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Enron Files For Bankruptcy

Enron Files For Bankruptcy


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On December 2, 2001, the Enron Corporation files for Chapter 11 bankruptcy protection in a New York court, sparking one of the largest corporate scandals in U.S. history.

An energy-trading company based in Houston, Texas, Enron was formed in 1985 as the merger of two gas companies, Houston Natural Gas and Internorth. Under chairman and CEO Kenneth Lay, Enron rose as high as number seven on Fortune magazine’s list of the top 500 U.S. companies. In 2000, the company employed 21,000 people and posted revenue of $111 billion. Over the next year, however, Enron’s stock price began a dramatic slide, dropping from $90.75 in August 2000 to $0.26 by closing on November 30, 2001.

As prices fell, Lay sold large amounts of his Enron stock, while simultaneously encouraging Enron employees to buy more shares and assuring them that the company was on the rebound. Employees saw their retirement savings accounts wiped out as Enron’s stock price continued to plummet. After another energy company, Dynegy, canceled a planned $8.4 billion buy-out in late November, Enron filed for bankruptcy. By the end of the year, Enron’s collapse had cost investors billions of dollars, wiped out some 5,600 jobs and liquidated almost $2.1 billion in pension plans.

Over the next several years, the name “Enron” became synonymous with large-scale corporate fraud and corruption, as an investigation by the Securities and Exchange Commission and the U.S. Justice Department revealed that Enron had inflated its earnings by hiding debts and losses in subsidiary partnerships. The government subsequently accused Lay and Jeffrey K. Skilling, who served as Enron’s CEO from February to August 2001, of conspiring to cover up their company’s financial weaknesses from investors. The investigation also brought down accounting giant Arthur Andersen, whose auditors were found guilty of deliberately destroying documents incriminating to Enron.

In July 2004, a Houston court indicted Skilling on 35 counts including fraud, conspiracy and insider trading. Lay was charged with 11 similar crimes. The trial began on January 30, 2006, in Houston. A number of former Enron employees appeared on the stand, including Andrew Fastow, Enron’s ex-CFO, who early on pleaded guilty to two counts of conspiracy and agreed to testify against his former bosses. Over the course of the trial, the defiant Skilling–who unloaded almost $60 million worth of Enron stock shortly after his resignation but refused to admit he knew of the company’s impending collapse–emerged as the figure many identified most personally with the scandal. In May 2006, Skilling was convicted of 19 of 35 counts, while Lay was found guilty on 10 counts of fraud and conspiracy. When Lay died from heart disease just two months later, a Houston judge vacated the counts against him. That October, the 52-year-old Skilling was sentenced to more than 24 years in prison.


Enron scandal

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Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy, commodities, and services company Enron Corporation and the dissolution of Arthur Andersen LLP, which had been one of the largest auditing and accounting companies in the world. The collapse of Enron, which held more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United States, and it generated much debate as well as legislation designed to improve accounting standards and practices, with long-lasting repercussions in the financial world.

Enron was founded in 1985 by Kenneth Lay in the merger of two natural-gas-transmission companies, Houston Natural Gas Corporation and InterNorth, Inc. the merged company, HNG InterNorth, was renamed Enron in 1986. After the U.S. Congress adopted a series of laws to deregulate the sale of natural gas in the early 1990s, the company lost its exclusive right to operate its pipelines. With the help of Jeffrey Skilling, who was initially a consultant and later became the company’s chief operating officer, Enron transformed itself into a trader of energy derivative contracts, acting as an intermediary between natural-gas producers and their customers. The trades allowed the producers to mitigate the risk of energy-price fluctuations by fixing the selling price of their products through a contract negotiated by Enron for a fee. Under Skilling’s leadership, Enron soon dominated the market for natural-gas contracts, and the company started to generate huge profits on its trades.

Skilling also gradually changed the culture of the company to emphasize aggressive trading. He hired top candidates from MBA programs around the country and created an intensely competitive environment within the company, in which the focus was increasingly on closing as many cash-generating trades as possible in the shortest amount of time. One of his brightest recruits was Andrew Fastow, who quickly rose through the ranks to become Enron’s chief financial officer. Fastow oversaw the financing of the company through investments in increasingly complex instruments, while Skilling oversaw the building of its vast trading operation.

The bull market of the 1990s helped to fuel Enron’s ambitions and contributed to its rapid growth. There were deals to be made everywhere, and the company was ready to create a market for anything that anyone was willing to trade. It thus traded derivative contracts for a wide variety of commodities—including electricity, coal, paper, and steel—and even for the weather. An online trading division, Enron Online, was launched during the dot-com boom, and the company invested in building a broadband telecommunications network to facilitate high-speed trading.

As the boom years came to an end and as Enron faced increased competition in the energy-trading business, the company’s profits shrank rapidly. Under pressure from shareholders, company executives began to rely on dubious accounting practices, including a technique known as “ mark-to-market accounting,” to hide the troubles. Mark-to-market accounting allowed the company to write unrealized future gains from some trading contracts into current income statements, thus giving the illusion of higher current profits. Furthermore, the troubled operations of the company were transferred to so-called special purpose entities (SPEs), which are essentially limited partnerships created with outside parties. Although many companies distributed assets to SPEs, Enron abused the practice by using SPEs as dump sites for its troubled assets. Transferring those assets to SPEs meant that they were kept off Enron’s books, making its losses look less severe than they really were. Ironically, some of those SPEs were run by Fastow himself. Throughout these years, Arthur Andersen served not only as Enron’s auditor but also as a consultant for the company.

