DEPARTMENT OF

REAL ESTATE AND

BQS
200:COMMERCIAL
LAW

JUMA GIVONS
OGOMA
B66/3865/2009
ENRON SCANDAL

Introduction

Once the seventh largest company in America, Enron was formed in 1985; though its main
business was distribution of electric power, it was involved in other assets like natural gas, pulp
and paper e.t.c. In India, their Dabhol power plant project collapsed because the Indian
government could not pay them the required sum of cash.

Fortune magazine selected Enron as “ America’s most innovative company’ for six straight years
before investigations into their complex network of off- shore partnership and accounting
practices.

Accounting practices

Enron created off shore entities which were used for planning and avoidance of taxes, raining
profits of the business. The entities made Enron to be seen as profitable through financial
deception when in real sense it was losing money. This led to rise in stock price while the
executives began to off load and trade their stock. Investors were not aware of the offshore
accounts bidding losses; only the executives and the insiders new about it. Chief financial officer
Andrew Fastow, led the team that created off bank companies and manipulated deals for his
personal and close associates benefit at the expense of the Enron corporation and stockholders.

Under Jeffery skilling as the CEO, Enron adopted ‘market to market’ accounting where
anticipated future profits from any deal were tabulated as if already achieved. This was risky as
the projected profits would turn to be losses. Enron usually manipulated its stock prices and its
success was measured by agreeable financial statement emerging from black box whose actual
balance sheet proved inconvenient.

Enron’s actions were gambles that led to pushing up of its stock prices. When its stock prices hit
highest in 2000, i.e. 90 dollars, executives who possessed inside information on hidden losses,
began to sell their stock while encouraging the general public & investors to buy stock as price
level would rise even higher.

When the stocks started dropping, Ken Lay always came and assured investors, who trusted him,
that stock price would rebound as Enron was headed in the right direction. Even when stock
prices were as low as 15 dollars, investors misplaced trust on Enron, made them continue buying
shares. Skilling on noticing the downward trend of Enron’s future resigned claiming personal
(family) issues. The then chairman, Ken Lay, stepped in as CEO.

Discovery of fraud

 Environ VP, Sherron Watkins, wrote an anonymous letter to Ken Lay suggesting that
Skilling had left because of accounting improprieties and other legal actions she also
questioned Enron’s accounting methods, especially Raptor transactions.
 In the same month, Chung Wu, a UBS PaineWebber broker in Houston sent an email to
73 investors saying Enron was in trouble and advising them to consider selling their
shares.
 When Sherron met Lay she gave more details to her charges noting that SPE (Special
Purpose Entities) were controlled by Enron’s CFO Andy Fastow; and he and some Enron
employees made money & left Enron at risk for support of Raptors.
 When Enron’s stocks fell, Raptors losses began to appear. It was when the stock fell to
36cents that SEC began investigations into Enron’s accounting procedures and
partnerships.
 Enron officials admitted to overstating company earnings by 57 million dollars thus filing
for bankruptcy in Dec 2001.

WHO TO BLAME

Ken Lay; former CEO and Chairman

 He ignored warnings from Cliff Baxter about Borget and encouraged reckless gambling.
 He was unethical as he gave investors wrong impression about the firms progress
 Never took Watkins letter seriously

Federal regulators: for allowing Enron to adopt ‘Mark to market’ accounting procedure yet
they were aware how risky it was.

Arthur Anderson; Accounting firm

 For obstructing justice and auditing a firm running unscrupulous deals.

Jeffrey Skilling (former CEO)

Sherron Watkins replaced Cliff Baxter in the CFO’s office. Baxter committed suicide leaving a suicide note
behind for his wife Carol.
  Was the one who brought the infamous idea of ‘Mark to market’ accounting process.
 Made sure that balance sheets or cash flow statements with earnings were not available so
as to track their ‘dirty’ deals.
 Introduced performance review committee which ensured 15% of Enron’s employees
were sent packing after evaluation. This was a way of minimizing cost while creating
unemployment.
 Was unethical; calling an analyst ‘asshole’.

Traders at Wall Street

 Were unethical and succumbed to their leaders pressure by influencing share prices
without minding repercussions to investors.

Andrew Fastow (Former CFO)

 He established the ‘ghost accounts’ (LJMs) which profited him and his cronies.
 He ensured the stocks were kept up and debts, losses hidden.

THOSE AFFECTED

 Investors and shareholders, misplaced trust and belief. made them lose money(millions)
 Enron employees lost their jobs
 Business world suffered a major setback as it was difficult to convince investors that the
same would not happen again. Low investor confidence.
 Arthur Anderson accounting firm collapsed

THOSE LIABLE WERE:

1. Ken Lay: was irresponsible that he shifted all blame to Fastow for Enron’s downfall.
2. Jeffery Skilling
3. Andrew Fastow
4. Arthur Anderson accounting firm
5. Ken Lay’s wife for selling shares just moments before the scandal was unraveled.
 6. Paula Rieker, former executive: convicted for criminal insider trading. She bought shares
cheaply and sold them at inflated prices.

ADVANCEMENT OF THE SUITS

Enron’s C.F.O Andrew Fastow

 Was behind the complex network of partnership and money questionable practices
 Was charged with 78 accounts of fraud, conspiracy, and money laundering.
 After pleading guilty to two counts of conspiracy, he was given 10 year prison sentence
and ordered to pay 23.8m dollars in exchange for testifying against other Environ
executives.

Jeffrey Skilling and Ken Lay

 Were both indicted in 2004 for their roles in the fraud: They were found guilty by Texas
federal court in May, 2006.
 Skilling was convicted of 19 counts of conspiracy, fraud, insider trading and making false
statements.
 Lay was convicted of 6 counts of conspiracy and fraud. In a separate trial, Lay was also
found guilty on four counts of bank fraud.
 Lay died of heart attack on July 5 2006, and a federal judge ruled that his conviction was
void because he died before he had a chance to appeal
 On Oct 2006, Skilling was sentenced to 24 years in prison.

REFERENCES
Enron: The smartest guys in the room movie.
Internet.

Sherron Watkins replaced Cliff Baxter in the CFO’s office. Baxter committed suicide leaving a suicide note
behind for his wife Carol.