's first fiefdom, Enron Capital & Trade. As Skilling consolidated his power, he and Fastow allegedly designed the partnerships that were constructed to hide losses and maximize profits. Testifying before Congress, tax lawyer Jordan Mintz recalled sending a memo and leaving messages for Skilling asking him to sign off on crucial legal documents. Skilling testified that he had no memory of that. Last December, The New York Times had Skilling saying that the partnerships were Fastow's idea. Bupp, who remained close to Skilling, is now confounded. "I can't believe he did not know what was going on, yet I can't believe Jeff would lie .... [The partnerships are] a clear black-and-white conflict of interest. Holy smokes!"

One day in 1995, Jan Avery sat in a conference room and watched Andrew Fastow, standing in front of a whiteboard, grapple with how to deal with a coming loss on the books of his group's investment in an M.T.B.E. fuel-additive plant outside Houston. Fastow and Skilling had gambled on the toxic additive used in gasoline, but, as a result of a steady attack from the media and environmentalists, the market for M.T.B.E. had virtually disappeared. Fastow exuded anxiety, Avery remembered, raising his voice, barking orders. "We have to be able to come up with something! We have to construct a structure where the loss could be camouflaged." Most of Enron's now notorious partnerships were still in the future, but Fastow had already seen the possibilities they offered. There were already roughly 300 in place. "Losses were never allowed at Enron, even then," Avery said. "You did not recognize losses." She remembered that the meeting stretched on for much of the day, and Fastow became increasingly agitated. Avery recalled thinking, This has gone too far.

"We sat there and bounced it around," she said, while Fastow frantically drew circles representing subsidiary corporations all over the board -partnerships within partnerships- to suggest how to move the loss. Fastow also asked them for ideas on how to maintain the value. "That was our language for hiding a loss. We called it 'maintaining value,"' Avery said. "I knew that this was something that was ultimately going to drag the company down, because you could not maintain this level of loss. It was hundreds of millions of dollars, never acknowledged on the books." Isn't that fraud?, I asked. "It was still within the realm of accounting rules, but they were way out in the gray zone. It became criminal when they continued it to such a degree that it put all the shareholders at risk." Did anyone raise an objection? "All the time. We called it house-of-cards accounting and would openly discuss how crazy it was. In meetings, we were always told the same thing: 'You have to be able to come up with a solution.' There was no alternative."

Fastow's wife, Lea Weingarten, was in the room; she too worked at Enron, which was not unusual in the culture. Fastow had met Weingarten, the daughter of one of Houston's prominent Jewish families, when they were at Tufts. The Weingartens' fortune had come from a chain of grocery stores. Around town the couple was thought of as a study in opposites; Lea Weingarten was low-key, with the casual style of old-money Texas.

Enron was hermetic and pulsing with sexuality. Ken Lay had married his secretary; Jeff Skilling had left his wife and taken up with Rebecca Carter, whom he promoted to company secretary and who earned more than $600,000 last year.

People who know Kenneth Lay well insist that his destruction can be understood by looking at his longtime attraction to ruthless, brainy alter egos such as Jeff Skilling and Andrew Fastow, who could act out Lay's ambitions while he played Mr. Congeniality. The aura of fraud permeated Enron from its inception in 1985, when the legacy and corporate style of Michael Milken were imprinted on Lay and his company. It was Michael Milken and Drexel Burnham that helped raise the $2.3 billion needed for the InterNorth-Houston Natural Gas merger. A little-known fact is that Enron stock was one ingredient of the scandal that brought down Michael Milken and Dennis Levine. Tipped off by a banker at Lazard Frères, Levine and his group of insider traders profiteered on the merger, as James B. Stewart has reported in Den of Thieves. They later went to prison.

Lay thrived in a culture of rivalries. He was a man of parts, a winner of awards and member of committees, generous with young associates, serving them himself when they traveled with him on one of the many Enron planes. "All these planes give my C.E.O.'s something to aspire to," Lay said to an ABC news reporter just months before Enron crashed. Inside the company, Lay overlooked, even encouraged, all the vicious infighting that went on. Lay came from a modest background, had a cheerful salesman's façade, and wore a Mr. Magoo mask of disconnection. He was a Gatsby of the pipelines, a minister's son from Missouri fueled with the desire for grandiose status. He earned a Ph.D. in economics at the University of Houston, was a navy officer, and clocked time in Washington as an undersecretary in the Department of the Interior. He was attracted to Houston by the hope of staggering returns in the oil-and-gas world.

When Lay became allied with Milken in 1985, the junk-bond king's reputation as the genius of inventive financial structures was at its peak. Not long before Drexel Burnham chief executive Frederick Joseph denounced the press for its "outrageous" allegations linking Milken to insider trading and the unsavory affairs of arbitrageur Ivan Boesky, Lay arrived in Beverly Hills in search of the financing he needed to realize his dream. The steady drumbeat of allegations in 1986 concerning Milken's honesty would have alarmed a more prudent C.E.O. In a 1987 interview, Milken went as far as to defend his business practices by boasting that he was helping Enron increase the size of its debt offering by an additional $225 million. Lay never cut his ties with Milken, and would later talk about him as a visionary who had been unfairly prosecuted. After Milken got out of jail, Lay invited him to speak at an Enron conference, despite a vocal protest from lawyers inside the company. "Ken always thought Mike was an out-of-the-box thinker who deserved sympathy," an Enron executive said.