The severity of the situation began to become apparent in mid-2001 as a number of analysts began to dig into the details of Enron’s publicly released financial statements. An internal investigation was initiated following a memorandum from a company vice president, and soon the Securities and Exchange Commission (SEC) was investigating the transactions between Enron and Fastow’s SPEs.

As the details of the accounting frauds emerged, the stock price of the company plummeted from a high of $90 per share in mid-2000 to less than $1 by the end of November 2001, taking with it the value of Enron employees’ 401(k) pensions, which were mainly tied to the company stock. Lay and Skilling resigned, and Fastow was fired two days after the SEC investigation started.

On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection. Many Enron executives were indicted on a variety of charges and were later sentenced to prison. Arthur Andersen came under intense scrutiny and eventually lost a majority of its clients. The damage to its reputation was so severe that it was forced to dissolve itself. In addition to federal lawsuits, hundreds of civil suits were filed by shareholders against both Enron and Andersen.

The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of financial reporting for publicly traded companies. The most important of those measures, the Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.


Reactions: SarbOx, Lawsuits and the Collapse of Arthur Andersen

Sources in this Story

In 2002, in response to the scandals at Enron, WorldCom, Tyco and other companies, Congress passed the Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act. The legislation was intended to improve the transparency and accountability of corporate finance.

Enron shareholders sued the company for losses they suffered due to fraudulent accounting and, in January 2005, 18 of Enron&rsquos former directors agreed to pay $168 million to settle the lawsuit. The deal stipulated that 10 of those directors contribute $13 million of their own money to the settlement.

In 2002, Enron&rsquos accounting firm, Arthur Andersen LLP, was convicted of obstructing justice after it destroyed sensitive documents relating to Enron before the company collapsed. The former &ldquoBig Five&rdquo accounting firm was largely dismantled, and its approximately 30,000 employees lost their jobs as a result of the conviction. A 2005 Supreme Court ruling overturned the Andersen conviction, but the company remains tarnished.


Enron Files For Bankruptcy - HISTORY

On this day in 2001, the Enron Corporation files for Chapter 11 bankruptcy protection in a New York court, sparking one of the largest corporate scandals in U.S. history.
An energy-trading company based in Houston, Texas, Enron was formed in 1985 as the merger of two gas companies, Houston Natural Gas and Internorth. Under chairman and CEO Kenneth Lay, Enron rose as high as number seven on Fortune magazine's list of the top 500 U.S. companies. In 2000, the company employed 21,000 people and posted revenue of $111 billion. Over the next year, however, Enron's stock price began a dramatic slide, dropping from $90.75 in August 2000 to .26 by closing on November 30, 2001.
As prices fell, Lay sold large amounts of his Enron stock, while simultaneously encouraging Enron employees to buy more shares and assuring them that the company was on the rebound. Employees saw their retirement savings accounts wiped out as Enron's stock price continued to plummet. After another energy company, Dynegy, canceled a planned $8.4 billion buy-out in late November, Enron filed for bankruptcy. By the end of the year, Enron's collapse had cost investors billions of dollars, wiped out some 5,600 jobs and liquidated almost $2.1 billion in pension plans.

Over the next several years, the name "Enron" became synonymous with large-scale corporate fraud and corruption, as an investigation by the Securities and Exchange Commission and the U.S. Justice Department revealed that Enron had inflated its earnings by hiding debts and losses in subsidiary partnerships. The government subsequently accused Lay and Jeffrey K. Skilling, who served as Enron's CEO from February to August 2001, of conspiring to cover up their company's financial weaknesses from investors. The investigation also brought down accounting giant Arthur Anderson, whose auditors were found guilty of deliberately destroying documents incriminating to Enron.

In July 2004, a Houston court indicted Skilling on 35 counts including fraud, conspiracy and insider trading. Lay was charged with 11 similar crimes. The trial began on January 30, 2006, in Houston. A number of former Enron employees appeared on the stand, including Andrew Fastow, Enron's ex-CFO, who early on pleaded guilty to two counts of conspiracy and agreed to testify against his former bosses. Over the course of the trial, the defiant Skilling--who unloaded almost $60 million worth of Enron stock shortly after his resignation but refused to admit he knew of the company's impending collapse--emerged as the figure many identified most personally with the scandal. In May 2006, Skilling was convicted of 19 of 35 counts, while Lay was found guilty on 10 counts of fraud and conspiracy. When Lay died from heart disease just two months later, a Houston judge vacated the counts against him. That October, the 52-year-old Skilling was sentenced to more than 24 years in prison.

