Bad Business

59

I t's Byzantine," Marty said.

"You find it Byzantine?" I said.

"Me, the world's greatest CPA. I'm in awe."

"Is it legal?" I said.

"Oh, God no," Marty said.

"Can you explain it to me?"

"I can oversimplify it drastically," he said.

"Oh good," I said.

The rain had broken the humid stretch and the day was dry and pleasant. Marty had an office on Staniford Street, and we'd agreed to meet sort of halfway between us. Which is why he and I were sitting on a bench in the Common, not very far from the Park Street Station, watching the street life move past us on Tremont Street. Pigeons and squirrels circled us in case we were interested in feeding them, which we weren't. But neither a pigeon, nor a squirrel, is easily discouraged.

"As far as I can tell, your culprits are Trent Rowley and Bernie Eisen. Do you know what a special purpose entity is?"

"No."

"A special purpose entity is a device often used for securitization of debt."

"I urge you to oversimplify," I said.

"It was always my intention," Marty said. "Say you have a shop, Spenser's Sandwich Shop. You have a bunch of customers who buy their sandwiches on credit, for which convenience you charge them one percent a month. So at the end of the day you have earned a hundred bucks plus one percent a month. But there's nothing in your cash register. What you do is, you create a special purpose entity, and call it, say, Susan's Equity Trust. You can invest your own money in this company, but at least three percent of it has to be independent capital. Then you sell your hundred dollars worth of accounts receivable and its interest payments to Susan's Equity Trust. Now at the end of the day you have a hundred in cash. Susan's Equity Trust, in turn, sells shares in itself to investors eager to make one percent a month on the sale of sub sandwiches. So Susan's gets a markup. The investors get their money back in installments plus the one percent interest. Got it?"

"Yeah, sure, banks do that, with mortgages, don't they? Car dealers?"

"Lot of people do it and it's perfectly legitimate."

"Even when banks and car dealers do it?"

"Amazing but true," Marty said.

"But in the case of Kinergy?"

"Rowley and Eisen were creating SPEs to hide debt. Remember what I told you. They had a ton of earnings, but not much cash."

"The old mark to market accounting trick," I said.

"Very good."

"So the absence of cash would begin to create debt."

"Right again," Marty said.

"Or one or another project was a losing proposition."

"And payment on the debt would use up cash."

"It would."

"So they needed to keep these matters off the books, or their profit picture would suck and people would stop buying their stock."

"Gracelessly put, perhaps," Marty said, "but not inaccurate."

"And the SPEs were their solution."

"Better," Marty said. "They could sell one operation or another, that had a lot of debt, to the SPE and show it on their books as income."

"And that's legal?"

"Remember what I said about conditions?"

"Essentially that the SPE needed to be independent of the creating company."

"Yep. These weren't. They were owned mostly by Rowley and Eisen, or Mrs. Rowley, or Mrs. Eisen, people like that. And the money they raised to create the SPEs was guaranteed by Kinergy stock."

"Including the three percent?"

"Yes."

"So they weren't independent of Kinergy."

"Nye, and, as they developed, some of these outfits began have interests antithetical to Kinergy's, but very beneficial to Rowley and Eisen. You want to hear how?"

"Jesus Christ, no," I said. "I never want to have this discusion again."

"Which is why you are not a world-class CPA."

"Thankfully," I said. "Isn't there somebody supposed to approve stuff like this?"

"Board of directors," Marty said.

"They approved?"

"The Kinergy board of directors, as far as I can see, would have approved compulsory pederasty if urged by Trent and Bernie."

"Isn't there any outside accounting?"

"There is, one of the best accounting firms in the Northeast. Kinergy pays them about three million a year."

"So much for them," I said. "And where was our man Coop in all of this?" I said.

"Yonder somewhere gazing at a star," Marty said.

"You don't think he knew?"

"I don't think he wanted to know. A company like Kinergy is out there on a shoeshine and a smile. The way they do business they have to increase earnings every year, so their stock will look good and the investment banks and big brokerage will suck around them."

"So he looked the other way?"

"I don't think he even had to," Marty said. "These deals are very complicated. The flowcharts look like they were created by Hieronymus Bosch. I had trouble figuring some of it out."

"Holy mackerel," I said.

"And," Marty said, "Coop's probably not that smart."

"And him a CEO," I said.

"Disheartening, isn't it," Marty said.

"Is there trouble ahead?"

"For Kinergy? You better believe it," Marty said.

"Are they going to go under?"

"Absolutely," Marty said. "And pretty soon."

"Any indication that Eisen knows this, or Rowley did?"

Marty smiled at me.

"They both owned tons of Kinergy stock," he said.

"How nice for them," I said.

"Rowley was selling it as fast as he could without causing a stir. Eisen still is."

"A lot of money?"

"Yes."

"A hundred dollars?" I said.

"No. That's a lot of money to you. A lot of money to them is millions.

"Millions?" I said.

"Depending on the price of the stock, quite a few millions."

"So it would be in their best interest to keep pumping Kinergy up until they unloaded their stock," I said.

"Then they can let it flop."

"Most of the employees' 401(k)s and other pension vehicles are invested in Kinergy stock."

"So when it tanks?"

"They're fucked," Marty said.

"You CPAs talk a language all your own," I said. "You happen to run across the name Darrin O'Mara anywhere?"

"Sure. He owns one of the SPEs."

"How about Lance Devaney?" I said.

"Yep."

"SPE?"

"Yep."

"Funded in one way or another by Kinergy?"

"Yep."

"Hot damn," I said.

"Hot damn?"

"Yeah," I said. "Detectives talk a language all their own, too. Can we prove all this stuff in court?"

"If I can continue to access the books," Marty said. "We going to court?"

"I have no idea," I said.