In one magazine spread, Lay was portrayed as the wizard of energy, his body a glowing electricpower line. As for the Kool-Aid, it was the elixir of money. Young traders just out of school were tantalized with promises of $500,000 in bonuses within a year. The Enron car of choice was a silver Porsche; the parking garage in Houston was full of them. Vice presidents and managers preparing to make a budget presentation in front of Lay, Skilling, and Fastow were told, "Here is your number." The numbers-always larger than what was feasible to demand on a contract-would have to be reached or, the vice presidents and managers knew, they could be "redeployed," Enron language for being switched to another department, often before being forced out in a vicious biannual performance review. These performance reviews, referred to as "rank and yanks," were a variation on the old English Star Chamber. Your picture was displayed, and your colleagues blasted your job performance, knowing that their own advancement depended on your demise. Originators of deals might find that their numbers had been tampered with so that in the performance review their deal structures no longer made sense. "Because of the complexity of the math, it could take you weeks to figure out what had been changed, and by that time your deal was shot down or you were fired," one former associate recalled. Skilling would be very blunt with vice presidents who questioned these methods: Change your assumptions. You can always refinance! You can always get the deal done! In addition, the public-relations staff had to keep Lay's competing division heads from getting too many cover stories in Fortune and Forbes. "Ken didn't like it," one told me. "He wanted the coverage for himself."

By the mid-90s, Fastow was the whiz kid of Enron's financial structuring, always ready with sophisticated accounting arcana such as the "costless collar"-a complex financial instrument which allowed an investor to sell a stock in partnership with a bank at a guaranteed trigger price and yet not have it reported to the S.E.C. Jan Avery, for one, grew more and more alarmed at the accounting tricks required to support Skilling's and Fastow's bookkeeping. She used the term "feeding the monster" to describe the process.

As the Enron tentacles spread, it became increasingly difficult for Fastow and Skilling to disguise their ambitions. The deal structures became more and more byzantine. At the broadband division, which trafficked in the fiber-optic cable used in high-speed Internet connections, trades called "Barney deals" -meaning "I love you, you love me"- were constructed. Enron would sometimes swap control of its fiber lines with those of another company, only to undo the transaction a few days later, so as to create the appearance of volume. Other maneuvers pushed hundreds of millions of dollars of trading equity around in a circle, a practice employed by such companies as Q west, Cisco, and Global Crossing, which was headed by Gary Winnick, who had trained at Drexel Burnham. When Global Crossing went bankrupt in January, Winnick was able to walk away with a reported $735 million. At the broadband group, Fastow used the lawyer Kristina Mordaunt, who represented the group in its dealings with the separate partnership of LJM2, which was run by Fastow. In March 2000, Mordaunt was invited into a Fastow venture called Southampton Place. She put down $5,800. She heard a few weeks later that the deal was winding down. Opening her bank statement the next month, she saw a deposit of $1 million. Another friend of Fastow's, managing director of Enron Global Finance Michael Kopper, would make more than $10 million from a $125,000 investment in Chewco, according to the report released by Enron directors in February.

“There is someone you should talk to," Alex Conn told Milberg Weiss partner David Walton in a surprise telephone call. Conn, an Austin software entrepreneur, had met Jan Avery when he negotiated with Enron, and he was impressed by her. Several weeks after Enron collapsed, he reached out to the people at Milberg Weiss to let them know what a valuable witness she could be. It was November 2001, and Walton, a Milberg forensic accountant, arranged a conference call with Paul Howes, who is the Milberg partner in charge of day-to-day operations for the Enron investigation. Howes has thick blond hair, a former athlete's build, and the empathic conversational style of the Southwest; in his years as a Washington-based assistant U.S. attorney, he radiated such useful kindness that he could get drug lords to confess. After his conversation with Avery, in which she talked about her experience at Enron International, which ran the company's projects overseas, Howes got on a plane to Houston. From then on, in his research reports Avery was referred to only as "confidential witness." He had yet to determine whether her information would check out.

By 1996, Avery had been transferred to Enron International and was therefore in the middle of the drama that would define the fall of Enron. It involved assets versus trading, and a rivalry between Rebecca Mark and Jeff Skilling, which led to the demise of Enron International, frequently referred to as "the purge." The war was fought over "paper gas," as the executives at Enron International called Skilling's ruthless consolidation of his power on the trading side. Skilling's traders occupied three floors in the Enron headquarters, and the trading room had more plasma screens than any other office in America. The atmosphere, according to one former Enron manager, was "the Royalton Hotel meets the Death Star." At the height of Skilling's power, the company was moving toward a peak moment, when the partnership structures would enable price-earnings ratios of 60, and the stock would surge in 2000 to $90.

Avery entered Enron International on the tax side and soon began working 18-hour days. She kept a picture in her office of Kay, now 11 with long blond hair, but when people asked her, "Who is that?," Avery would reply only, "My daughter." She rarely talked about her private life, but during the last weeks of each summer, as Kay got ready to return to her father, Avery was clearly under strain. Kay would lie in bed, crying, "Please let me stay." By 1999, Avery was earning more than most vice presidents, almost $300,000 a year with her bonus. She was angry that Enron refused to give her the title, and was convinced that, at 49, she was a victim of ageism. She took on an onerous amount of work in order to blot out her anger over her custody problems. Exploring the foreign-tax implications for Enron dealmakers negotiating for pipelines and power plants in Brazil, Bolivia, Peru, Eastern Europe, and Africa, Avery had to learn the tax code for each country. By then "the Skilling atmosphere," as it is often called, had begun to permeate the department. Avery recalled, "We were told constantly, 'Keep the debt off the balance sheets." This was done not only through off-the-books partnerships but also through loopholes in the tax laws of the foreign countries. Tax meetings would go on for hours, but Avery rarely complained.