Legend has it that on the night of December 2, 1777, Philadelphia housewife and nurse Lydia Darragh single-handedly saves the lives of General George Washington and his Continental Army when she overhears the British planning a surprise attack on Washington's army for the following day. During the occupation of Philadelphia, British General William Howe stationed his headquarters across the street from the Darragh home, and when Howe's headquarters proved too small to hold meetings, he commandeered a large upstairs room in the Darraghs' house. Although uncorroborated, family legend holds that Mrs. Darragh would eavesdrop and take notes on the British meetings from an adjoining room and would conceal the notes by sewing them into her coat before passing them onto American troops stationed outside the city. On the evening of December 2, 1777, Darragh overheard the British commanders planning a surprise attack on Washington's army at Whitemarsh, Pennsylvania, for December 4 and 5. Using a cover story that she needed to buy flour from a nearby mill just outside the British line, Darragh passed the information to American Lieutenant Colonel Thomas Craig the following day. The British marched towards Whitemarsh on the evening of December 4, 1777, and were surprised to find General Washington and the Continental Army waiting for them. After three inconclusive days of skirmishing, General Howe chose to return his troops to Philadelphia. It is said that members of the Central Intelligence Agency still tell the story of Lydia Darragh, one of the first spies in American history. In Charles Town, Virginia, militant abolitionist John Brown is executed on charges of treason, murder, and insurrection. Brown, born in Connecticut in 1800, first became militant during the mid-1850s, when as a leader of the Free State forces in Kansas he fought pro-slavery settlers in the sharply divided U.S. territory. Achieving only moderate success in his fight against slavery on the Kansas frontier, and committing atrocities in the process, Brown settled on a more ambitious plan in 1859. With a group of racially mixed followers, Brown set out to Harpers Ferry in present-day West Virginia, intending to seize the Federal arsenal of weapons and retreat to the Appalachian Mountains of Maryland and Virginia, where they would establish an abolitionist republic of liberated slaves and abolitionist whites. Their republic hoped to form a guerrilla army to fight slaveholders and ignite slave insurrections, and its population would grow exponentially with the influx of liberated and fugitive slaves. At Harpers Ferry on October 16, Brown's well-trained unit was initially successful, capturing key points in the town, but Brown's plans began to deteriorate after his raiders stopped a Baltimore-bound train and then allowed it to pass through. News of the raid spread quickly, and militia companies from Maryland and Virginia arrived the next day, killing or capturing several raiders. On October 18, U.S. Marines commanded by Colonel Robert E. Lee and Lieutenant J.E.B. Stuart, both of whom were destined to become famous Civil War generals, recaptured the arsenal, taking John Brown and several other raiders alive. On November 2, Brown was sentenced to death by hanging.

Enron files for bankruptcy

On this day in 2001, the Enron Corporation files for Chapter 11 bankruptcy protection in a New York court, sparking one of the largest corporate scandals in U.S. history. An energy-trading company based in Houston, Texas, Enron was formed in 1985 as the merger of two gas companies, Houston Natural Gas and Internorth. Under chairman and CEO Kenneth Lay, Enron rose as high as number seven on Fortune magazine's list of the top 500 U.S. companies. In 2000, the company employed 21,000 people and posted revenue of $111 billion. Over the next year, however, Enron's stock price began a dramatic slide after revelations of questionable accounting practices, dropping from $90.75 in August 2000 to .26 by closing on 30 November 2001.As prices fell, Lay sold large amounts of his Enron stock, while simultaneously encouraging Enron employees to buy more shares and assuring them that the company was on the rebound. Employees saw their retirement savings accounts wiped out as Enron's stock price continued to plummet.

After another energy company, Dynegy, cancelled a planned $8.4 billion rescue buy-out in late November, Enron filed for bankruptcy. By the end of the year, Enron's collapse had cost investors billions of dollars, wiped out some 5,600 jobs and liquidated almost $2.1 billion in pension plans.Over the next several years, the name "Enron" became synonymous with large-scale corporate fraud and corruption, as an investigation by the Securities and Exchange Commission and the U.S. Justice Department revealed that Enron had inflated its earnings by hiding debts and losses in subsidiary partnerships. The government subsequently accused Lay and Jeffrey K. Skilling, who served as Enron's CEOs from February to August 2001, of conspiring to cover up their company's financial weaknesses from investors. The investigation also brought down accounting giant Arthur Andersen, whose auditors were found guilty of deliberately destroying documents incriminating to Enron.In July 2004, a Houston court indicted Skilling on 35 counts including fraud, conspiracy and insider trading. Lay was charged with 11 similar crimes.

The trial began on 30 January 2006, in Houston. A number of former Enron employees appeared on the stand, including Andrew Fastow, Enron's ex-CFO, who early on pleaded guilty to two counts of conspiracy and agreed to testify against his former bosses. Over the course of the trial, the defiant Skilling – who unloaded almost $60 million worth of Enron stock shortly after his resignation but refused to admit he knew of the company's impending collapse – emerged as the figure many identified most personally with the scandal. In May 2006, Skilling was convicted of 19 of 35 counts, while Lay was found guilty on 10 counts of fraud and conspiracy. When Lay died from heart disease just two months later, a Houston judge vacated the counts against him. That October, the 52-year-old Skilling was sentenced to more than 24 years in prison.


The rise and fall of Enron: a brief history

Enron's origins date back to 1985 when it began life as an interstate pipeline company throughthe merger of Houston Natural Gas and Omaha-based InterNorth. Kenneth Lay, the former chief executive officerof Houston Natural Gas,became CEO, and the next year wonthe post of chairman.

From the pipeline sector, Enron began moving into new fields. In 1999, the company launched its broadband services unit and Enron Online, the company's website for trading commodities, which soon became the largest business site in the world. About 90 per cent of its income eventually came from trades over Enron Online.

Growth for Enron was rapid.In 2000, the company's annual revenue reached$100 billion US. Itranked as the seventh-largest company on the Fortune 500 and the sixth-largest energy company in the world. The company's stock price peaked at $90 US.

