The scandal surrounding the Enron energy company included political implications due to Enron's close links with the White House, the Deregulation of ENRON allowing the corporation to operate largely free from US government scrutiny, misrepresentation in earnings reports, a fraudulent 'energy crisis' and embezzlement undertaken by ENRON Executives.
The Enron scandal eventually led to the bankruptcy of the corporation together with and the dissolution of the auditing company Arthur Andersen. ENRON shareholders lost $74 billion leading up to its bankruptcy, and its employees lost their jobs and billions in pension benefits. Enron CEO Jeff Skilling was sentenced to 24 years, former CEO Kenneth Lay died before serving time.
Enron was founded in July 1985 with the merger of Houston Natural Gas and Omaha-based InterNorth. The chairman and chief executive was Kenneth Lay (April 15, 1942 – July 5, 2006), an energy economist who had held both academic and government positions throughout his career.
In the early 1970's Ken Lay worked as a federal energy regulator and became undersecretary for the Department of the Interior. He returned to the business world as an executive at Florida Gas Transmission and then CEO of of Houston Natural Gas which was was acquired by InterNorth Inc. in 1985. After the merger the company was renamed as ENRON.
In the process of the merger Enron acquired huge debts and began to look for innovative business strategies to generate profits and cash flow. Ken Lay hired McKinsey & Co. to assist in developing Enron’s new business strategy who assigned a young consultant called Jeffrey Skilling to the project.
Key Players: Jeff Skilling joined Enron in 1990 and quickly rose in the ranks of the corporation. On February 12, 2001, Jeff Skilling was named CEO of Enron and Ken Lay adopted the position of Chairman of the corporation.
Key Players: Andrew Fastow became the chief financial officer of Enron Corporation in 1998 and also managed the companies partnerships. Andrew Fastow testified in exchange for leniency when the Enron scandal erupted
Key Players: Sherron Watkins would feature in the Enron Scandal as a whistleblower. She began her career in 1982 at Arthur Andersen as an auditor accountant and joined Enron in 1993. Sherron Watkins became Vice President of Corporate Development in 2001.
Political implications: Ken Lay was a close, personal friend of the Bush family and Enron provided millions of dollars to finance the Bush 2000 election campaign.
Political implications: Enron executives met Vice President Dick Cheney and his energy task force on several occasions to discuss the Bush administration's energy plan.
When Enron was formed, electricity and natural gas were produced, transmitted and sold by state-regulated monopolies. The deregulation of the energy markets allowed companies to operate largely free from US government scrutiny and Enron began trading energy online, like stocks and bonds, placing bets on future prices.
The company then poured billions of dollars into other trading ventures. These were converted into contracts, called derivatives, that were sold to investors. It was Jeff Skilling who came up with the idea of the energy derivative. EnronOnline was launched in November 1999 as the first global commodity trading web site.
The prices of Enron stock grew and Fortune Magazine named the corporation as "America's Most Innovative Company" for six years in a row between 1996 and 2001.
One of the "Big Five" accounting firms, Arthur Andersen LLP, provided auditing, tax, and consulting services to the Enron corporation.
However huge debts inside the corporation were beginning to grow but executives were able to hide the debts by setting up partnerships in which the losses could be buried and generating imaginary revenues
The corporation kept their huge debts off the balance sheets by misrepresentation. By misrepresenting earnings investors were completely oblivious to the true financial condition of ENRON.
"Creative accounting" - Assets and profits were inflated, and in some cases, completely fraudulent and nonexistent.
The executives used embezzled funds from investments and reported fraudulent earnings to their investors. This resulted in increasing investments from current stockholders and attracting new investors eager to make money from the apparent financial gains enjoyed by the corporation.
Fraudulent 'energy crisis': Enron created artificial power shortages in California, helping to trigger an energy crisis in 2000 and 2001. The corporation was able to manipulate power supplies and charge excessive prices.
Jeff Skilling famously joked about the California energy crisis at a meeting of Enron employees by asking, "What is the difference between California and the Titanic? At least when the Titanic went down, the lights were on".
On the surface the corporation was a massive success, the seventh largest company in the United States. On December 31, 2000, Enron's stock was priced at $83.13 and its market capitalization exceeded $60 billion.
In February 2001 Ken Lay announced his retirement, retaining the position of Chairman, and named Jeff Skilling president and CEO of Enron.
After just a few short months as CEO, Jeff Skilling unexpectedly resigned on August 14 2001. He cited 'personal reasons' as his reason for resignation and he subsequently sold large amounts of his shares in the corporation. Skilling's sudden resignation prompted Wall Street to question the health of the company and stock market prices began to drop.