Sent to Rio, she stayed for months in Copacabana, mastering the Brazilian tax code in order to facilitate negotiations for a pipeline between Brazil and Bolivia. She also began an affair with a member of the Enron team and for the first time in years felt it was possible to have an emotional life. She then went to Bolivia and Peru, spent weeks in Warsaw, returned to Houston, and flew to Africa, attempting to explain to Kay why it was often 9 or 10 hours later where she was calling from.

During this period, she was searching for lawyers in the counties around Eudora, Arkansas, hoping to find a talented attorney who would take on the Avery family. She knew she could not defend her travel schedule in a courtroom; she was on constant call, and, as she confided to her friends, the strain was becoming unbearable. How could she put an 11-year-old through the hell of an ugly custody battle?

In 1997 she was invited to the Enron International executive retreat in Beaver Creek, Colorado. At lunch during a ski break, she was joined at an outdoor table by Rebecca Mark, who was there with her 12-year-old twins. Mark was also divorced, and they talked about the constant emotional pull exerted on single working mothers. That day Avery resolved that she would try to become a deal originator in order to make more creative use of her time. At the bar, she sought out Mark's co-C.E.O., Joseph Sutton, a former brigadier general who resembled Burt Lancaster. Taking power and American investments around the world had made Mark and Sutton well known in developing countries, but also, at times, the targets of scathing criticism for supporting the alleged imperial exploitation of local workers. In India they were accused of pushing through a $2 billion energy plant at Dabhol with bribes and threats, and of manhandling laborers. The Indian press is notorious for libel, and Enron officials vigorously denied the charges, which were never proved. Sutton was intrigued when Avery told him she had once set up her own pipeline-marketing business, and he suggested that she write a letter to Mark.

I went to Houston determined to meet Rebecca Mark. For the last decade Mark had been a template of female achievement for the business press -named twice to Fortune's list of the 50 top women C.E.O.'s. Her style had become famous -the size-6 Armani skirts, the stiletto heels. As the head of Enron International, she had early on taken part, with John Wing, in negotiating the billion-dollar power plant in England called Teesside, and had structured the deals for the Indian facility at Dabhol and the Brazilian pipeline. She and Henry Kissinger dealt with the Chinese premier, Israeli prime minister Ariel Sharon took her calls, Indian taxi drivers in Delhi would ask Enron executives, "Do you know the famous Miss Mark?" Back in Houston, she would work the phone late into the night in her flannel pajamas as her twins complained, "Mother, get off the phone!" She was an absence in the Houston social firmament; her ambitions were global, at the greatest remove from the Houston Country Club. As with Jan Avery, her job was her life, and her attractiveness and her ability to draw crowds in such places as Brazil and Vietnam helped to establish Ken Lay's political bona fides and extend the Enron brand.

The day I went to see her, her houseman was hanging Christmas boughs on the front gates of her mansion. Mark lives palatially behind a high wall in River Oaks. As I walked toward the house, two large dogs came bounding up to me, followed by a tail blonde with a distinct Texas-rich-girl look, a bouncing mane of hair, and the skintight pale-blue stonewashed jeans that Houston and Hollywood power women pair with a $1,000 blazer and a white Gap T-shirt. Estimates of Mark's personal fortune vary wildly, from $30 million to $80 million. She married for the second time two years ago to Michael Jusbasche, who was born in Bolivia and owns a chemical company.

Like Ken Lay, Mark came from a small town in Missouri, one of four children in a farm family with deep fundamentalist beliefs. Her conversational style has been polished in Texas, and she is a master of "hillbillying," the trick of playing up one's humble origins. "Sometimes it was so cold in our farmhouse that frost was on the quilt," Mark told me as we sat in her vast drawing room with a grand piano in it and looked out on the garden. Within Enron International, Mark presented herself with the same down-home attitude, along with a rapier-sharp skill in marshaling rigorous arguments for deals. She was a booster of talent, particularly in women, and she created an atmosphere that felt familial. She would throw Christmas parties for as many as 900 people at her house, with carolers, clowns, and rides for the children. As a C.E.O. operating under terrible tension, she told me, she taught herself to conceal her anger behind a midwestern sorority-girl smile, particularly as she felt the Enron culture turning increasingly ruthless. She had a trick: when other executives excoriated her in meetings for not producing enough profits, she would not fight back but would simply tell herself that she was the smartest person in the room. "I was looking at them but it wasn’t real," she said. "It was like an out-of-body experience."

At the time I met Mark, she was angry about an ongoing attack on her abilities in the business press. Moreover, she was bound by a confidentiality agreement and had been named as one of the 29 officials who are potential defendants in the class-action cases against Enron. As she told me later, "I am prepared for two stories: the 'I had sex with everyone in the universe' story and 'Rebecca's assets stink.' If they have a reason to try to destroy me, it will be over the quality of my business and what they will make up about my love life. The sole reason will be to put less credibility on the side of the asset business I built up."

There appear to be few people in Houston who do not hold strong opinions about Mark's investments. One economist who knows her well described her as "a bundle of energy ... but she and John Wing figured out a way to take a juicy bite of the apple with their power-plant development, and the credulous banks went along with them ... loaning 95 percent financing on the basis of pro formas that no fool would believe .... The poor Indian and Chinese residential electricity consumers would have been spending half their disposable annual income on electricity." A prominent money manager who shorted Enron stock in 2000 said, "Almost everything that Mark touched at Enron was catastrophic in terms of investment return. The company had to either recognize the losses or cover them up. To Skilling's detriment, he chose to cover them up." When I asked Mark about this, she said, "None of the money managers have ever read the contracts backing up these businesses. The companies we created around the world are not bankrupt."