However, cracks began to appear in 2001. In August of that year, Jeffrey Skilling, a driving force in Enron's revamp and the company's CEO of six months, announced his departure, and Lay resumed the post of CEO. In October 2001, Enron reported a loss of $618 million— its first quarterly loss in four years.

Chief financial officer Andrew Fastow was replaced, and the U.S. Securities and Exchange commission launched an investigation into investment partnerships led by Fastow. That investigation would later show that a complex web of partnerships was designed to hide Enron's debt. By late November, the company's stock was down to less than $1 US. Investors had lost billions of dollars.

On Dec. 2, 2001, Enron filed for bankruptcy protection in the biggest case of bankruptcy in the United States up to that point. (WorldCom's collapse would later stealthat dubious honour.) Roughly 5,600 Enron employees subsequently lost their jobs.

The next month, the U.S. Justice Department opened its investigation of the company's dealings, and Ken Lay quit as chairman and CEO.

In January 2004, Fastow agreed to a plea bargain and a 10-year sentence. He pleaded guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud. He also agreed to cooperate with federal prosecutors.

In February, Skilling entered a plea of not guiltyto 40 charges, including wire fraud, securities fraud, conspiracy, insider trading and making false statements on financial reports.

Lay was charged with fraud and making misleading statements in July. He pleaded not guilty to the 11 charges.

Lay, Skilling go on trial

The trial of Lay and Skilling began in January 2006. Lay and Skilling both testified for more than a week in their own defence. Some of the charges against them were dropped.

Prosecutors alleged that Lay and Skilling used "accounting tricks, fiction, hocus-pocus, trickery, misleading statements, half-truths, omissions and outright lies" to commit their crimes.

Lawyers for the two accused said their clients may be guilty of bad business judgment at Enron, but they never broke the law. "The company failed, but it did not fail because of a fraud," Lay's lawyer, Bruce Collins, told the jury in the case.

Defence lawyers also argued that former Enron executives who took plea deals and testified against Lay and Skilling accepted responsibility for crimes they didn't commit.

Testimony wrapped up, with the jury beginning deliberations on May 17 and presenting the verdict on May 25.


Ten Years Later, Some Press a Different View of Enron

LLANO, TX – When Enron filed for bankruptcy on December 2, 2001—at the time the largest bankruptcy in U.S. history—the once high-flying energy company cemented its reputation as the very symbol of corporate fraud.

Its top executives, including Chairman Ken Lay, CEO Jeffrey Skilling and Chief Financial Officer Andy Fastow became household names, and the term “Enron accounting” joined the business and political lexicons.

Eventually, dozens of high-profile convictions and some tough corporate reforms later, the public moved on.

But on a sprawling, picturesque ranch here in the Texas hill country outside Austin, F. Scott Yeager can’t move on. Not yet.

“I try to put behind me, I try to go on with life,” Yeager said in an exclusive interview. “But the part that keeps taking me back, let's call it, the injustice anger part.”

After years of silence, Yeager agreed to speak to CNBC in hopes of changing the widespread public perceptions about Enron and the sweeping federal investigation that followed. He was one of dozens of executives ensnared in that probe, but in 2009 became one of the only ones cleared of criminal charges, in a case that went all the way to the Supreme Court. He has left the bustle of Houston and moved to the ranch in Llano, where he does consulting.

But rather than be content having cleared his own name, he wants to clear Enron’s name as well.

“I think that the perception—and I'll call it the Enron myth—is very solidified in the country,” he said. “And it is definitely incorrect and inaccurate.”

Yeager, 60, is one a small but increasingly vocal group of ex-Enron employees still trying to rewrite the legacy of Enron, ten years after the firm’s epic collapse.

He was a top executive at Enron Broadband Services (EBS)—a tiny division, but one that prosecutors claimed was a prime example Enron’s fraud. They accused executives of misleading investors by over-hyping the division’s prospects at the height of the technology bubble.

Yeager, who helped develop many of the unit’s products in the 1990s, was accused of conspiracy and insider trading for selling stock with the knowledge that the technology being touted to investors didn’t actually work.

“Yes, it did work,” he said. “In multiple ways.”

Prosecutors claimed Enron did not yet have the software it would need to run its broadband network, but Yeager said it did.

“I was in New York, and saw it work. I was in San Francisco and saw it work. I personally used streaming media. So I know it worked.”

He still holds onto hundreds of computer files and video demonstrations that he says are proof Enron was not a fraud, but a pioneer in many technologies that are commonplace today.

One demonstration from 1999 narrated by Yeager appears to show an early concept of cloud computing, in which a user could access online applications or “apps” through an Enron network.

“You would ride across the Enron ‘cloud’ all the way to the source of the content,” the video says.

“We drew everything as a cloud back then,” Yeager said. “We didn’t coin it. But the notion of cloud computing as a bunch of servers distributing inside of networks—the internet—and that you would get services from them close to where you are physically, we did come up with that idea.”

Another video from 2000 shows an early concept of video conferencing. “Enron Communications is changing how the world communicates,” the video says.

And yet another presentation from 2000 includes a demonstration of an on-demand movie service similar to those available on most cable TV systems today:

“Once the end user selects the movie, it takes just a second for the video stream to begin,” the demonstration says.

Enron's Former Executive Vice President of HR

Enron had a deal with Blockbuster to provide movies on demand, but prosecutors claimed Enron over-hyped the prospects for the venture, and underplayed licensing issues with Hollywood studios.

Five Enron Broadband executives ultimately pleaded guilty to reduced charges, but Yeager says all were pressured by prosecutors.

