Introducing Bad Bets

Summary

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WSJ Your Money Briefing

Special Episode: Introducing Bad Bets — The Enron Story, Episode 1 "Potemkin Village"

Date: October 16, 2021

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Episode Overview

This special edition of the WSJ Your Money Briefing introduces listeners to the Wall Street Journal’s new podcast “Bad Bets.” The focus of season one is the dramatic rise and fall of Enron, the 1990s energy juggernaut that became synonymous with one of the most notorious cases of corporate fraud in U.S. history. Hosts and journalists John Emschwiler and Rebecca Smith, who originally reported on the Enron scandal, revisit the company’s story, analyze how the fraud was perpetuated, and why the lessons are still relevant decades later. Episode one, "Potemkin Village," explores Enron’s public façade, the pressure to maintain its stock price, and the early signs of trouble that ultimately unraveled the company.

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Key Discussion Points & Insights

1. Enron’s Overview and Impact

• Enron’s 2001 bankruptcy was one of the largest in U.S. history, wiping out tens of billions of dollars, destroying jobs, and ruining retirements ([01:34]).
• The scale of the scandal placed Enron among the FBI's top historical cases, alongside events like JFK’s assassination and Watergate ([01:54]).
• Quote: “It would, in fact, go from being this highly respected company into being this massive symbol of corporate dishonesty. It happened so rapidly.” — Rebecca Smith ([02:21])

2. Corporate Culture and Deception: The ‘Potemkin Village’

• In 1998, Enron wanted to impress Wall Street analysts with a new sales room for Enron Energy Services. The room wasn’t functional yet, so employees staged a busy work environment to deceive visitors ([03:26]–[05:54]).
• Robert Bradley, a former Enron speechwriter, recounts the charade:
  • Quote: "I remember being told everyone, bring some of your personal items, put it on the desk, make it look normal, and everyone just act like you're really busy." — Robert Bradley ([04:41])
  • Quote: "This was sort of like you invent your own reality by deceiving others and making it happen." — Robert Bradley ([05:54])
• The incident became emblematic of Enron’s repeated efforts to present an inflated image, setting a precedent for deeper deception.

3. Maintaining the Illusion and the Stock Market’s Role

• Enron’s need to impress Wall Street was tied closely to its stock price. Executives and employees had significant investments in Enron stock—creating personal incentives to maintain its value ([05:22]–[06:27]).
  • Quote: "You know, a lot of your sins can go unnoticed if everything's going well." — Robert Bradley ([06:20])
• The company’s image was carefully curated with technology, luxury, and bravado—even down to holding music (“Simply the Best” by Tina Turner) ([09:43], [10:22]).

4. The First Major Crack: CEO Jeff Skilling’s Resignation

• In August 2001, CEO Jeff Skilling resigned abruptly, causing industry shockwaves ([10:55]–[11:08]).
• His public reason was “personal,” but a revealing interview with John Emschwiler hinted otherwise:
  • Skilling admitted disappointment with the falling stock price and said he might have stayed if it had not dropped ([13:19]).
  • Quote: "I remember when he said that I thought, well, that doesn't sound like a personal reason. That sounds like, you know, a business concern." — Mark Palmer ([13:53])
• The resignation raised suspicions about Enron’s internal health.

5. Ken Lay’s Leadership and Reassurance Tactics

• Ken Lay, former CEO, resumed the role and quickly attempted to bolster morale and halt panic after Skilling’s exit, notably with a company-wide meeting at Houston’s Hyatt Regency ([15:51]).
  • He acknowledged concerns about stock options and attempted to inspire optimism by granting employees more options:
    • Quote: “Now, it won't make you rich, but it might make you feel better. I think we've got a lot of great stuff going on. We are now about three times the size of the next largest competitor.” — Ken Lay ([16:51])
  • He predicted a rebound in stock value, a statement later scrutinized in criminal proceedings ([17:09]).
    • Quote: "We certainly think we're close to, if not at the bottom of this cycle and we want you to enjoy the ride back up." — Ken Lay ([17:09])
• Lay’s assurances eventually proved misleading and legally dubious.