Some insiders theorized that Mark's "special relationship" with Ken Lay may have given her carte blanche to operate with no checks and balances. It was commonly thought that Rebecca Mark and Jeff Skilling had had an affair; they were both divorced, had children the same ages, and often went to school sporting events together. Mark's detractors suggest that she also had relationships with several members of her development team. Mark has become used to hearing this type of sexual branding, and believes it is a classic attempt to diminish her tenacity and achievement. "These were people outside the international arena who did not know how we worked," she said. "I used to make jokes about this in speeches and say, 'I had no idea I was so staggeringly attractive.' And how in the world would I ever have time, when I have passports so thick they look like volumes of the Bible."

For years, Mark operated under the protection of Ken Lay and Rich Kinder. She represented the assets-based side of Enron, which went back to the early days of the company, when Lay realized that gas could be traded as a commodity. By then the government had forced the utilities to accept the notion of unregulated power. Mark's great skill as a C.E.O. was always in presentation, her colleagues say, not in operation, which was routinely handled by other executives. Mark was able to persuade the Indian government to change its policies and reverse its course on the power plant at Dabhol, and she negotiated ironclad agreements protecting the assets in the event the government should change. She understood that her ability to survive at the highest level required her to project certitude, a sense that she was comfortable in her own skin.

In the early days of Enron International, Mark was told repeatedly, "You eat what you kill," and initially she and her team worked without bonuses. However, she was able to come up with a lucrative contract-value-percentage arrangement that ultimately earned her close to $80 million in stock options and reportedly enraged Jeff Skilling. "I think they gave us this deal because they were convinced we couldn't get anything done," she said. She and Joe Sutton operated on sheer nerve. Sutton would tell her, "Act like we've already won," as they went into meetings with foreign leaders.

A former executive at Shell Oil described Mark in Bolivia, determined to sell the government on the idea of giving Enron the contract to assist in building a billion-dollar pipeline between Brazil and Bolivia, a project so politically problematic that even industry leaders such as Shell and Mobil wouldn't touch it.

Mark sailed into one presentation and spoke for hours without notes to 300 officials, dazzling them with her command of the area's problems and stimulating them with her assurances of what Enron could bring to the table. She was less successful in dealing with complexities in the Middle East. The Enron team arrived in Qatar to set up a three-country development deal for the richest supply of natural gas in the world. "No one tells us how to negotiate -we are Enron," Mark allegedly said to one diplomat representing the emir. Moreover, the Enron bids were couched in very aggressive language. "They told us they were doing us a public-relations favor, letting our negotiation be a model for good relations with Israel," the diplomat said, startled at the team's lack of understanding of the region. In fact, Mark later told me, she had inherited this deal from another division of the company and found herself locked in a negotiating struggle with two governments. "We walked into a mess, and the Qataris were angry," she said. "But we felt we could not leave a billion dollars on the ground." Two years later the emir was said to be offended by the low price Enron bid for the gas. Ken Lay tried to smooth out the difficulties and renegotiate. "Not if you send in the same group," the emir said sternly, according to an official who was in the room.

In 1998, Jan Avery was in Nicaragua as a project developer, supervising the building of a $75 million barge power plant, one of Enron International's last enterprises. The night before the final approvals, she was on a conference call with Skilling's aide Rick Buy and the Enron International executive who was presenting the Nicaraguan barge plant to the board. "They were screaming at each other," Avery recalled. "It was clear how Skilling and his group were out to put a stop to all assets being developed. They were trying to make us lower the assessments, although the numbers had already been presented." By then Skilling had turned against Mark, telling her in meetings, according to one of her associates, that her assets were a disaster, the worst investments Enron had ever made.

Nine months after Avery moved to Managua, she developed a persistent cough. The working conditions were filthy, she recalled, and the air was full of smoke and pollution. The barge project had caused a political firestorm. The president of Nicaragua was demanding a payment of $2 million to allow the company to finish the work, and a warrant was put out by the Nicaraguan government for the arrest of Enron executives. "You have a spot on your lung," her doctor told her. "You have to go home immediately." In Houston she was diagnosed with a rare bacterial disease. She spent the next five months in the hospital, and several times her blood pressure climbed so high that she was close to death.

At the top of Enron International, the pressure on Rebecca Mark was increasing. She confided to friends that Skilling's approach was like Chinese water torture, a subtle, continual bombardment of what she was doing. He was attempting to consolidate his power, moving Enron into a future where it was asset-light, as he said. He was still an icon of the business magazines, celebrated for his Gas Bank innovation, which moved Enron into a new world where it created a market in gas. His elliptical phrases, such as "vertical integration," became koans of the dot-com era. One day Mark sat him down and asked him how his business worked. She was curious, she told colleagues, about Broadband and the emerging energy markets. "I wanted a sense of comparison," she said. "Are we that bad? Or are they that good?" Mark was operating in a closed system. Enron International had separate accounting and was in a different building. At the height of this internal war, Rich Kinder, who for years had kept a brake on the company's exponential expansion, was passed over for C.E.O. Later, Ken Lay reportedly ran into Rich Kinder's wife and told her that none of Enron's problems would have happened if Kinder were still at the company. After Kinder left Enron, he started a new energy company, Kinder Morgan, which is traded publicly; he is said to be a billionaire.