“There were tens of thousands of really good employees, honest people, top people that were very proud to work for Enron that worked very hard on all kinds of innovative things of which EBS, our group, was just one of those,” Yeager said.

“It was a great company. It was an exciting company,” said Cindy Olson, Enron’s former Executive Vice President of Human Resources.

Olson instantly became part of Enron lore when investigators uncovered video of her answering questions at an employee meeting in 1999, the year before Enron’s stock price hit its peak.

“Should we invest all of our 401k in Enron stock? Absolutely,” Olson says, the room erupting in laughter as Jeff Skilling and Ken Lay look on.

“Everybody burst out laughing. I mean, it was a joke,” says Olson, now 59 and living in Colorado. “Never in a million years did I think that one little second of being humorous or flippant would turn into investment advice.”

Nonetheless, Olson found herself testifying before Congress and questioned by the Department of Labor about the 401k plan following Enron’s collapse. She also testified in defense of Chairman Ken Lay at his 2006 criminal trial.

“I was proud to work for Ken Lay,” she said. “You know, I dealt with a lot of CEOs in Houston, and Ken Lay was the best.”

Olson wrote a book about her experiences, The Whole Truth So Help Me God (Tate Publishing & Enterprises, 2008), that is being re-released this month to coincide with the tenth anniversary of Enron’s bankruptcy.

“I want to talk,” she said. “I want to talk about what a great company it was.”

Olson is prominent in a web site, ungagged.net, created by Houston video producer Beth Stier and purporting to tell “the other side of the Enron story.”

As an outside contractor who handled Enron’s corporate video production, Stier was the official custodian of thousands of hours of videotape. As a result, she found herself at the heart of the investigations of Enron, and, she says, under unrelenting pressure from federal prosecutors.

“Not one of the Enron defendants got a fair trial because of vicious and deliberate prosecutorial abuse,” she said. “During the Enron trials, I experienced it myself and I also saw it happen to many other people with my own eyes.”

Allegations of misconduct on the part of prosecutors have been raised in a number of Enron-related cases, some still pending. But officials have always insisted their actions were above board.

The site, which Stier calls a “webumentary,” includes dozens of interviews with former Enron employees, attorneys and legal experts detailing what it was like to be on the inside of the Enron scandal. Ironically, the site uses some of the internet video technology Enron helped develop.

“Politically, I knew the case was driven to indictment,” says Lay’s defense attorney Mike Ramsey in an interview on the site. “I think many of us who were reasonably sophisticated in the law knew that. Ken never was willing to believe that.”

Lay, the politically connected founder of Enron, was convicted on six securities fraud counts and four bank fraud counts in 2006, but the convictions were wiped out when Lay died before he was able to appeal.

A former assistant to Enron CEO Jeffrey Skilling says on the site that FBI agents tried to intimidate her colleagues.

“I mean, the FBI is acting like the KGB for heaven’s sake in this case,” says Sherri Sera. “And they were given carte blanche to do it.”

Skilling, now five years into a 24-year prison sentence for conspiracy, fraud and insider trading, is continuing to appeal his convictions, including a new petition to the Supreme Court just this week. Neither Skilling nor his legal team are involved in the “ungagged” web site.

Leslie Caldwell, the first director of the Justice Department’s Enron Task Force, discounts the web site’s central theme that the Enron prosecution was politically motivated and aimed at a solid company that had suffered a “run on the bank.”

“There was absolutely no political pressure to get indictments or to not get indictments,” said Caldwell, who left the task force following the 2004 indictment of Jeff Skilling, and is now a partner at Morgan Lewis in New York.

“There definitely was a lot of pressure, but the pressure that we felt as a team and as professional prosecutors really was let’s make sure we get this right.” Caldwell is confident they did.

“I know there were a lot of really good, solid, talented people who worked at Enron,” she said. “But it was not a run on the bank.”

The problems occurred, she said, when Enron decided to move beyond its roots as a pipeline company and expand into more risky ventures like energy trading. By the time investors and counterparties began abandoning the company in 2000, she says, the die was already cast.

“They were a company that was teetering and that was basically counting on its continued rise in its stock price for its survival.”

Even Cindy Olson, the former human resources chief who worked at Enron from the time it was founded in 1985, acknowledges that by the time Enron reached its peak, the company had somewhat lost its way.

“We didn’t require that some of the upper management people live the values of integrity, respect, communication,” she said. “And I think that’s what happened. I don’t think we were true to our values.”

Those values are laid out in a 1998 corporate video featuring Lay and Skilling entitled Enron Vision and Values. “There probably are times that there’s a desire to cut corners,” Skilling says. “We can’t have that at Enron.”

“Enron is a company that deals with everyone with absolute integrity,” Lay adds. “We play by all the rules.”


At its height, Enron was a master of its universe: a gas pipeline company that stepped into a newly deregulated market and made money by the barrel.

First chartered in Omaha, Nebraska, as Northern Natural Gas, the company became Enron in 1985 when Kenneth Lay, a former federal regulator, began taking over. He moved Enron from Omaha to Houston, where Lay began accumulating debt and selling assets to help diversify the company's business dealings. Through the 1990s, the company became a financial juggernaut that capitalized on energy deregulation at the state and federal levels. By 2000, Enron&mdashreporting annual earnings of $100 billion from the global distribution of natural gas, transmission of electricity, marketing of energy products, construction of power plants, commodities investments, broadband services, and even management of water and wastewater&mdashwas a perennial as one of Fortune magazine's "most innovative" companies, employing 20,600 people.