6. Uncovering the Hidden Partnerships: The Reporting Breakthrough

• Upon Skilling’s resignation, John and Rebecca dove into Enron’s SEC filings and noticed cryptic “Related Party Transactions”—outside partnerships run by a senior Enron executive, which raised alarms about conflicts of interest ([18:31]–[19:47]):
  • "It raised the possibility that a senior executive of Enron might be making money for himself and his partners at the expense of his employer and its shareholders." — John Emschwiler ([19:54])
• Initial speculation pointed to Skilling, but Enron PR confirmed it was CFO Andy Fastow—revelation that would become central to the scandal ([21:21]).
  • Quote: “Maybe I should have asked a hell of a lot more questions.” — Mark Palmer ([21:59])
• These partnerships had handled transactions worth more than a billion dollars and involved millions of shares of Enron stock ([22:29]).

7. The Whistleblower: ‘Our Mutual Friend’

• A confidential Enron insider reached out after reading the Journal’s reporting, offering firsthand accounts and internal documents about the partnerships ([24:16]–[25:28]).
  • "I was probably the architect of the idea. What information would you like to have? Because I've got quite a bit on it." — Anonymous Enron Insider ([25:01])
  • "It's one of the most beautiful phrases any reporter can ever hear." — Rebecca Smith ([25:28])
• The insider's evidence confirmed rampant conflicts of interest and non-disclosure of losses, showing shareholders had no real window into Enron’s actual condition ([25:51]).
  • "It told us that your average shareholder would have no idea what the true financial condition of the company was." — Rebecca Smith ([25:51])

8. The Scale and Aftermath of the Scandal

• Enron’s accounting tricks hid hundreds of millions in losses. Federal prosecutors later charged leadership (Skilling, Lay, Fastow) with fraud and conspiracy.
• Lasting consequences included criminal convictions (Ken Lay’s conviction was later vacated due to his death), lost retirement savings, and a crisis of confidence in corporate America ([01:34], [17:24]).
• The episode closes by warning that the conditions enabling Enron remain present today; financial scandals recur in cycles:
  • “We could see that we're setting ourselves up for another round of corporate scandals, which history tells us does occur every 25 to 30 years.” — Lynn Turner, former SEC Chief Accountant ([27:17])

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Notable Quotes & Memorable Moments

• "There are a lot of moments like these when reality didn't match executives’ ambitions." — John Emschwiler ([07:01])
• “It was only in retrospect that I realized that, yeah, I had participated in this and there was something really wrong with it.” — Robert Bradley ([06:42])
• “We hit something, we bounce off, we go on another direction, we come back, we bounce against it again. We're roombas, we just keep moving.” — Rebecca Smith on the journalistic investigation ([22:12])
• “You can't serve two masters. If you're in arrangements in which you're on both sides of a transaction, you're going to have to pick which side to favor.” — Rebecca Smith ([20:35])
• "It was our key to unlocking one of the biggest corporate scandals in American history." — John Emschwiler ([26:21])

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Timestamps for Key Segments

• Enron’s Rise and Infamy: 01:10 – 02:21
• The Sales Room 'Potemkin Village' Incident: 03:26 – 06:42
• CEO Jeff Skilling’s Abrupt Resignation: 10:55 – 14:09
• Ken Lay’s Town Hall and Morale Campaign: 15:36 – 17:18
• Discovery of the Fastow Partnerships: 18:31 – 21:21
• Anonymous Insider’s Revelations: 24:16 – 25:51
• Closing Reflection on Enron and Future Risk: 26:28 – 27:24

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Conclusion

This episode provides a gripping behind-the-scenes account of how the Enron scandal began to unravel—from staged workspaces to suspicious financial deals and persistent reporting in the face of stonewalling. The hosts' personal narratives, combined with candid interviews and a real-time unfolding of the investigation, underscore why the tragedy of Enron still resonates today for investors, retirees, and the broader public.

At its heart, "Potemkin Village" is a cautionary tale about unchecked ambition, the seduction of Wall Street, and the vital role of both journalistic scrutiny and financial transparency in a healthy marketplace.

For listeners interested in business scandals, investigative journalism, or financial history, this debut of “Bad Bets” sets a compelling tone for understanding corporate America’s greatest cautionary tales.

Transcript

[Small Business Owner]

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[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Advocate]

they need while increasing megastore profits. They deserve it, don't they?