One day Rebecca Mark confronted Lay in a meeting. "You are being snookered, Ken," she told her old friend. "These are profits from the sale of assets. These are not trading profits." Their conversation was about their European business, and Lay's response, Mark told someone close to her, was to look at her kindly, condescendingly, as if to indicate that her lack of vision made her a dinosaur. Her assets, at best, could return 14 percent, but she was planning for the long run with equity investments, a strategy designed to hold an investment for decades, and the company had veered inexorably toward the culture of traders, where profits now soared to close to 30 percent every year.

It became clear, Mark told a few intimate friends, that Skilling was trying to shove her out. She began to negotiate a partnership agreement with Shell to sell half of Enron International's assets, which would have brought $3.2 billion of equity to the company. They negotiated for seven months, a Shell executive remembered. Inside Enron International, it was generally assumed that Mark's position as a C.E.O. of the new company would ensure her prestige, but the Shell executive said that the fluctuating stock price made the deal impossible to close. Mark was made a vice-chairman -a position known as "the ejector seat"- and allowed to take a bold gamble and explore treating water as a commodity in the international markets. The board approved the $2.3 billion purchase of an English water company called Wessex Water, which would become the backbone of Enron's global water company, Azurix, and which looked to be a great source of profit, but which turned into a disaster when Britain changed its water rates. Soon the whole water business changed, and Azurix was losing so much money that it was affecting the price of Enron’s stock. When asked to respond, Mark said, "It wasn't a disaster. We couldn't survive as a public company because we didn't have earnings sufficient to support the growth of the stock."

As Skilling moved against Mark, Cliff Baxter found himself in an increasingly untenable position. He was a lieutenant with a conflict, whose responsibility it was to enforce the new Skilling culture and his loyalty, many believe, was what would ultimately drive him to suicide. By 1997, Skilling had consolidated his power and had assembled his own team, which included Fastow and Baxter. The group was known as "the beautiful people" or "the seven dwarfs." One day the accounting staff at Enron International learned that Skilling's team had reaudited Mark's assets and was planning to sabotage her in front of the board. She arrived at the meeting to hear Skilling say, "These assets are a disaster. Not just Azurix -everything. They are returning 3 percent, not 14 percent." Mark tried to remain calm and responded, "I take issue with these numbers. My analysis is there for anyone to see." According to an associate of Mark's, however, Lay conveyed a few days later that it made no difference to him what her analysis said about the assets; he wanted no debate about getting rid of all of them, because he wanted the cash for the trading operation. In August 2000, Mark was asked to leave the company she had helped start. She immediately sold all of her Enron stock.

For Jan Avery, Enron had become incomprehensible; nothing she had experienced since Nicaragua had prepared her for the internal chaos she found. Sent to Abu Dhabi in October 1999, Avery watched Skilling torpedo nine months of negotiations on the $3 billion Dolphin pipeline. The projected pipeline would link the United Arab Emirates with Qatar in a deal so innovative that Conoco, Amoco, and British Petroleum were all vying for it. The pipeline business had once been the very basis of Enron's financial strength, and this deal-which required Enron to invest $300 million-was projected to return tenfold profits to the company.

In Abu Dhabi, Avery supervised a 10-person team through months of due diligence and negotiations. The Dolphin pipeline became a symbol of the Middle East's emergence into the 21st century and a staple in the European press. Surrounded by computer models and sheikhs in robes, Avery was oblivious to what was going on in Houston. Skilling was directing his attention to Broadband, to which he had pledged $3 billion. Three days before the press conference announcing the successful acquisition of the Dolphin contract, Avery received an agitated phone call from Joe Sutton, who was now sitting in the ejector seat as vice-chair. "Stop the press conference," he told her. "This cannot go through. Skilling has put a stop to it." But it was too late. The Dolphin pipeline had been announced throughout Europe and the Middle East. Nevertheless, within months Skilling had walked away from the deal. "I don't want any assets," he announced.

In Houston, Avery went to Broadband Services, and during her interview there she was asked to take a look at the projected trading models. It would be her job to help determine the pricing for the Broadband swaps-trades that would later provide the basis of Bill Lerach's invective in court, when he would compare them to Michael Milken's fraudulent operations.

Avery studied the models and told the head of the division, "There is no way that these can work." She then walked away from the job and was moved to the international group, where she worked on a deal to create a trading hub for liquid gas in Malaysia. Skilling's purge had now infected the entire company, and there were waves of firings. While in Kuala Lumpur to negotiate with the local oil-and-gas company, Avery learned of the "ethnic cleansing" being used to close down her division. "Don't worry, they are keeping the best people and re-deploying them," she was told.

She was next assigned to Enron Energy Services (E.E.S.), the playground of Lou Pai, who had set up a division to trade energy in California. The move meant changing buildings and giving up her large office for a trading desk. E.E.S. sold "bundled energy" to customers such as Starwood Hotels, J.C. Penney, Quaker Oats, and Owens-Illinois, the glass company. The "bundle" was a promise of future service -meaning air-conditioning replaced, lightbulbs changed, wiring fixed. In her first weeks, Avery approached a commodity analyst who was proposing a price that would absolutely guarantee a loss to Enron. "We can't do this," Avery told him. "How can you be selling something that is a negative?" The commodity analyst replied belligerently, "Just do it. We sell negatives all the time."

