From seventh largest company in the US to bankruptcy, Enron's fate was inevitable once its operations started to unravel.
At the height of its apparent success, Enron Corporation had grown to become America's seventh largest company. Employing more than 20,000 people worldwide, it was one of the world's largest energy suppliers, in addition to running other operations in telecommunications and in the pulp and paper industry. At its peak in 2000, the company reported revenues of $100b, and at the end of that year the share price stood at over $80, valuing the company at $60b or more than 70 times its earnings. This would have been serious bubble territory for even an honest company in a growing market.
After being named "America's Most Innovative Company" six times by Fortune magazine, where could such a high-flyer go next? Well, down, because the only real innovation was in its accounts. Enron, together with its accountants Arthur Andersen, had been making them up for years, in what turned out to be one of the most audacious and systematic accounting frauds in corporate history.
"Special purpose entities"
What Enron had been doing was creating offshore companies, known as "special purpose entities", which it used to offload and isolate risky and dodgy deals and to hide company losses, making the Enron accounts themselves look squeaky clean and healthy.
The more successful the strategy became, the deeper Enron's bosses, under the direction of Chief Financial Office Andrew Fastow, had to dig to maintain their increasingly deceptive financial distortions, as their fraudulently reported profits drifted further and further from the reality of losses and cash flow problems. But for a while it was successful, pushing the stock price ever higher and bringing in desperately-needed new investor capital.
Chief Operating Officer Jeffrey Skilling then hit upon another way of fabricating non-existent profits, by accounting for any possible future profits from long-term contracts as if they were real profits today. This enabled Enron to record profits from deals that may well have turned out to make losses when completed. It's like buying up the futures market for, say, oranges based on today's prices, and then accounting for your estimated profits as if future prices and sales are guaranteed.
To make matters worse, in addition to hiding the poor financial state of the company, the Enron bosses had their own noses in the trough too through insider dealing. CFO Fastow, while in charge of the team that created the bogus "special purpose entities", manipulated the deals to make a vast fortune for himself, his family, and his cronies.
Investors started to lose confidence as Enron's accounting practices became ever more obscure, and this accelerated when COO Skilling quit after just six months in the job, having just sold $33m dollars worth of Enron shares.
In a desperate attempt to bring its balance sheet closer to reality, at the end of 2001 the company took a $1bn write-down, ostensibly due to investment losses and restructuring charges, but in reality to cover previously reported profits that weren't really there. Over the coming weeks, further financial squirming, including attempts to buy back all its own commercial paper to cover up its cash-flow problems, hammered what little investor confidence was left, and after an aborted takeover attempt by Dynergy Inc, Enron's credit rating was downgraded as far as "junk" and its share price fell to just 61c.
The company filed for bankruptcy, and former CEO Kenneth Lay, Skilling, Fastow, and others went on trial.
Fastow was charged with 78 counts of fraud, money laundering and deception, and in a plea bargain deal he admitted to two sample fraud charges. In return for his agreement to to spill the beans on his fellow fraudsters and to hand over $24m of his fraudulently-acquired family assets, he was sentenced to 6 years.
Lay pleaded not guilty, but was convicted on six counts. He died in 2006 with the SEC still pursuing him for $90m plus other fines. Skilling was handed down a sentence of 24 years and ordered to compensate the Enron pension fund to the tune of $26m. Chief Accounting Officer Richard Causey pleaded guilty and was banged up for 7 years and fined $1m. Others received various punishments -- some still under negotiation and some subject to appeal.
Enron's accountants, Arthur Andersen, were fined a record $500,000, but that was really just a token judgment as the company had already effectively folded.
The full extent of the political fallout from the Enron collapse will probably never be known, but it turned out that the company made very substantial donations to the Democrats during Bill Clinton's term, and subsequently contributed handsomely to the Republicans and to G W Bush's presidential campaign.
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