[Consumer Advocacy Representative]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[JR Whalen]

Hey, your money briefing listeners, It's JR Whalen. The Wall Street Journal launched a new show this week called Bad Bets about the big business dramas that have had a big impact on our world. Season one is about Enron, the 90s energy giant that later became synonymous with epic corporate fraud. The reporters who covered the story for the Wall Street Journal, John M. Schwiler and Rebecca Smith, are back with key players from the saga to explain how and why it all fell apart. Today, we're sharing episode one with you. If you like what you hear and want to keep listening, you can subscribe to Bad Bets wherever you listen to this podcast. All right, here it is, episode one of Bad Bets.

[John Emschwiler]

My name is John Emschwiler. For four decades, I was a Wall Street Journal reporter. In that time, I wrote a lot of stories. There's one that stuck with me more than any other. Enron. It's been 20 years now since Enron fell into bankruptcy.

[Rebecca Smith]

Its list of creditors was 54 single pages. So this was a massive bankruptcy filing within weeks.

[John Emschwiler]

Tens of billions of dollars, thousands of jobs gone, retirement plans destroyed. This was my life savings, my nest egg. And that was just the beginning. Congressional committees rushed to investigate. The Justice Department launched an epic criminal probe. The cfo, chief accounting officer, treasurer, and more than a dozen others pleaded guilty in perhaps the highest profile corporate fraud trial in U.S. history. Former CEO Jeff Skilling was convicted. He maintained his innocence, but he spent more than a decade in prison. Here's a measure of just how big a deal Enron was on the FBI's list of his most famous cases. JFK's assassination, Watergate, 9 11. It's the only corporate name.

[Rebecca Smith]

It would, in fact go from being this highly respected company into being this massive symbol of corporate dishonesty. It happened so rapidly.

[John Emschwiler]

My colleague Rebecca Smith and I broke the stories that Enron officials blamed in part for sparking the company's collapse. This podcast, based on hundreds of interviews, years of reporting, and reams of court documents, is about how it all happened and why today, the Enron story is as relevant as ever.

[Small Business Owner]

Access to affordable credit helps me pay my employees that I don't really need it.

[Retail Industry Advocate]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Advocate]

they need while increasing megastore profits. They deserve it, don't they?

[Consumer Advocacy Representative]

Tell Congress. Stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments coalition.

[John Emschwiler]

In the 80s, Enron was a pretty standard oil and gas company. It had pipelines that moved energy around the country. But executives weren't satisfied. They told everyone they were going to revolutionize the energy industry, and they did. Starting in the mid-90s, Enron would be named America's most innovative company year after year. Enron had a reputation, and executives would do just about anything to keep it. That's where I'd like to start the story. 1998 Enron Headquarters Houston that year, Enron wanted to showcase a brand new sales room it had set up for one of its new operations, Enron Energy Services. The goal was to cut up the middleman by selling energy directly to businesses and, of course, make a lot of money in the process. Enron had invited Wall street analysts to downtown Houston to check it out. If they were impressed, the analysts might tell their clients to invest even more in Enron. There was just a little problem. The sales room wasn't ready. Enron still hadn't hired enough people to fill it. They could have delayed or just told people they were ramping up. But instead, Enron executives decided to just go ahead and make it look like it was fully running.

[Robert Bradley]

I remember being told everyone, bring some of your personal items, put it on the desk, make it look normal, and everyone just act like you're really busy.

[John Emschwiler]

That's Robert Bradley, a former Enron speechwriter. He was one of the staffers asked to be an extra, a sort of body in the room.

[Robert Bradley]

I thought it was strange, but I really didn't follow up or investigate it.

[John Emschwiler]

On the day of the tour, Bradley headed to the sixth floor with a pen and notebook and got settled in the back.

[Robert Bradley]

We had desks that looked out the window, so my back was turned. But I do remember, you know, turning around and looking, looking and seeing the people coming.

[John Emschwiler]

The people were stock analysts, the audience from Wall Street. Bradley says he and his colleagues were personally invested in impressing them.

[Robert Bradley]

We all had a lot of stock and so, you know, keeping the stock price up was really important.

[John Emschwiler]

Enron had spared no expense on their new sales room. They even included flat screen TVs, cutting edge tech at the time. One employee would later describe the elaborate ruse as a Potemkin village. You know, like that story about the Russian minister who tried to impress his queen by building fake villages all along her travel route.

[Robert Bradley]

This was sort of like you invent your own reality by deceiving others and making it happen.

