Enron

Enron
• In reality, it was all a big scam filled with lies, fraud, and political manipulation
• Biggest scam in US history
• Billions of dollars stolen, thousands of lost jobs, dozens of convictions, one suicide and unveiling
of corporate greed that shined directly into the heart of corporate America
• This is the story of how one company took ten years to grow to sixty billion dollars in value and
then in less than a month go bankrupt

Enron Orgins
• Energy supply company dealing with natural gas
• Eventually the company moved on to trading, broadband, and even weather
• Enron was the single biggest contributor to the Geroge W. Bush campaign

Kenneth Lay / “Kenny Boy”

• Founder of Enron
• Prominent figure in the deregulation of the energy sector
• PhD graduate and financial analyst in the Pentagon

First Sign of Trouble – The Vahalla Scandal of 1987

• 2 oil traders gambled enormously on the company’s behalf shifting money to fake accounts with
names such as “Mr. M. Yass”. Those traders were moving their money into their own accounts
manipulating earnings and gambling on trades beyond their capacity. But instead of firing the
two traders, they made no changes as if it didn’t seem to matter. Enron even sent them a letter
saying, “Please keep making us millions”.
• Later, the 2 were convicted to fraud. Ken Lay acted shocked saying that he was not aware of
their reckless gambling and theft but as revealed later he encouraged it. The one of his big
moneymakers was behind bars and he needed someone new to bring in cash. Enter Jeffery
Skilling.

How to Make Unlimited Money

Mark-to-Market Accounting
• Enron’s new CEO, Skilling, was Lays biggest asset because when he arrived at Enron, he stared
moving the company towards a different direction.
• Skilling wanted to turn Enron from a gas supply company into a stock market for natural gas. He
also introduced the company to mark-to-market accounting, an idea that would allow the
company to fraudulently reap billions.
• Mark-to-Market Accounting simply allows the company to write down profits in their books on
the day that the deal was signed. This meant if Enron signed a deal with 50 million dollars over
the next 10 years, they could write 50 million dollars in their books that day despite not
receiving a penny. It didn’t even matter if the deal fell through effectively.
 The Ruthless Mind of Skilling
• Skilling is known for his Darwinian philosophy survival of the fittest
• Favorite book: “The Selfish Gene” by Richard Dawkins. It describes how greed and
competition motivate human nature. One way he did this was grading all employees on a
scale of 1-5 with 1 being the best and 5 being the worst. At least 10% of the employees were
graded to 5 and when you’re graded to five, you’re fired. This began the competition Skilling
was looking for. People began to work 18 hours a day and were ruthless to earn the
company as much money as possible. Skilling famously said that money was the only thing
that motivated people.
• Unsurprisingly, Skilling was a massive risk taker. He often went on wild adventures with
other Enron executives. This includes dirt biking on dangerous trails where people often flip
their cars. An executive even required stitches after a biking accident on one of these trips.
Skilling said he liked guys like this, guys with a bit of edge.
• Lou Pai a mild-mannered executive was one of those guys with a bit of edge.

Lou Pai
• Skilling’s ICBM (Intercontinental Ballistic Missile)
• He is an CEO of an Enron subsidiary seem to be motivated by 2 things (money and strippers)
• Pai isn’t mysterious things as one can be in such a huge scandal. He left on in 2001 with 215
million dollars, became the second largest landowner in Colorado. He left his business division
with 1 billion dollars of losses and escaped the whole scandal pretty much intact.

The DotCom Boom and Enron

• It wasn’t just internet companies feeling the fever. Enron stocks had tripled in the span of 2
years. Everyone with a little bit of cash was playing the stock market game. Enron knew that if
the company met or exceeded endless expectations, the stock price will keep rising and
somehow, they always met and exceeded those expectations.
• Enron had poured billions of dollars into plants in India only to realize that India couldn’t afford
to buy the electricity. But that didn’t stop the executives at Enron writing down future profits for
the project into their books and handling themselves massive bonuses.
• The analysts, the very people who were supposed to stop the corruption fell under the spell of
Skilling. The complexity of the company and the charisma of Skilling made analysts simply take
him at his word in fact the ones that didn’t were fired.
• The company soon began trading bandwidth to provide streaming services, but the technology
just simply didn’t work well enough yet. The deal fell through, but Enron still rode 53 million
dollars in their books.
• Things began to get out of control and Enron soon began trading weather (yes, the weather like
sunshine and rain). They would soon sell futures on the weather essentially gambling what the
temperature would be. You would probably imagine that most people would be skeptical of this,
but it was activities like this that led Enron to being listed on the Fortune 500s most innovative
companies list. But one reporter at Fortune start asking questions and this would later lead to
the company’s demise.
Cracks Appear
• Bethany Mclean a reporter at fortune was doing a piece on Enron. She had a phone call with
John Skilling where she asked some simple questions like “How exactly does Enron make its
money?”. Skilling said he couldn’t answer because he wasn’t an accountant, so he sent a few
finance guys including Andy Fastow, CFO, to answer her questions the next day. They sat in the
office for 3 hours pouring over documents. At the end, others had left the room and he turned
to the reporter and said I don’t care what you write about the company just don’t make us look
bad.
• Andy Fastow was a character described as having no moral compass. He made Enron deaths
disappear by moving them to show companies that on paper Enron was profitable. He even set
up his own fraudulent firm just to buy Enron assets. His fraudulent firm was called the “LJM”.
Andy would later convince 96 bankers to invest in the scam LJM firm. LJM would make Andy
Fastow 45 million dollars but it seemed that the banks were in on the deal too. Merrill Lynch
bought 3 Nigerian barges from Enron and sold them back 5 months later. This was to help
anyone cook their books and later several bankers would go to jail for this. Both Skilling and Lay
knew that even this couldn’t last forever. They needed a new gold mine and they turnedtheir
eyes to the Golden State, California.