During the "dot-com bubble" of 1997 to 2000, Enron had endured and even thrived. But the experience caused some analysts to cast a skeptical eye on Enron's increasingly opaque financials and noticeably vague explanations for what was driving the company's success.

Under CEO Jeffrey Skilling and CFO Andrew Fastow, Enron had created a byzantine network of transactions between limited liability vehicles driven by unconventional accounting practices. The effect of these transactions was to overstate revenues and understate debt on the company balance sheet year after year. And when journalists and investment analysts began to question Enron's financial practices, Skilling and other Enron officials became evasive and angry.

By Dec. 2, 2001, when the company filed the largest corporate bankruptcy claim until that point in history, its stock&mdashonce valued at $90 per share&mdashhad bottomed out at 26 cents. The collapse left behind tales of self-dealing through "special purpose entities" with names like JEDI and Chewco, and trails of angry investors&mdashamong them, thousands of employees who had invested their life savings in Enron stock. Disclosures to the Securities and Exchange Commission later revealed that Lay and Skilling had been dumping large blocks of Enron shares, even as they were urging their employees to buy more to help the company stabilize.

In 2002, a Houston jury convicted the accounting firm of Arthur Andersen&mdashEnron's accountants&mdashof obstruction of justice. Though the Supreme Court later overturned the conviction, Andersen was forced to close its doors. In early 2004, Fastow pleaded guilty to wire and securities fraud and agreed to help prosecutors unwind the maze of Enron transactions. In 2006, Lay and Skilling were convicted of conspiracy and fraud. Lay died before he could be sentenced. Skilling is serving a 14-year sentence at FPC Montgomery. And the name Enron has become synonymous with unbridled corporate deceit.


Enron Scam: The biggest scam in the history of America

Enron Scam is the name of an institutional fraud committed by a corporation Enron registered in the United States of America. The scam was a result of faulty accounting of the company’s assets.

Enron Corporation (hereinafter referred as ‘Enron’) was an American energy, commodities and services company based in Houston, Texas. It came into existence in the year 1985 as a merger between Houston natural Gas and Internorth, both being relatively small regional companies. In its initial years, the company was simply a natural gas provider. By the year 1989, it began trading in natural gas commodities, and by the year 1994 it started trading in electricity as well. That’s how quick the transformation and enlargement of the company occurred. It employed approximately 20,000 persons. It was one of the world’s leading electricity, natural gas, paper and communication companies which claimed approximate revenue of nearly $101 billion in the year 2000. The company extensively dealt in the trade of sugar, coffee, grains, hog and other meat products. The company made revolutionary changes in the energy trading which allowed it to grow overnight. Enron tailored electricity and natural gas contracts which effectively minimized the cost of the same. In essence, it became nation-wide and soon a global energy trading corporation. Fortune named Enron as “America’s Most Innovative Company” for six years in a row. By the end of 2001, it was revealed that there are huge errors in the accounting of Enron so much so that Enron had to file for bankruptcy in December 2001.

Issue

The scam came into notice when the balance sheets of Enron were analysed and they did not make any sense to analysts. Enron was seen to be shifting its debt obligations to offshore partnerships, mainly created by the Chief Financial Officer of the company Andrew Fastow. The company was also reporting inaccurate trading revenues. Some mala fide practices of Enron included serving as a middleman in a contract, then showing the entire sale as Enron revenue. Enron also used its various partnerships to sell their own contracts to themselves.

In February 2001, Jeffrey Skilling, the president of Enron, took over as the CEO of the company. He soon resigned abruptly. After his resignation, it came into cognizance of the company about a possible accounting fraud. Before the troubles of Enron could calm, the firm shocked its investors in October with an announcement that the company has been undergoing huge losses. In the third quarter of 2001, the company officially registered a loss of $638 million. It took a $1.2 billion reduction in shareholder equity.

An important role here was played by Arthur Andersen LLP, one of the largest public accounting firms in 1990s, with approximately 85,000 employees operating in 84 nations. This LLP was Enron’s accountant and auditor as well. In the year 2002, the partnership was found guilty of destroying documents relating to Enron audits, which amounts to obstruction of justice. The decision was later unanimously overturned by the Supreme Court of the United States of America. By September 2001, Enron insiders decided to declare losses for the third quarter. Arthur then went into crisis management mode in anticipation of SEC investigation. In October 2012, the company destroyed all extraneous documents by complying with the company’s documentation retention policy.

The SEC had begun an inquiry into Enron and the partnerships. After a week of inquiry, a full investigation was launched against the company. The SEC even issued a cease and desist order against Anderson regarding security violations in some other company. When Anderson was asked to provide the Enron audit documents, it couldn’t comply. Various companies which were audited by Anderson were under the scrutiny of SEC for fraudulent acts which evidenced of an error on the part of Anderson as well. This forced the company to abruptly declare bankruptcy. The company was found guilty of shredding of documents which also amounted to obstruction of justice, a felony under the federal laws of the USA. Arthur Anderson lost its license to engage in public accounting when the Justice Department declared it guilty. Three years later, the Supreme Court overturned the judgment but the firm had lost all its clientele by then. Soon, the company vanished.