[John Emschwiler]

Now it's hard to know if this whole charade had a direct impact on the stock price. Enron had already promised that this venture was coming, but the company's showboating had often been effective and it would continue to be. Over the next couple of years, the stock would soar from $20 a share all the way to 90.

[Robert Bradley]

You know, a lot of your sins can go unnoticed if everything's going well.

[John Emschwiler]

And back then everything was going, it seemed very well for Enron. Eventually Enron hired more people and got that sales room fully up and running. At the time, Bradley says, it seemed more like a half truth than a lie.

[Robert Bradley]

And that's a good example of, you know, the slippery slope when you start going along with this stuff, how you can become pretty numb toward it all. It was only in retrospect that I realized that, yeah, I had participated in this and there was something really wrong with it.

[John Emschwiler]

When I look back at Enron, there are a lot of moments like these when reality didn't match executives ambitions. But most of these moments weren't about a stage play in the sales room. They were about creating financial facades to mask problems brewing inside the company. In 2001, reality bit back. It's a stunning fall.

[Mark Palmer]

Enron had grown into the seventh largest

[John Emschwiler]

company in the country, ahead of IBM and AT&T.

[Consumer Advocacy Representative]

Enron, once an energy giant, now amid government investigation, finds its in Chapter 11 bankruptcy court.

[John Emschwiler]

It's hard to believe that a company

[Rebecca Smith]

with revenues of some $100 billion last year would be filing for bankruptcy this year.

[John Emschwiler]

This is Bad Bets, a podcast from the Wall Street Journal that unravels big business dramas that have had a big impact on our world. Season one, the story of Enron's collapse. My colleague Rebecca Smith and I will take you inside, show you the successes that made Enron a Wall street darling and explore the deceptions that brought it down. The scandal rocked people's faith in big business because in the eyes of many, it didn't just expose what was wrong at Enron, it exposed unchecked power throughout corporate America. The story of success became so enticing that that for a Moment there, it didn't matter if it was fraud. This is episode one, Potemkin Village. I came to this story two decades ago knowing very little about Enron and the world of American energy. I covered white collar crime for the Journal, but I was paired with Rebecca Smith, the Journal's reporter for utilities and power markets. Enron was part of repeat. The company was headquartered in Houston, the epicenter of the US energy industry.

[Rebecca Smith]

Houston was to energy what Wall street was to finance and what Silicon Valley was to the tech industry. It was the center. There's a massive gas pipeline system. Of course there are oil and gas reserves in Texas. Many big companies were based there. Enron had a certain swagger. And at the time, of course, I was in California. I was never sure. Is this just Texas? Is it the Texas swagger or is it the Enron swagger? Enron was the flashiest, brashiest player.

[John Emschwiler]

Carl Clicker was a training manager at Enron. He remembers pulling up on his first day of work to the Enron Tower. It was like he was working in Hollywood, not energy. There were like 25 Ferraris and Maseratis and Bentleys lined up on bonus baby row. And I thought, who works here? This is crazy. And what I found out later was if you're a 26 year old Stanford MBA and you make a billion dollar deal, you get a million dollar bonus. Enron was about big bucks and big attitude, right down to their hold music.

[Retail Industry Advocate]

You're sampling the vest.

[John Emschwiler]

Yep, that's Tina Turner. Simply the best. I mean, who does that? Enron's bravado never seemed to miss a beat. Then something happened. The first real crack in the Enron FAC. And it was a big one. It was August 2001. Enron CEO Jeff Skilling resigned completely out of the blue.

[Rebecca Smith]

Jeff Skilling's resignation was just a stunning, shocking thing to have happened. I mean, this is a man who'd spent years working his way up to become CEO. And you know, he'd barely gotten the seat.

[John Emschwiler]

Warm Skinling had only been CEO for six months, but he'd been with Enron for more than a decade. He'd helped transform the once sleepy gas pipeline company into a global enterprise. He'd become a corporate celebrity in the process. You might compare him to Apple's Tim Cook or Tesla's Elon Musk. So when he resigned, it sent shockwaves through the industry. Skilling said it was for personal reasons. But CEOs usually don't just quit. They especially after just landing the job. It often signals something is up at the company now. Covering something like this would normally have fallen to Rebecca. Like I said, this was her beat. But she was moving into a new house that day and had no Internet connection, so I was asked to fill in. I figured it would be one and done. I had no idea that I'd be spending the next few years on Enron's trail. That's next after the break.