Enron Owns California

• Skilling became increasingly volatile arriving at worked unshaved and red eyed. On 2001
investor’s call, he even called an investor an asshole, a harsh reaction from a Fortune 500 CEO.
• The company had to keep making quarterly targets despite their business failing at home and
abroad. California was going to be the next big score.
• Enron merged with Pacific Gas and Electric Company which gave them access to the Californian
grid. Once this was achieved, strange things began to happen. In the newly deregulated
electricity market of California, rolling blackouts became common but strangely the state had
almost doubled the capacity than there was demand, so why is this happening? It turns out that
Enron traders were manipulating the market. They moved electricity out of state to increase
demand and when the price got high enough they would move it back in. They even called
power plants and asked them to make excuses to shut down for few hours increasing the price
as those less demand. Traders had energy maps and control to move the energy. They knew
exactly how to squeeze every last dollar from the people of California. While the state faced
blackouts causing unknown holes on the lives of Californians, the Enron traders were high-fiving
themselves over their bonuses. Ken Lay even said it doesn’t matter how many rules you
Californian’s make I’ve got a bunch of smart people here that will figure out how to make
money anyway. The year-long ordeal would cost California 30 billion dollars but why didn’t the
state put a stop to it? Well the law states that it’s the federal govt issue and it’s their
responsibility to take care of it and guess who the president was at the time, it was his friend
George W. Bush. Bush refused to step in saying that its was his administration’s belief that
intervention would not solve anything.
• The Federal Energy Regulation Commission also didn’t step in until the Senate forced them to
the chairman of the Commission was personally recommended by Kenneth Lay. This whole
 ordeal caused the people of California to turn on their governor and appoint a new one. One
that was more suitable for the role, the “terminator”

The Fall
• One day in 2001, out of the blue Skilling suddenly resigned. Perhaps he figured he could leave
the company years before it imploded then he could say it was fine when I left it. Regardless,
Kenneth Lay took over the CEO role. Just one day later, Sharon Watkins who worked under the
company CFO Andrew sent a letter to Kenneth Lay detailing the staggering amount of
corruption and fraud that she found in the company. The Wall Street Journal would write a
piece about some of Andy’s dealings and soon the SEC would launch an informal inquiry. At this
point, investors began to feel nervous.
• Kenneth Lay tried to bring calm and reassurance to investors and employees. While he was
addressing the company’s issue to a speech to employees, several blocks away and runs
accounting firm was busy shredding documents. One of the accounting firm shred one ton of
paper on October 23rd but it was too late. The walls began to fall and over a course of a month,
the company went from that healthy appearance of one of the leading innovators to total
bankruptcy. Enron stocks was frozen at the 32 dollar mark and when it reopened it was 9 dollar
a share. Meanwhile, Enron executives had a fire sale of all their stock.
• Cliff Baxter, a trader who often went on Skilling’s wild adventures cashed in 30 million dollars
from Enron after being called to testify in court, Baxter in his Mercedes drove down a quiet
street and shot himself.
• Andy, CFO was sentenced to 10 years but only served six and paid 23 million in fines.
• Enron’s accounting firm Arthur Andersen the one that shredded one ton of paper was convicted
of obstructing justice. America’s oldest firm collapsed due to loss of reputation and 29,000
people lost their jobs.
• Ken Lay earned 300 million from Enron and he was found guilty of 10 counts of securities fraud
and was facing 45 years in prison but died of a heart attack a month before his sentencing.
• 20,000 people at Enron lost their jobs and medical insurance with an average severance pay of
only 4,500 dollars. Executives were paid 55 million dollars during bankruptcy and cashed a
further 774 million in the year before the collapse.
• Skilling, the mastermind behind Epenron was convicted of 19 counts of security and wire fraud.
He was sentenced to 24 years and 180 million in fines. While in jail, his parents and his son
passed away. He only served 12 years of his 24 year sentence and was released in early 2019.

Skilling’s Second Act

• Skilling is hoping that he can get a second chance. He appears to be applying a return to the
energy sector. Only 2 months after his prison release in early 2019, he was entered as a
manager of a new company which he founded a few years ago, Lou Pai, former executive, who
sailed off into the sunset with us 250,000,000 is reported to be helping Skilling regain
connections and funding. Accdg to Wall Street, Skilling has been holding meetings from former
Enron executives in relation to starting a new venture. This may be difficult for him as obviously
his reputation has been massively smeared but apart from people’s perception there’s
 technically nothing stopping him. The SEC has banned him from being an officer of any public
company so as long as this venture stays private he can do whatever he wants.

Conclusion
• Despite of being one the biggest players in the biggest scam in the US history resulting in billions
of dollars in losses for average people. Tens of thousands of lost jobs and executives reaping and
billions. Skilling is out of jail and free to start again. Enron’s motto was asked why during his
astoronomical rise, it seemed that no one bothered to ask why, how, or where the money was
coming from and now with Skilling is out of jail and trying to re-enter the business world, maybe
once again we should ask why.