The Scam

Enron scandal is the name for the events that led to the bankruptcy of the US energy, commodities and services company Enron and dissolution of its auditor Arthur Anderson LLP. Enron held more than $60 billion worth of assets, when it abruptly filed for the biggest bankruptcy in the history of the USA leaving long lasting repercussions on the financial world.

To understand the scam in detail, we must understand the two concepts of market system, the Bullish and the Bearish system. The Bear system is more into trial and error. The investments and capitalisation is on daily level. The fluctuations are also regular and very evident. Whereas in Bullish system, the market is stabilised at all times. The stock market has mostly been Bullish. Enron took the benefit of the Bullish system of market and grew overnight. The company was ready to create a market for anything and everything in which anyone was willing to trade. It made derivative contracts for a wide range of commodities like electricity, coal, paper, steel and even weather reporting. The company also invested in building a broadband telecommunication network to facilitate high speed trading. This was a period of boom for the economy when there was a market for every commodity. Soon, the system changed. The company was facing increased competition and its profits shrank rapidly. To compete, and to avoid the pressure from shareholders, the company began a practice of dubious accounting known as ‘mark-to-market’ under which the company accounts showed the future gains from trading contracts into current income statements, thus fooling the investors by showing higher profits than they actually were. The troubled operations of the company were transferred to Special Purpose Entities (hereinafter referred as ‘SPEs’), to limit the partnerships created with outside parties. Enron used the SPEs as a dump site for its troubled assets. Transferring the assets to SPEs meant that the same need not be shown in company’s books, which made the losses look less severe than they actually were. All this while, Arthur Anderson worked not only as the auditor of the company but also as a consultant for the company. This was seen as a fraud and malicious practice against the investors who were not told the truth before they planned to invest in the company.

The matter came into notice when various analysts began to dig into the financial statements of Enron. An internal investigation took place, headed by the Vice President of the company, which was soon followed by an official investigation by the SEC analysing the transactions between Enron and the SPEs. Soon after, Enron filed for bankruptcy . The Enron executives were indicated on a variety of charges and were later sentenced to prison. Along with the federal lawsuits, multiple civil suits were filed by the shareholders against Enron.

Class Action Suit

A class lawsuit was brought by former Enron employees, who held company’s stocks at the time the company filed for bankruptcy in November, 2001. They suffered huge losses in their retirement savings plan. The defendants in the case were Enron, members of its Board, its executives and employees, the institutional trustee Northern Trust Company and the auditor of Enron, Arthur Anderson. The violations were from the Employee Retirement Income Security Act, 1974 (hereinafter referred as ‘ERISA’). The court held that the corporate officers and employees who are appointed by the employer to administer its retirement plan may be held personally liable. The defendants further breached their fiduciary duty to disclose accurate information about Enron’s financial condition. It defrauded the people for investing in the company. Northern Trust acted as a trustee for the company, which puts a fiduciary responsibility on the company to make the persons investing aware of the dangers of the plan. Northern Trust was declared liable under ERISA for failing to override the directions received by the company. The suit against Arthur Anderson was upheld as well for knowingly participating in hiding the truth about Enron’s financial condition. The compensation in this case amounted to $7.2 billion which was paid out by a group of banks accused of participating in the fraud and breach of fiduciary duties.

Downfall of Enron

Enron grew manifold in the short time span of 20 years. But, it also saw the most abrupt downfall ever by going for bankruptcy from a market capitalisation of $60 billion in a year. The reasons for its downfall were many, mainly that the financial statements of the company were confusing the shareholders and analysts. Its business model was very complex that most people could not understand, the company was falling into many unethical practices. The company even used its accounting limitations to misrepresent its earnings and modify the balance sheet to indicate favourable performance. The company kept finding ways to hide its debt till the extent that the company went into total losses. The company’s officers prepared such balance sheets, complex financial structures and bewildering deals that no one could understand them, let alone wishing to invest. Therefore, the company sunk into losses and had to go for bankruptcy.

Repercussions

The whole scam was a huge setback for America. To avoid the slightest possibility of such an incident in future, new regulations and legislations were introduced to improve the accuracy of financial reporting of public companies. The Sarbanes-Oxley Act, 2002 also called as “Public Company Accounting Reform and Investor Protection Act” and “Corporate and Auditing Accountability, Responsibility, and Transparency Act” was passed by the US Senate which provides for a set of enlarged requirements for all US Public Company Boards and managements relating to destroying, altering or fabricating records in investigations and attempting to defraud shareholders. The Act also increased the accountability of auditing firms, in order to make them unbiased and independent of their clients. It provides for a criminal penalty for such acts, which is a welcome step as it will surely deter companies from involving in fraud and the auditors from supporting the same. The Act also prohibited auditing firms to act as a consultant for the same clients as well as had happened in the present case.

Timeline of Events

1985- Houston Natural Gas merges with Inter North to form Enron.

1989- Enron enters the natural gas commodities trading market.

1990- An energy consultant was hired to run a new subsidiary called Enron Finance Corporation.

October 16, 2001– Enron announced a third quarter loss of $168 million. The company later confessed that it overstated its earnings since 1997.

October 31, 2001- SEC initiates a formal investigation against the company.

November 2001- There were headlines regarding the merger of Enron with rival company Dynergy, which was denied by Dynergy.

January 2002- The US Department of Justice started a criminal proceeding against Enron’s collapse.

January 10, 2002- Arthur Anderson LLP, the accounting firm that handled Enron’s audits, disclosed that the company has destroyed all the relevant documents.