Enron executives, including Ken Lay, began selling large amounts of stock as prices continued to drop. The prices of Enron stock would eventually fall from a high of $83.00 per share to less than a dollar.
Chairman Ken Lay returned as CEO and on August 16, 2001 called an executive's meeting to address Jeff Skilling's resignation.
On August 22, 2001, in response to questions raised at the meeting Sherron Watkins, the newly appointed Vice President of Corporate Development, alerted Ken Lay of accounting irregularities in financial reports. Her action triggered the chain of events that led to the collapse of Enron and the ensuing scandal.
Ken Lay assured Sherron Watkins that he would address her concerns and selected law firm Vinson & Elkins (V&E), assisted by Arthur Andersen LLP, to review the situation. Neither companies were impartial. V&E had been involved in Enron’s dealings and Arthur Andersen LLP was the company's auditors.
V&E concluded the review did not warrant a further widespread investigation by independent counsel or auditors.
In October 2001 the U.S. Securities and Exchange Commission (SEC) opened a formal investigation into transactions among the Enron Corporation and partnerships headed by Andrew Fastow. A special committee was appointed to examine the financial transactions of the corporation
Enron Corporation disclosed that its shareholders' equity had dropped over one billion dollars due of a deal with partnerships led by Andrew Fastow. The write-down was not apparent in Enron's quarterly earnings report, suggesting that Enron were hiding losses. On October 24, 2001 Andrew Fastow was sacked
On November 8, 2001 Enron admitted that, dating back to 1997, it had overstated profits by $600m. The next day Enron Corporation agreed to its acquisition by the Dynegy energy company for $9bn.
In less than two weeks the Dynegy offer was rescinded when Enron's credit rating sank to high-risk, junk-bond status. (Note: In 2002 Dynegy nearly went bankrupt and several executives were eventually convicted of financial fraud and mismanagement)
On November 29, 2001 the investigation by the U.S. Securities and Exchange Commission (SEC) is extended to cover Arthur Andersen LLP.
On December 2, 2001 Enron Corporation filed for bankruptcy.
On January 9, 2002 the Justice Department confirmed it had begun a criminal investigation of Enron.
January 9, 2002 the White House discloses that Ken Lay had sought help from two US Cabinet members, US treasury secretary Paul O'Neill and commerce secretary Don Evans, shortly before the company collapsed, although neither offered aid.
On the same day, January 9, 2002, Ken Lay resigned as chairman and CEO and the company's auditor, Arthur Andersen LLP, admitted it had destroyed tons of Enron documents. .
Cliff Baxter, former head of Enron's trading unit and later vice president before his resignation in May 2001, had agreed to testify before Congressional committees in February 2002. On January 25, 2002 Cliff Baxter was found dead of a gunshot wound. The coroner subsequently returns a suicide verdict.
On June 15, 2002, Arthur Andersen LLP was convicted of obstruction of justice for shredding documents related to its audit of Enron. Although the conviction was later reversed by the Supreme Court, the impact of the scandal virtually destroyed the firm.
On October 31, 2002, Andrew Fastow was indicted by a federal grand jury in Houston, Texas on 78 counts including fraud, money laundering, and conspiracy. He agreed to cooperate with the prosecution former Enron employees. On September 26, 2006 Andrew Fastow was sentenced to six years, followed by two years of probation.
On July 7, 2004, Ken Lay was indicted for his role in Enron's collapse and scandal. He was charged with 11 counts of securities fraud, wire fraud, and making false and misleading statements.
The trial of Jeff Skilling began on January 30, 2006. He was indicted on 35 counts of fraud, insider trading, and other crimes related to the Enron scandal. Skilling agreed to become an informant regarding former Enron executives in order to receive a reduced sentence.
On May 25, 2006, Ken Lay was found guilty by a jury on all six counts of conspiracy and fraud. Ken Lay died of a heart attack on July 5, 2006, while vacationing in Colorado.
At the time of the scandal and its collapse, Enron was the biggest corporate bankruptcy ever to hit the financial world but other larger bankruptcies soon emerged surpassing Enron as the largest corporate bankruptcy.
Congress passed the Sarbanes-Oxley Act of 2002 in response to the Enron scandal. The purpose of the Sarbanes-Oxley Act is "...to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports”.
Corporate scandals have plagued America. The scandals that followed including those of WorldCom Scandal (2002), Tyco Scandal (2002, Healthsouth scandal (2003), Freddie Mac scandal (2003), American Insurance Group scandal (2005), Lehman Brothers (2008), Bernie Madoff scandal (2008) and the Washington Mutual (2008).
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