The Enron Scandal

In late 2001, a company filed for bankruptcy. This would not have been unusual, had this company not been one of the top ten fastest growing companies in America. How could such a successful company go down so quickly? The answer is simple: they cheated. Now, the responsibility falls to the government and the SEC to clean up the mess left behind. This is their story.

Enron was formed in 1985 when Kenneth Lay became CEO of the Internorth Corporation. Lay shifted the headquarters of the company to Houston, Texas from Omaha, Nebraska. He quickly changed the name to from Internorth to Enteron, then quickly changed it again when he realized that "enteron" means intestine. Enron won Fortune Magazine's award of "America's Most Innovative Company" 6 years in a row, from 1996 to 2001. In 2000 is made Fortune's list of the "100 Best Companies To Work For In America." It continued to be one of America's best and brightest companies until December of 2001, when it filed for bankruptcy amid accusations of insider trading and fraudulent accounting practices. It would later come to light that most or all of Enron's massive success was based on fraud. This is the story of a good company that lost its way.

Before the Enron scandal came to light, it enjoyed a very good financial and political position. They not only enjoyed huge profits and financial successes, but also had many allies in the Bush administration due to the huge campaign contributions they made to him. Vice President Dick Cheney drafted an energy plan in early 2002 that relied heavily on advice from Enron CEO Kenneth Lay. Many believe this energy plan was an attempt by the Bush administration to reward Enron for its massive campaign contributions.

The beginning of Enron's shady practices dates back to 1988, when it was discovered that millions of dollars had been moved from the company into the personal accounts of two employees. These two employees were later found to be participating in insider trading and stealing from the company. Insider trading is the act of making security-trading decisions though the use of non-public information. It is outlawed by the SEC. When these issues were brought to light, top Enron officials told investigators to drop their investigation. The two guilty employees had brought millions to the company; millions that Enron did not want to lose regardless of the moral standards of these employees.

Enron's success continued through the 1990's. When Enron stock hit its peak of $90 in August of 2000, investors were told to buy, buy, buy! At the same time, top Enron executives were unloading their Enron stock. Investors were told that the sky was the limit for Enron stock, but top executives who knew the truth were selling their shares as fast as they could. While the Enron stock dropped as a result of this massive unloading, investors were reassured that it would soon skyrocket yet again. By the middle of August, that stock had sunk to $40.

Enron's stock continued to slip. By the end of October, it had hit $15. Enron continued to reassure investors, and dump stock, until November 28, 2001. The stock value finally fell to less than a dollar when Enron finally came public with information indicating that the company was actually worth 1.2 billion dollars less than it had previously reported. This admission prompted the SEC to launch a full scale investigation into the Enron Corporation that is still in progress. Enron filed for bankruptcy in December of that year.

But how were Enron executives able to hide their company's huge losses from the public? Through the use of partnerships with other companies, fraudulent book keeping, and questionable loans, Enron was able to conceal the fact that it was losing money hand over fist and present itself to the public as profitable. Here are a few partnerships that Enron used to do this, courtesy of securitiesfraudfyi.com.

ە RADR- a group of entities secretly funded by Enron that purchased electricity-generating windmills from Enron, then later sold them back with some of the profits going to key Enron officials and their families.

ەChewco - a company formed by executives of Enron in order to buy out the shares of California Public Employees' Retirement System (CalPERS) in a joint venture investment partnership known as JEDI. Chewco bought out CalPERS interest in order to retain JEDI's off-balance-sheet status. However, Chewco did not meet the requirements for accounting rules and claimed profits that it was not entitled to. In addition, when Enron bought out Chewco's interest, Chewco's price was driven up, reaping huge benefits for the original investors (Enron execs).

ە Southampton- Enron bought the shares of National Westminster Bank (NatWest) in a limited partnership with Credit Suisse First Boston. Enron paid $20 million, but only $1 million went to NatWest. The remainder of the money went to several executives and their families, as well as to three NatWest employees who were in on the deal.

Enron not only used these companies to hide its losses, but also to line the pockets of top executives.

Enron also created "dummy" companies outside the US to hide its debt in. Technically called "offshore entities," allowed Enron to shift its depts. around, and off of Enron itself, tax free. However, as Enron continued to use these offshore entities, it became more and more difficult for them to hide the huge debts that the company had incurred, until finally the company spiraled out of control and was forced to bring its losses public.

The SEC investigation revealed many conspirators in the Enron scandal. Many of these conspirators have been charged with "wire fraud, money laundering, securities fraud, mail fraud, and conspiracy (securitiesfraudfyi.com)." A short list, again courtesy of securitiesfraudfyi.com, is below:

ە Kenneth Lay - former CEO and Chairman of Enron.

ە Andrew Fastow - former CFO of Enron. Fastow was indicted on 78 counts of securities fraud, money laundering, wire and mail fraud, as well as conspiracy to inflate Enron's profit.

ە Michael Kopper - former director in the global finance unit.

ە Kopper pleaded guilty to financial wrongdoing in August 2002.
Jeffrey Skilling - former CEO of Enron.

ە J. Clifford Baxter - former Vice Chairman of Enron. Accused of securities fraud, Baxter died in an apparent suicide in January 2002.

ە Arthur Anderson - the accounting firm that was responsible for auditing Enron. Arthur Anderson was found guilty of obstruction of justice for shredding documents related to the Enron scandal.

ە Timothy Belden - former head of trading at Enron's Portland, OR office. Belden pleaded guilty to one count of conspiracy to commit wire fraud related to Enron's activities during the California power crisis.

ە Gary Steven Emigre, Gilles Robert Hugh Darby, David John Birmingham - three former employees of NatWest (National Westminster Bank). These men have been charged with wire fraud that defrauded their employer but benefited themselves and executives at Enron.

To this date, the Enron Corporation is still under SEC investigation. Ken Lay is still in trial, and is pleading not guilty to all charges. He claims that he was manipulated by those around him and was unaware that he was doing anything wrong. Lay's demeanor at trials and his ability to make people like him have served him well, though there have been times when his amiability has broken down, In July of 2004, "he raised his voice, scowled and snarled repeatedly at the prosecutor who secured an indictment against him (Hays)."

Enron Corporation is in the process of liquidating its remaining assets to pay its creditors.

As you can see, the Enron scandal was one perpetrated by dishonest, dishonorable men. These men, however, were quite possibly economic and business geniuses. They're ability to hide billion dollar losses and illegal securities trading practices from the SEC and the public for so long is amazing. While what they did was certainly wrong, one cannot dispute the economical genius behind their actions.

Works Cited

"Behind the Enron Scandal - Multiple Articles." TIME 2002. 27 Apr. 2006 .

"BBC NEWS | Business | Enron Scandal At-a-Glance." BBC News. 22 Aug. 2002. The BBC. 27 Apr. 2006 .

"Enron Scandal - Information on Enron." Securities Fraud Fyi. 2003. 27 Apr. 2006 .

Hays, Kristin. "Prosecutor Questions Lay At Enron Trial." Business Week 27 Apr. 2006. 27 Apr. 2006