That was during last year's California brownouts, and Avery made a startling discovery. Enron had sold contracts to retail customers, including the University of California and the Simon Property Group, which owned malls in San Francisco. As the cost of power soared, Enron returned the power to the utilities, employing a loophole the Enron salesmen had cleverly provided. The resulting cost to the state of California by one estimate was close to $500 million, but within Enron there was no acknowledgment of the larger meaning. Avery remembers that the press releases were still rosy. No mention was made of Enron's reduction of a buying price from $1,500 per megawatt to $10. "This was disguised as normal business procedure," Avery said. "What it meant was that all their contracts were under water."

"Margaret, this is insane," Avery said to Margaret Ceconi, who sat next to her at the trading desk. Like Avery, Ceconi was new to the department, having been hired from G.E. Capital with the promise of annual bonuses as high as $ 1 million. Ceconi was voluble and freewheeling, a person who would throw pool parties and invite several boyfriends only to describe their reactions with bursts of laughter the next day at work. "We have to find some new men for you, Jan!" she told Avery, and soon they were spending time together. "This place is going down," Ceconi said to Avery, "and we have to get off the ship." They talked about financial analysts they could tip off, finally settling on Carol Coale at Prudential, who for months had been cautioning that Enron was not sound.

One day in the summer of 2001, Skilling arrived at the E.E.S. floor and jumped on a desk. By then the new-business developers were frequently logging on to thomsonFN.com, which tracks insider trading. "Why are you selling your stock, Jeff?" someone shouted at him. According to Ceconi, Skilling, after citing a list of dubious reasons for unloading his shares, reassured the developers that "life
was good and that they should keep buying Enron stock. After that, Ceconi said to Avery, "You and I are going to write a letter to the board, Jan." Avery was wary. Two weeks before Skilling's abrupt departure, both women lost their jobs. It was early August, shortly before Kay Avery, finally in her mother's custody, was to leave for Baylor University. Without a job, Jan could no longer afford the $20,000-a-year tuition.

"You don't know me," said Margaret Ceconi in a phone call to Carol Coale, but I'm a friend who wants to tell you what's really going on at Enron." Ceconi, who didn't reveal her identity at first, began writing to Coale from an E-mail account with the address Enrontruth. "We are sending you a lengthy letter that we have sent to the Enron board," Ceconi wrote. The letter, like Sherron Watkins's now famous warning to Ken Lay, spelled out $500 million in false profits Enron had claimed in the last year. Unlike Watkins's straightforward, cogent criticism, Ceconi's letter began with a litany of complaints about the company. More reasoned analysis of the financials was buried on subsequent pages.

The S.E.C. opened its inquiry into Enron's accounting on October 22. Ken Lay continued to tout his company's stock in a conference call the following day. On October 24, Carol Coale, fed up with Enron's rosy predictions, downgraded the stock to a "sell." The company filed for bankruptcy six weeks later. Ceconi's letter was given to Apache Oil, an Enron competitor. It ultimately found its way to the congressional committees working on the investigation into Enron. The day Ceconi's letter was published in the Houston Chronicle, 65 news organizations contacted her. She was on Good Morning America, being interviewed by Diane Sawyer, at the same time Linda Lay was telling NBC's Lisa Myers, "Other than the home we live in, everything we own is for sale."

“Good God, it's a Rorschach test," Paul Howes said to Jan Avery during one session in Houston as he studied a diagram of an Enron partnership. It was the first time the lawyer had ever seen the circles and boxes that would soon confound even the most sophisticated economists. "It is simple to understand," Avery told him. "The more circles and boxes, the bigger the bonuses, and the more the customer is confused." Howes had weighed Avery's unhappiness over her treatment by Enron with her expertise on the financials and had decided to use her as a consultant. He was working on the Enron case with a team of investigators and Frank Karam, a partner from the New York office, as well as with Lynn Hodges, whose California firm, L. R. Hodges & Associates, specializes in "witness development."

In January, Howes and his team were fielding more than 100 calls and E-mails a day. "This is the most exhausting case I have ever done," Hodges told me. "All I am doing at the moment is reacting." She had received that morning an E-mail with a photograph of a shredding-company truck parked outside the Enron building. One Saturday, Howes spent eight hours in a hotel room with an auditor from Enron International, another "confidential witness." He and a second auditor told Howes that Robert Jaedicke -then dean of the Graduate Business School at Stanford and the head of the Enron audit committee- visited the internal-audit staff in March 1989. "How do you view your role as an independent director?," Jaedicke was asked. "I'm here to support management. I'm here to support Ken Lay," he replied. The two auditors took this remark as an indication of where Jaedicke's loyalties lay. Later, they told Howes, Enron International developers in pursuit of bonuses put through projects rife with engineering problems, which later became budget nightmares. They had been disgusted to be outsourced to Arthur Andersen. "Jeff Skilling ran a casino for a business side and a day-care center for junior auditors," one said.

In early February, Howes told me he had finally tracked down Herb Perry, the auditor who 15 years earlier had gathered an investigative file on the rogue-trading operation at Enron Oil that had so mystified Jan Avery in her first months on the job. Avery had told Howes about the missing file, and Howes finally persuaded Perry, who had just retired, to see him. The day before Sherron Watkins testified in Congress, Howes flew to New Orleans and drove for an hour to a house near the water. A 10-year-old sheltie came out to greet him, and Howes, who is passionate about dogs, played with her before he said hello to Perry and his wife. "Well, if our dog likes you, you must be all right," Perry's wife said.