[Consumer Advocacy Representative]

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[John Emschwiler]

I was asked to write the story about Jeff Skilling's sudden resignation, my first move was pretty standard. I called Enron's PR head at the time, Mark Palmer.

[Mark Palmer]

Jeff's departure as a milestone in the history of Enron was big. It was huge. But it was just kind of one of those things that didn't stand out as a oh my gosh, this is really bad.

[John Emschwiler]

Palmer downplayed it. Nothing to see here, but I still wanted an interview with Skilling. Palmer quickly got the CEO on the phone.

[Mark Palmer]

He was a great spokesperson for the company, so I had a lot of confidence in Jeff Skilling.

[John Emschwiler]

Stuck to his story at first. Did he resign for personal reasons which he wouldn't go into. But as the interview progressed, he started to sound troubled, almost depressed. Then, to my surprise, he went off script and he said something that would help turn a two day story into years of investigation. He told me right there on the phone that he was disappointed by the fall in the stock price. It fell by half during his six months as CEO, and if it hadn't fallen, he said he probably would have stayed.

[Mark Palmer]

I remember when he said that I thought, well, that doesn't sound like a personal reason. That sounds like, you know, a business concern. It just sure didn't seem like a great one to bring up. In an interview with the Wall Street Journal.

[John Emschwiler]

Skilling declined to be interviewed for this podcast, but his admission on the phone that day in 2001 certainly caught my attention. This wasn't a canned response. I thought, hey, I've got a scoop here. I wrote up a quick story for the paper. But the interview and Skilling's almost confessional tone about the stock price just kept bouncing around in my head. Sure, lots of executives see their stock price and quarterly returns as a personal report card. And 2001 was a generally bad year for the stock market. It was right after the dot com bubble had burst. A lot of CEOs weren't thrilled, but they weren't all quitting en masse. Enron stock had long been considered a good bet, one that was likely to outperform the broader market. The price could rebound. That's why Skilling bringing up the stock price drop made the whole resignation feel more suspicious. It made me think there might be bigger problems inside of Enron, that the captain might be abandoning a sinking ship. Earlier in 2001, Enron's stock price had been $80 a share. By August, it was 40. Now Skilling had suddenly quit. Enron was understandably eager to quiet any concerns. And the company had no better man for that job than former CEO Ken Lay, the charmer in chief. Rebecca had interviewed him several times.

[Rebecca Smith]

Ken Lay was always a very affable, congenial, polite person to talk with. As you know, he grew up on a farm in Missouri. He could make you feel you'd had a visit instead of an interview.

[John Emschwiler]

Lay had been Enron's CEO for over a decade before Skilling and was perhaps the company's most famous figure. He had close personal relationships with both Presidents. Bush, George W. Sometimes even referred to him as Kenny Bo. Lay stepped back into the CEO role after Skilling resigned. He knew the shareholders couldn't be happy about the falling stock price and many of his employees had their life savings wrapped up in company stock. So a couple of days after Skilling's resignation, Lay held a company wide meeting at the Hyatt Regency's Imperial Ballroom in downtown Houston.

[Ken Lay]

Good morning.

[John Emschwiler]

Under the spotlight, he spoke directly to employees.

[Ken Lay]

Many of you concerned about the about the value of your stock options? I'm concerned about the value of my stock options.

[John Emschwiler]

In a seeming effort to boost morale, he offered them a little something pulled from his back pocket. More stock options.

[Ken Lay]

Now, it won't make you rich, but it might make you feel better. I think we've got a lot of great stuff going on. We are now about three times the size of the next largest competitor, but

[John Emschwiler]

there's more than meets the eye here. Listen closely.

[Ken Lay]

We certainly think we're close to, if not at the bottom of this cycle and we want you to enjoy the ride back up do you hear that

[John Emschwiler]

the prediction the stock would climb? Well, that type of positive spin would eventually get Ken lay in big trouble with federal criminal authorities. I should note here that Ley would plead not guilty to charges of misleading investors, but he was ultimately convicted in 2006. That conviction was vacated because of his death shortly after the trial. His optimism at that meeting in 2001 would soon collide with a reality Rebecca and I were on the hunt to uncover after the break. An Enron Insider Reaches out.

[Consumer Advocacy Representative]

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[John Emschwiler]

companies in the US are supposed to disclose what's really going on in their organizations, the good and the bad. So investors know companies write quarterly reports and submit them to the securities and Exchange Commission, the sec.

