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Enron built fake nerve centre for new operation

It wasn't only the accounting that was creative at Enron Corp.

To hawk a new venture to Wall Street at a 1998 conference, the company built a make believe command centre and ordered employees to act like they were cutting deals months before it was operational, a former executive said on Wednesday.

According to the executive, Enron staffed the then-inactive nerve center with employees, ordered to act like they were working as two top executives emceed an intricately choreographed show put on for financial analysts in 1998.

Former Enron chairman Kenneth Lay and ex-President Jeffrey Skilling led a rehearsal the day before the show opened in a theatrical presentation of the sort that helped make the now-disgraced bankrupt energy trading giant the darling of Wall Street.

To show analysts what the brave new world of Enron Energy Services would look like, the company built a shining fake command center for its next-big-thing operation just in time for the 1998 annual analyst conference.

The only problem was that EES was not up and running yet, former Enron senior director Joseph Phelan said in an interview with Reuters.

The former executive at Enron's retail energy arm said the sixth floor was gutted and outfitted with big screen televisions, computers and telephones to the tune of a half-million dollars, and converted into a "war room" that was touted to analysts as the heart of EES.

"The intent was to use it, and a month after the analysts took off, the space was used for that purpose. But to time it right for the analyst conference, people were asked to come down and act like they were working on deals," Phelan said.

Phelan called the stage-managed war room Enron's Potemkin Village, a reference to the sham villages set up by Russian general Grigory Potemkin to impress Catherine the Great when she toured the Crimea in 1787. Others referred to the incident as "The Sting," a reference to the 1973 movie about an elaborate confidence game.

Despite the mirage, Phelan said the deals EES ultimately executed were legitimate. "EES went on to successfully close a great many profitable deals, so in hindsight the temporary ruse seemed OK in the end and bought us some time to really develop our infrastructure," he said.

To keep the ruse alive, Phelan said elaborate plans were put in place to make sure the war room was hopping when the analysts were on the site. "You were assigned a shift and told when to show up, and they actually scheduled calls with prospective clients and routed them to certain phones. It was pretty stupid," Phelan said.

REHEARSING THE RUSE

Former chairman and chief executive officer Lay and former CEO Skilling, then president and chief operating officer, walked the floor and emceed as the analysts were brought through, Phelan said. EES supervisors directed staff and "coached everyone a little bit," he said.

Enron declined to comment on the story.

In 1998, EES was the Houston energy company's next big thing.

The unit promised to manage the energy needs of large industrial customers for a fee, and signed several major corporations to multi-year deals in excess of $1 billion. Though it was ultimately profitable, the unit in 1998 was very small and deals were few and far between, Phelan said.

Internally, workers justified the fakery as a way to buy time until the operation got rolling. Phelan likened it to how 1940s automobile visionary Preston Tucker promoted his venture to manufacture the "car of the future" before he finished working on it.

"It was a scam, but it depends on how you look at it. You know how Tucker didn't have an engine in his car when he displayed it, but he was real and just a bit behind schedule. I think that was the way everybody justified it," Phelan said.

Tucker built 51 prototypes of his car before the US Securities and Exchange Commission began investigating his company for fraud. Although he was ultimately cleared by the SEC, his company folded and the car was never sold to the public.

Enron remains under investigation by Congress, the Justice Department and the SEC.

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