The men drove to a nearby café and shared a shrimp po'boy sandwich. To an investigator, Perry's background was impeccable. Before going to Enron in June 1986, he had spent 17 years at Shell on internal audits and fraud investigation. His specialty was white-collar crime. He found Enrons accounting department in disarray, he later told me; the new corporation was still trying to integrate InterNorth and Houston Natural Gas. The board had six members from each, and the group was fraught with tension, because the Houston executives had profited in the merger, and the InterNorth members had not. Ken Lay and Rich Kinder, who had been together at Florida Gas, were running the new company, with Kinder as general counsel.

On January 23, 1987, Perry says, his boss, David Woytek, the vice president of audit, got a call from a security officer at Apple Bank on 42nd Street in New York. "Hey, something interesting happened. You should know about it. There are unusual cash transactions from the Isle of Guernsey coming into my bank from Enron in $100,000 increments!" the officer said. The approvals of the transactions, he went on, were not coming from authorized corporate treasurers but from two executives in Valhalla, New York, named Louis Borget and Thomas Mastroeni. "Borget and Mastroeni appear to be writing checks to themselves," the bank officer said.

Woytek called Rich Kinder and then spoke to an aide of Enron's John Harding. The news of the suspected fraud rocked the audit staff. Enron Oil appeared to be a great source of profit for Enron, and Harding had personally appeared before the board, one auditor told me, describing in detail the connections to the Saudi royals and Kuwait that had enabled his executives to make such vast trading profits. All the midwesterners at Enron, including Ken Lay, understood pipelines and their rich, dependable cash flow, but Harding's description of the potential bonanza to be made in trading money thrilled them. "They swallowed it hook, line, and sinker," the auditor said. Lay was told that the amount at issue in Valhalla was no more than $2 to $4 million, a relatively small amount since Enron Oil was reporting profits of more than $30 million a year -one-third of the earnings of the company at that time. "Lay told us, 'Just go up there and get the money back," Perry said. By then the audit department had gotten statements from Apple Bank and suspected that Borget and Mastroeni were keeping double books. Perry, who went with Woytek to Valhalla, was sternly warned, "Whatever you do, do not upset Borget."

Before Perry left Houston, he made a to-do list of 19 items, which included "locking the system down, getting a warrant to track the Western Union teletypes, because that was how the deals were confirmed in those days."

Arriving in New York, Perry and Woytek discovered that the trading operation was controlled completely by Borget and Mastroeni. To go there, you had to be picked up in a limo, Perry recalled. "I don't want the competition to get close to my staff" Borget told him to explain the quirky privacy procedures. The Houston employees were not allowed to interview anyone on the staff. One member of the Houston team was an Arthur Andersen partner and an expert in oil-and-gas trading. "Everything is proper," Borget told Perry. "We've just had an audit done."

Perry and Woytek sat in an octagonal trading room with John Beard, another Enron auditor, trying to unravel the fraud. Two days later a call came from Houston; Perry remembers distinctly that the caller was Rich Kinder. "I am hearing one side of it," he said. "Woytek was just beside himself. He carried on with Kinder, getting quite aggressive. He was saying, 'I can't believe you are going to ask us to do this.' Kinder told Woytek, 'Get out of the building and come back to Houston. You are off the case.' The reason? "They were all scared," one auditor told me, "that the traders would get upset and they would lose the income." He is not sure whether the call came from Kinder or John Seidl, the president of Enron, but he said that Perry's memory is "sharp" and he kept perfect notes.

Perry remembered Kinder saying, "We are turning the investigation over to Arthur Andersen."

Soon a flotilla of Arthur Andersen auditors arrived from Houston; among them was the young Jeffrey McMahon, who in 2002 would replace Andrew Fastow as Enron's chief financial officer.

The Houston auditors appeared before the audit committee in April 1987 and reported on what the Enron staff and Arthur Andersen had found in Valhalla. The two groups were in complete agreement. Woytek had managed to retrieve the millions that Borget and Mastroeni had misappropriated, but one auditor recalls Woytek telling Lay and the committee that they had to get rid of the two men. They were adamant; they should have been gone in February, they said. Borget had told the auditors that he was keeping the money in a personal account but that it would soon come back to Enron. One auditor said, "If the Apple Bank had not called, this money might never have been recovered."

I asked the auditor to read me the minutes from the April 29, 1987, meeting. "Dr. Jaedicke called upon management for a matter that involved Enron Oil Corporation that was investigated by the company and subsequently investigated by Arthur Andersen .... After a full discussion, management ['This was Ken Lay,' the auditor said] recommended the person involved be kept on the payroll but relieved of financial responsibility, and a new chief financial officer of Enron Oil Corp. be appointed. The committee agreed with reservations .... Mr. Orloff [the future general counsel, who is now at Bracewell & Patterson] reported on possible legal consequences. He stated that all legal work for Enron Oil Corp. would now be done in Houston by an attorney reporting to him."

Fifteen years later, the auditor is still upset. "And when they say 'management,' I can remember Ken Lay sitting there saying, 'I have made the decision!'... What can I say? He was the C.E.O., and he felt that they could put controls in place and that he needed those earnings. That was his call .... We all knew those people were crooks! We told him that."

He became solemn as he read out the names of the people gathered in the room, several of them now familiar players in the Enron drama, who would maintain their silence and remain aligned with Kenneth Lay right up until the corporation collapsed. Robert Jaedicke, the distinguished accounting professor, would appear before the congressional subcommittee this year. Herbert Winokur Jr., a Harvard overseer, would also testify as the chief of the finance committee who in the wake of the scandal finally ordered an investigation. Arthur Belfer's family would lose about $2 billion in Enron stock. Steve Goddard of Arthur Andersen would be relieved of his management responsibilities.