[Rebecca Smith]

One of the strengths of American capitalism is the existence of generally agreed upon standards for what will be included in these public documents, and they can be a treasure trove for reporters.

[John Emschwiler]

The day after skilling quit in August 2001, I had pulled up Enron's most recent SEC filing before I did my interview with him, just to see if anything jumped out. It was 37 pages, single spaced, and pretty dense. I was on deadline, so I scanned some important sections, including one titled Related Party Transactions. These are outside business deals involving directors or top officers. It's what I've always thought of as a company's potential dirty laundry list. And there I found something most unusual, something that ended up being a big deal. Deep in the document was a reference to outside partnerships that were doing vast amounts of business with Enron worth hundreds of millions of dollars.

[Rebecca Smith]

These were not something that Enron had ever talked about in any setting I'd ever been in, so it seemed to come out of the blue.

[John Emschwiler]

Rebecca also hadn't heard about these partnerships from stock analysts who followed Enron. Now the descriptions of the transactions in the SEC filings were so convoluted they were practically gibberish. But one thing was clear, and it stunned me. The partnerships had been run and partly owned by a Senior executive of Enron. It didn't take me long to think conflict of interest. It raised the possibility that a senior executive of Enron might be making money for himself and his partners at the expense of his employer and its shareholders. It seemed to me, at the very least, an outrageous arrangement. Rebecca agreed.

[Rebecca Smith]

It's as simple as saying you can't serve two masters. If you're in arrangements in which you're on both sides of a transaction, you're going to have to pick which side to favor. They're never going to be equally treated.

[John Emschwiler]

At first, I suspect that the unnamed executive running the partnerships might be former CEO Jeff Skilling. After all, that person had just quit the partnerships, according to the SEC filing, and Skilling had just quit the company. I hurriedly called Palmer again. He was essentially the only source I had at Enron. Palmer said the partnerships were fully disclosed and completely above board.

[Mark Palmer]

It had been all approved that. The accountants, the lawyers, the board, everybody had approved it, so it was fine.

[John Emschwiler]

Palmer said the partnership simply provided outside capital that helped the company. It was a company line. Ken Lay told us the same thing in a subsequent interview. During that call, Palmer told me the executive who had headed those partnerships wasn't Skilling. It was Enron's chief financial officer, Andy Fastow, who was still working at Enron. It was the first time I'd ever heard Fastow's name. It would hardly be the last. Now, to be clear, Mark Palmer was never accused of wrongdoing by authorities, but he suspected something was up with these partnerships. Many months later, he confided to me that he sensed people inside Enron were concerned.

[Mark Palmer]

Maybe I should have asked a hell of a lot more questions.

[John Emschwiler]

Yeah, clearly Rebecca and I also needed to ask a hell of a lot more questions. It felt like we weren't getting the truth, hitting walls.

[Rebecca Smith]

We hit something, we bounce off, we go on another direction, we come back, we bounce against it again. We're roombas, we just keep moving.

[John Emschwiler]

We looked back at some of the prior SEC filings and we saw these partnerships have been up and running for a while and it dealt with a lot of money during that time.

[Rebecca Smith]

You know, their annual filing in 2000 said that these enterprises were conducting more than a billion dollars worth of business with Enron. Well, that's a massive number, but there was absolutely nothing in it to tell you what these relationships were.

[John Emschwiler]

And on top of that, we noticed Enron had some of its own stock tied up in these deals. 12 million shares of it. And we knew the stock had dipped, potentially crippling those deals, potentially crippling Enron. Did these partnership deals have anything to do with Skilling being so upset about the fallen stock price? I didn't yet know how it all fit in. So we did what journalists do. We made it public. In late August, two weeks after Skilling resigned. We wrote about the partnerships in an article. It was a small mention, just a few paragraphs near the bottom. We quoted directly from the SEC filing.

[Rebecca Smith]

It says Enron has entered into agreements with entities formed in 2000 which included the obligation to deliver 12 million shares of Enron common stock in March 2005 and entered into derivatives.

[John Emschwiler]

Yeah, it was basically gibberish, but that's pretty much all we had at that point.

[Rebecca Smith]

And it absolutely defies the entire purpose of financial disclosure. There's no information being conveyed through this.

[John Emschwiler]

We didn't understand the information in the SEC filing, but hoped that someone would come forward and help us.