January 15, 2002- The New York Stock Exchange suspends trading of Enron shares on its stock exchange.

January 17, 2002- Enron- Arthur partnership ended.

March 2002- Arthur declared guilty of obstruction of justice and its licence to audit pubic companies was revoked.

2006- The company officials Skilling and Lay were convicted of fraud and conspiracy. Additional charges of insider trading and making false statement were proved. Lay died of heart attack while awaiting sentence.

2008- A class action lawsuit was filed by shareholders and investors of Enron and the settlement was arrived at in the federal court. An amount of $7.2 billion was paid out by a group of banks accused of participating in the fraud.

2013- Skilling’s sentence was reduced as he forfeited $42 million to be distributed among the victims of Enron fraud.

2015- The SEC announced its judgement against Skilling barring him from serving as an officer or Director of any public company.

February 21, 2019- Skilling was finally released after serving over 12 years in the federal prison.

Lessons Learnt from Enron Scandal

The following lessons can be learnt from the scandal which shook the Wall Street majorly-

  • There should be a healthy corporate culture in a company. The executives of Enron believed Enron was best at everything and jumped into any possible new arena. The shareholders were overly optimistic. Hiding the losses of company in order to protect the name and reputation wasn’t a great idea.
  • A more holistic system is required for supervision of the company by shareholders, so that the executives are under a constant scrutiny of the shareholders.
  • The government needs to make more stringent norms regarding public companies as their downfall hits the entire economy of the country, like in the present case.
  • The approval of US government to use an immoral and illegal method ‘mark-to-market’,which is nothing but a manner to fool the investors, and to hide the losses of the company. Long term gains cannot be made out of this system. The ignorance regarding the drawbacks of this system is a failure on the part of government as it hides the major accounts of the company.
  • This case is the best example of antithesis of ethics. A company is such an organisation where there are multiple possibilities of fraud and demeanour. It is of utmost importance to follow business ethics and be loyal to each other for all employees of the company. In the present matter, the company officials defrauded their own employees by hiding the accounts of the company from them.

Potential Solution

While going through news reports, we find that the cases of financial fraud have grown manifold over the last few years. This has been one of the most deterring factors for the people with lesser knowledge about this sector from investing their capital and contributing in the growth of a country’s economy. To bring about a decline in this culture of corporate scams, the following systematic changes need to be brought-

  • The law for protection of Whistle Blowers is imperative. More people will come forth to give information if they are given assurance of their protection.
  • The regulating agencies involved in these cases should be provided with greater autonomy and less political influence.
  • An essential judicial reform to provide for fast disposal of such matters, so that the consequences are severe and immediate.

Conclusion

A corporate scam of this level, that too in a country like America, which is known for its very stringent laws is a shame on our morals and a never undying greed for money. Even with all the laws coming up in this regard, we will not be able to curb these incidents because of the lack of activism in the judicial mechanism, the omnipresent loopholes and the power of money. Nonetheless, this case is an example of how the wrong will not prevail in the end irrespective of how fool proof it was. The company’s collapse not only affected thousands of its employees but also shook the Wall Street to its core.


July 26, 2001: Cheney Turns Request for Records into Battle between White House, Congress

ABC reporter Ted Koppel asks Vice President Dick Cheney about meetings with his “pals” from the oil and energy industries (see January 29, 2001 and April 17, 2001 and After). Koppel is referring to the attempts by Congress to be given the names of the participants in Cheney’s energy task force meetings. Cheney says: “I think it’s going to have to be resolved in court, and I think that’s probably appropriate. I think, in fact, that this is the first time the GAO [Government Accountability Office] has ever issued a so-called demand letter to a president/vice president. I’m a duly elected constitutional officer. The idea that any member of Congress can demand from me a list of everybody I meet with and what they say strikes me as—as inappropriate, and not in keeping with the Constitution.” Authors Lou Dubose and Jake Bernstein will later write, “The vice president was deftly turning a request for records into a constitutional struggle between the legislative and executive branches.” Representative Henry Waxman (D-CA), who issued the original requests before turning them over to the GAO, will put his demands for information on hold because of the 9/11 attacks and the war in Afghanistan, but the case will indeed end up in court (see February 22, 2002). [Dubose and Bernstein, 2006, pp. 11-12]


Enron

The collapse of energy company in December 2001 precipitated what would become the most complex white-collar crime investigation in the FBI’s history.

Top officials at the Houston-based company cheated investors and enriched themselves through complex accounting gimmicks like overvaluing assets to boost cash flow and earnings statements, which made the company even more appealing to investors. When the company declared bankruptcy in December 2001, investors lost millions, prompting the FBI and other federal agencies to investigate.

The sheer magnitude of the case prompted creation of the multi-agency Enron Task Force, a unique blend of investigators and analysts from the FBI, the Internal Revenue Service-Criminal Investigation Division, the Securities and Exchange Commission, and prosecutors from the Department of Justice.

Agents conducted more than 1,800 interviews and collected more than 3,000 boxes of evidence and more than four terabytes of digitized data. More than $164 million was seized to date about $90 million has been forfeited to help compensate victims. Twenty-two people have been convicted for their actions related to the fraud, including Enron’s chief executive officer, the president/chief operating officer, the chief financial officer, the chief accounting officer, and others.


Watch the video: The Enron Scandal Explained in One Minute: Corporate Recklessness, Lies and Bankruptcy (October 2022).

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