At least two people in the room that day questioned Lay's judgment. One was Ronald Roskens, then the president of the University of Nebraska, who would leave the board two years later to join the government. The other was Carolyn Kee, from Arthur Andersen. "When we walked out of the room, Carolyn Kee turned to me and said, 'I am just sick about this,"' one auditor remembered. Kee was concerned about the lack of internal controls and would spend months dealing with the fallout from future shareholder suits and the S.E.C. inquiry. Within three years she left Enron and is now in private practice in Arkansas.

For the Enron auditors, the April board meeting was prophetic. "It was obvious to us and to Arthur Andersen that [Borget and Mastroeni] had opened fraudulent bank accounts, and we felt that they were going to continue to manipulate transactions," one auditor told me. "Lay read the report and he read his budget, and estimated how much they made and if they were fired what he could lose .... My conclusion was that this is a guy who puts earnings before scruples, rather than reacting to the dishonesty right in front of him."

Does that establish a pattern of fraud?, I asked Herb Perry, a question I had often asked Jan Avery. "It is certainly the indicator that there is significant collusion between the executives at Enron and the senior people at Arthur Andersen. They were willing to tolerate improprieties."

Lay's designated watchdog was delayed in getting to Valhalla in 1987, and soon Borget and Mastroeni had spun out of control. They bet long on oil as the prices dropped and shorted when the prices rose. Borget called Houston and said, "There is going to be a huge loss. About a billion dollars."

I asked one auditor what it was like around Enron when that staggering figure was revealed. "Bad," he said. "We were all concerned because we thought that someone would be made a scapegoat." According to the auditor, the in-house lawyer Gary Orloff asked for the files. "They came to us and said, 'We want all of your files. We want everything .... Kinder was the chief operating officer and ... Orloff seemed to be protecting Lay in this thing." When Jan Avery went to work at Enron, she could hardly have known that the files on Enron oil she tried so hard to find had vanished six years earlier.

By the autumn of 1987, federal prosecutors in New York working under then U.S. attorney Rudolph Giuliani had detected the crime. The prosecutor who ran the case, James Comey, now has Giuliani's former job. Lay's inability to operate within the strict rules of corporate propriety had left his company close to collapse. What had started as "an expensive embarrassment" had become herculean. Lay had had to dispatch an Enron team, led by Mike Muckleroy, from Enron Oil Trade & Transportation, to unwind many of the deals. Muckleroy was able to reduce the loss to $185 million, a figure closer to the number Jan Avery first saw.

In September 1993, the year Jan Avery went to work for Enron, Perry learned that Arthur Andersen would be taking over all of Enron's auditing functions at the end of that year. The company said it was a cost-saving measure, but Perry believes that the real significance of the change was that internal investigation of off-shore partnerships and off-balance-sheet partnerships were no longer pursued. The new Arthur Andersen model, Perry was told, would be used as an exemplar for the rest of the industry. Perry remained on assignment for Enron Oil & Gas, a subsidiary of Enron which had gone public and had a separate accounting staff.

0n February 8, a week before Howes went to New Orleans, Jeff Skilling appeared before the House energy-and-commerce oversight subcommittee, one of a dozen government panels investigating the Enron debacle. Executives still working at the corporate headquarters in Houston watched him on television. One of them recalls hearing Andrew Fastow on any number of occasions mention his conversations with Skilling about the off-the-books partnerships Skilling was now telling congressmen he knew very little about. Earlier that day, Skilling had sat with cold eyes and an odd smirk on his face and told the committee, "I was not aware of any financing arrangements designed to conceal liabilities or inflate profitability... I did not believe that the company was in any imminent financial peril." At that, several financial officers screamed at the set, "Bullshit!" One kept saying during Skilling's testimony, "Now Jeff will say, 'I don't recall,"' and 27 times Skilling did not disappoint him. These Enron executives, who had cheered Skilling when he was named C.E.O., now studied him on the screen with contempt.

Congressman Ed Markey of Massachusetts, who had been the chairman of the House telecommunications-and-finance subcommittee that investigated Michael Milken in the 1980s, said of Jeff Skilling, "He testified like he was a guest on I've Got a Secret. He was treating Congress like he had treated his shareholders."

In Louisiana, Herb Perry spent Valentine's Day in his La-Z-Boy armchair watching Sherron Watkins testify before Congress. After the criminal investigation of Borget and Mastroeni began, Perry had turned over a copy of his Valhalla file to his boss, David Woytek. What happened to Perry's 50 cartons of documents about Enron's dealings over the years? "I shredded those," he said. "I did not want to carry them around, and I certainly did not want to be dragged into legal issues with Arthur Andersen." Watching Watkins in front of the committee, Perry was at first impressed with her stolid manner and muted outrage, but he began to revise his opinion as Watkins mused about Ken Lay's personal culpability. Watkins described a moment where she had tried to explain the cascade of partnership accounting fantasies to Lay. "He did not seem to understand," she said. Sitting with his wife and his dog, Perry laughed out loud. "I said a lot of language I can't repeat," he told me. He said he was mystified that an intelligent woman could have made such an assertion without fully understanding the history of the company. I asked Perry what he thought when Watkins asserted, "Mr. Lay was duped." He laughed. "Ken Lay duped? Well, I guess now you know better, don't you?"

END