[Rebecca Smith]

I was so happy that we were able to do that because to me, and I've done this many times as a reporter, I think of these as a letter in the bottle. You put the letter in the bottle, you toss it into the ocean. You have no idea where it's going or if anyone's ever going to read it or pick up on it.

[John Emschwiler]

Well, this time someone did. A person who had a lot of knowledge about these partnerships, an Enron insider. The source didn't want us to use his name. He feared Enron could harm his career. So we called him our mutual friend. His identity is a secret we've kept for 20 years.

[Enron Insider]

Was I the first person to talk to the Wall Street Journal? Yes, I was. I felt like finally somebody is getting this story out in public.

[John Emschwiler]

He called Rebecca at the Journal.

[Rebecca Smith]

My first impression of him was that he sounded like someone who was very knowledgeable. He was clearly intelligent. He sounded like he had a well balanced view of the company. So he sounded trustworthy.

[Enron Insider]

I said, what do you know? And she said, we know very little, but we were hoping, are hoping somebody comes forward and tells us more about it. Do you know anything about it? And I said, well, I was probably the architect of the idea. What information would you like to have? Because I've got quite a bit on it. I told her my name and I asked her to keep me anonymous.

[Rebecca Smith]

He said he had internal documents. It's one of the most beautiful phrases any reporter can ever hear. So at that point I thought, wow, this guy could be really important in helping unlock what's been happening at Enron.

[John Emschwiler]

Our mutual friend knew a lot about these outside partnerships. He'd even worked on them. He sent Rebecca a trove of material. It cracked our case open.

[Rebecca Smith]

It told us that there were rampant conflicts of interest that had not been dealt with. It told us that your average shareholder would have no idea what the true financial condition of the company was.

[John Emschwiler]

And we would soon learn that Enron had been taking extraordinary steps to hide losses, losses that federal prosecutors later said should have been reported to the public. Losses of hundreds of millions of dollars.

[Rebecca Smith]

It was the first indication that we were really onto a big story.

[John Emschwiler]

It was our key to unlocking one of the biggest corporate scandals in American history.

[Mark Palmer]

We had a cash problem. We spent all the cash.

[John Emschwiler]

It is my belief that Enron's failure was due to a classic run on the bank.

[Rebecca Smith]

I didn't drive us into the iceberg. I'm just trying to warn the captain of the ship.

[Robert Bradley]

A lot of the watchdogs did not bark.

[John Emschwiler]

On this season of Bad Bets, we'll take you through the many layers of mistakes and misdeeds at Enron. The accounting tricks that hit hundreds of millions of dollars in losses. The trial that demanded answers from the men once at the helm of American Energy. And we'll hear from the whistleblower who kicked it all off. Enron is dead. But 20 years later, the forces that gave rise to the scandal, well, they're still very much alive. And on the minds of folks such as Lynn Turner, former chief accountant at the sec, we could see that we're

[Rebecca Smith]

setting ourselves up for another round of corporate scandals, which history tells us does

[John Emschwiler]

occur every 25 to 30 years. That's next time on Bad Bets. This episode of Bad Bets was hosted by me, John Emschweiler. The original reporting on which this season is based was done by Rebecca Smith and me. Bad Bets is production of the Wall Street Journal. This season was produced in collaboration with Neon Hum Media from the Wall Street Journal. Kateri Yoakum is the executive producer of this podcast. Dan Rosen is the co executive producer of WSJ Studios. Anthony Galloway is the global head of video and audio at the Wall Street Journal. From Neon Hum Media, Muna Danish and Haley Fager reported, wrote and produced this season. Nafila Cato is the associate producer. Story editing by Annie Gilbertson and Vikram Patel. Sami Allison is the production manager. Sound design and engineering by Scott Somerville. And the executive producers from Neon Hum are Shara Morris and Jonathan Hirsch. This episode was fact checked by Laura Bullard. The theme song and many of the tracks you hear in this series were composed by Honsdale sue the other music in this season of Bad Bets is from Epidemic Sound and Blue Dot Sessions. Subscribe and listen wherever you get your podcasts. I'm John Emschweiler. Thanks for listening.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Advocate]

Inflation is killing me, but who cares? Big retailers are making records profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Advocate]

they need while increasing megastore profits. They deserve it, don't they?

[Consumer Advocacy Representative]

Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.